As filed with the Securities and Exchange Commission on October 31, 1996
Registration No. 333-13021
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
--------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------------
ADVANCE FINANCIAL BANCORP
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
Delaware 6035 55-0753533
- --------------------------------- -------------------------- -------------------
<S> <C> <C>
(State or Other Jurisdiction (Primary Standard Industry (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
1015 Commerce Street, Wellsburg, West Virginia 26070
(304) 737-3531
------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Mr. Stephen M. Gagliardi
President
Advance Financial Bancorp
1015 Commerce Street, Wellsburg, West Virginia 26070
------------------------------------------------------------------------
(304) 737-3531
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Please send copies of all communications to:
Samuel J. Malizia, Esq.
Gregory J. Rubis, Esq.
Felicia C. Battista, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
<PAGE>
PROSPECTUS ADVANCE FINANCIAL BANCORP
(Proposed Holding Company for Advance Financial Savings Bank)
Anticipated Maximum of 943,000 Shares of Common Stock
$10.00 Purchase Price Per Share
Advance Financial Bancorp, a Delaware corporation (the "Company"), is
offering between 697,000 and 943,000 shares (subject to adjustment up to
1,084,450 shares) of its common stock, par value $0.10 per share (the "Common
Stock"), in a subscription offering in connection with the conversion of Advance
Financial Savings Bank, f.s.b. (the "Bank") from a federally chartered mutual
savings bank to a federally chartered stock savings bank to be known as Advance
Financial Savings Bank and the issuance of all of the Bank's outstanding capital
stock to the Company pursuant to the Bank's Plan of Conversion (the "Plan"). The
Company may offer shares not subscribed for in the subscription offering in a
public offering, as described below. The simultaneous conversion of the Bank to
stock form, the issuance of the Bank's outstanding common stock to the Company,
and the Company's offer and sale of Common Stock are referred to herein as the
"Conversion." References herein to the Bank refer to the Bank in mutual form and
in stock form as the context may indicate.
Non-transferable rights to subscribe for the Common Stock have been
granted, in order of priority, to the Bank's deposit account holders with
deposits of at least $50 as of August 31, 1995 ("Eligible Account Holders"),
tax-qualified employee plans of the Bank, other deposit account holders with
deposits of at least $50 as of September 30, 1996 ("Supplemental Eligible
Account Holders"), and certain other depositors and certain borrowers of the
Bank as of the voting record date, October 31, 1996, for a special meeting of
members called to vote on the Conversion ("Other Members") in a subscription
offering (the "Subscription Offering"). Pursuant to Office of Thrift Supervision
("OTS") regulations, these subscription rights are non-transferable. Persons
violating this prohibition against transfer may lose their right to purchase
stock in the Conversion and be subject to other possible sanctions. Subject to
the prior rights of holders of subscription rights and market conditions at or
near the completion of the Subscription Offering, the Company may also offer the
shares of Common Stock for sale on a best efforts basis through Charles Webb &
Company ("Webb"), a division of Keefe, Bruyette & Woods, Inc. ("KBW") in a
public offering to selected persons to whom this Prospectus is delivered (the
"Public Offering"). Shares of Common Stock not subscribed for in the
Subscription and Public Offerings may be offered on a best efforts basis by a
selling group of broker-dealers in a Syndicated Public Offering managed by Webb
(the Subscription Offering, Public Offering and the Syndicated Public Offering
are collectively referred to as the "Offerings"). The Bank and the Company
reserve the right, in their absolute discretion, to accept or reject, in whole
or in part, any or all orders in the Public Offering or Syndicated Public
Offering at the time of receipt of an order or as soon as practicable following
completion of the Offerings. See "The Conversion Marketing Arrangements."
(Continued on next page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS," BEGINNING ON PAGE 1 OF THIS
PROSPECTUS. THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY
OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE, OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
FOR INFORMATION ABOUT SUBSCRIBING, PLEASE CALL THE CONVERSION INFORMATION CENTER
AT (304)______ - ______.
<TABLE>
<CAPTION>
=============================================================================================================================
Purchase Estimated Underwriting Commissions and Estimated
Price(1) Expenses(2) Net Proceeds(2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $10.00 $ 0.55(3) $ 9.45(3)
- -----------------------------------------------------------------------------------------------------------------------------
Total Minimum (1) $ 6,970,000 $433,000 $ 6,537,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Midpoint (1) $ 8,200,000 $450,000 $ 7,750,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Maximum(1) $ 9,430,000 $467,000 $ 8,963,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted (4) $10,844,500 $486,500 $10,358,000
=============================================================================================================================
</TABLE>
(1) Determined in accordance with an independent appraisal, dated as of
September 6, 1996 by Keller & Company, Inc. ("Keller"). The estimated
pro forma market value of the Common Stock ranges from $6,970,000 to
$9,430,000 ("Estimated Valuation Range" or "EVR") or between 697,000
and 943,000 shares of Common Stock at the purchase price of $10.00 per
share in the Offerings. See "The Conversion - Stock Pricing."
(2) Includes financial advisory and marketing fees to be paid to Webb that
are estimated to be $76,000, $93,000, $110,000, and $129,500, at the
minimum, midpoint, maximum, and maximum as adjusted, respectively, of
the EVR. A portion of such fees and expenses may be deemed to be
underwriting fees and Webb may be deemed to be an underwriter. Also
includes printing, postage, legal, appraisal, accounting, and filing
fees. Actual net proceeds and expenses may vary from estimated amounts.
If shares are sold in the Syndicated Public Offering, the underwriting
commissions and fees will be higher than the estimated amounts included
in the table.
(3) Assumes the sale of the midpoint number of shares. If the minimum,
maximum, or 15% above the maximum number of shares are sold, estimated
expenses per share would be $0.62, $0.50, or $0.45, respectively,
resulting in estimated net proceeds per share of $9.38, $9.50, or
$9.55, respectively.
(4) Gives effect to an increase in the number of shares which could occur
without a resolicitation of subscribers or any right of cancellation
due to an increase in the Estimated Valuation Range of up to 15% above
the maximum of the Estimated Valuation Range (for an issuance of up to
1,084,450 shares) to reflect changes in market and financial conditions
following commencement of the Offerings or to fill in part or in whole
the order of the ESOP. See "The Conversion - Stock Pricing."
CHARLES WEBB & COMPANY
A division of Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is __________ ____, 1996
<PAGE>
The Bank's Employee Stock Ownership Plan ("ESOP") intends to subscribe
for up to 8% of the total number of shares of Common Stock issued in the
Conversion. However, the ESOP may acquire some or all of its shares in the open
market after the Conversion. Shares sold above the maximum of the Estimated
Valuation Range may be sold to the ESOP to fill its subscription. With the
exception of the ESOP, no person may purchase more than 10,000 shares ($100,000)
of Common Stock and no person, together with associates and persons acting in
concert with such person, may purchase in the aggregate more than 15,000 shares
($150,000) of Common Stock sold in the Conversion. The minimum purchase is 25
shares. However, the Bank and the Company in their sole discretion may increase
or decrease the purchase limitation without notice to members or subscribers.
See "The Conversion - Limitations on Purchases of Shares."
Webb has been engaged to consult with and advise the Bank and the
Company in connection with the Conversion and with the sale of shares of the
Common Stock in the Offerings. Webb has agreed to use its best efforts to assist
the Company and the Bank in the sale of the Common Stock in the Subscription
Offering. In addition, Webb has agreed to manage the Public Offering and the
Syndicated Public Offering, if any. Neither Webb nor any broker-dealer
participating in a Syndicated Public Offering will have any obligation to
purchase or accept any shares of Common Stock in the Conversion. Webb will be
indemnified against certain liabilities, including liabilities that may arise
under the Securities Act of 1933, as amended. See "Pro Forma Data," "The
Conversion - Plan of Distribution" and "- Marketing Arrangements."
To subscribe for shares of Common Stock in the Subscription Offering,
the Company must receive an executed order form and certification form (the
order form and certification form are referred to together as the "Order Form"),
together with full payment of $10.00 per share (or appropriate instructions
authorizing a withdrawal from a deposit account at the Bank) for all shares for
which subscription is made, at the Bank's office, by 4:00 p.m., Eastern Standard
Time, on __________ ___, 1996, unless the Subscription Offering is extended, at
the discretion of the Board of Directors, up to an additional 45 days with the
approval of the OTS, if necessary, but without additional notice to subscribers
(the "Expiration Date"). Subscriptions paid by cash, check, bank draft, or money
order will be placed in a segregated account at the Bank and will earn interest
at the Bank's passbook rate 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. Authorized withdrawals from
certificate accounts at the Bank for the purchase of Common Stock will be
permitted without the imposition of early withdrawal penalties or loss of
interest.
To order Common Stock in the Public Offering, or Syndicated Public
Offering, if any, an executed stock order and account withdrawal authorization
(if applicable) and certification must be received by Webb prior to the
termination of the Public, or Syndicated Public, Offering. The date by which
orders must be received in the Public, or Syndicated Public, Offering, if any,
will be set by the Company at the time of such offering provided that, if the
Offerings are extended beyond __________ ___, 1997, each person who has
submitted an order will have the right to modify or rescind his or her order. In
the event of such an extension, funds submitted by persons to order shares will
be returned promptly with interest to each person unless he or she affirmatively
indicates otherwise. See "The Conversion - Public Offering" and "-Syndicated
Public Offering."
The Company has received preliminary approval to have the Common Stock
listed on the Nasdaq SmallCap Market under the symbol "AFBC." Prior to the
Offerings 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 resales of the Common Stock can be made at or above $10.00
per share (the "Purchase Price"). See "Market for the Common Stock."
<PAGE>
ADVANCE FINANCIAL SAVINGS BANK, f.s.b.
================================================================================
[MAP]
================================================================================
THE CONVERSION IS CONTINGENT UPON THE RECEIPT OF ALL REQUIRED REGULATORY
APPROVALS, APPROVAL OF THE PLAN BY THE MEMBERS OF THE BANK, AND THE SALE OF AT
LEAST THE MINIMUM NUMBER OF SHARES OFFERED PURSUANT TO THE PLAN.
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
The following summary does not purport to be complete, and is qualified in
its entirety by more detailed information and the Consolidated Financial
Statements of the Bank and the Notes thereto appearing elsewhere in this
prospectus.
Advance Financial Bancorp: The Company was organized under Delaware law in
September 1996 at the direction of the Board of
Directors of the Bank to acquire all of the capital
stock that the Bank will issue upon its conversion
from the mutual to stock form of ownership. The
Company has not engaged in any significant business
to date.
Management believes that the holding company
structure will provide flexibility for possible
diversification or expansion of business
activities, although there are no current
arrangements, understandings, or agreements
regarding any such opportunities. Subject to
limitations on repurchases, the holding company
structure will also enable the Company to
repurchase its own stock without adverse tax
consequences. See "Advance Financial Bancorp" and
"Business of the Company."
Advance Financial Savings
Bank, f.s.b.: The Bank, a federally chartered mutual savings
bank, operates a traditional savings association
business, attracting deposit accounts from the
general public and using those deposits, together
with other funds, primarily to originate and invest
in loans secured by single-family residential real
estate. At June 30, 1996, the Bank had total assets
of $91.9 million, total deposits of $80.8 million,
and equity of $6.2 million. See "Advance Financial
Savings Bank, f.s.b." and "Business of the Bank."
The Plan and Approval
by Members: The Board of Directors of the Bank unanimously
adopted the Plan on September 3, 1996. Pursuant to
the Plan, the Bank will convert from a federal
mutual savings bank into a federal stock savings
bank and will become a wholly owned subsidiary of
the Company which will issue Common Stock in the
Offerings. The Plan must be approved by the
affirmative vote of the majority of total votes
eligible to be cast by the Bank's members. See "The
Conversion."
The Offerings and the
Purchase Price: Between 697,000 and 943,000 shares of Common Stock
are being offered at $10.00 per share in the
Offerings. The maximum number of shares sold in the
Offerings may be increased to up to 1,084,450
shares without a resolicitation of subscribers in
the event of an increase in the pro forma market
value of the Bank to an amount not more than 15%
above the maximum of the EVR. See "The Conversion -
Stock Pricing" and "-Number of Shares to be Issued
in the Conversion."
Distribution of Common
Stock and Purchase
Priorities: The shares of Common Stock will first be offered in
the Subscription Offering according to the
following priorities: (i) Eligible Account Holders;
(ii) the ESOP; (iii) Supplemental Eligible Account
Holders; and (iv) Other Members. The Company may
offer shares of Common Stock for sale through Webb
in a Public Offering or in a
- --------------------------------------------------------------------------------
(i)
<PAGE>
- --------------------------------------------------------------------------------
Syndicated Public Offering with selected dealers.
See "The Conversion - Public Offering" and "..
Syndicated Public Offering." Any shares
of Common Stock sold in excess of the maximum of
the EVR may be first sold to the ESOP prior to
satisfying unfilled orders from Eligible Account
Holders. See "The Conversion -Subscription Rights
and the Subscription Offering" and "- Public
Offering."
Transferability of Right
to Purchase in the
Offerings: DEPOSITORS AND CERTAIN BORROWERS MAY NOT TRANSFER
OR ENTER INTO AN AGREEMENT TO TRANSFER THE RIGHT TO
SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE
SUBSCRIPTION OFFERING. Persons violating this
prohibition against transfer may lose their right
to purchase stock in the Conversion and may be
subject to other possible sanctions. See "The
Conversion- Subscription Rights and the
Subscription Offering -Restrictions on Transfer of
Subscription Rights and Shares."
Purchase Limitations: The purchase limit for a person with subscription
rights is the greater of (i) 10,000 shares
($100,000), (ii) one-tenth of one percent of the
total offering, or (iii) 15 times the product
(rounded down to the next whole number) obtained by
multiplying the total number of shares of Common
Stock to be issued by a fraction of which the
numerator is the amount of the qualifying deposit
of such person and the denominator is the total
amount of qualifying deposits of all such persons
in that same subscription right category, but in no
event shall this number be greater than the 10,000
share maximum purchase limit. The maximum number of
shares of Common Stock that may be subscribed for
or purchased in the Offerings by any person (or
persons through a single account) together with any
associate or group of persons acting in concert may
not exceed 15,000 shares ($150,000), except for the
ESOP, which intends to subscribe for up to 8% of
the Common Stock issued. No assurances may be given
that the number of shares purchased by the ESOP
will not change. The Bank may, in its sole
discretion, without further notice to or
solicitation of prospective purchasers, increase
such maximum purchase limitation to up to 5.0% of
the total number of shares offered or decrease the
maximum purchase limitation to as low as 1.0% of
the maximum number of shares offered. No person may
purchase fewer than 25 shares in the Offering. See
"The Conversion -Limitations on Purchases of
Shares."
The Common Stock: Each share of Common Stock will have the same
relative rights as, and will be identical in all
respects with, each other share of Common Stock in
the Offerings. All of the issued and outstanding
voting stock of the Bank will be held by the
Company. THE COMMON STOCK OF THE COMPANY REPRESENTS
NONWITHDRAWABLE CAPITAL, IS NOT AN ACCOUNT OF AN
INSURABLE TYPE, AND IS NOT INSURED BY THE OTS, THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
SAVINGS ASSOCIATION INSURANCE FUND ("SAIF"), OR ANY
OTHER GOVERNMENT AGENCY OR FUND. Upon payment of
the Purchase Price for the Common Stock, all such
shares will be fully paid and nonassessable. See
"Description of Capital Stock."
- --------------------------------------------------------------------------------
(ii)
<PAGE>
- --------------------------------------------------------------------------------
Dividends: The Board of Directors of the Company currently
intends to establish a cash dividend policy
following the Conversion at a rate to be
determined. Dividends will be subject to
determination and declaration by the Board of
Directors, which will take into account a number of
factors, including the financial condition of the
Company and regulatory restrictions on the payment
of dividends by the Bank to the Company, on which
dividends the Company eventually may be primarily
dependent. There can be no assurance that dividends
will be paid on the Common Stock or that, if paid,
such dividends will not be reduced or eliminated in
future periods. See "Dividends."
Expiration Date of
Subscription Offering: The Subscription Offering will terminate at 4:00
p.m., Eastern Time, on __________ ____, 1996 unless
the Subscription Offering is extended, at the
discretion of the Board of Directors, up to an
additional 45 days with the approval of the OTS, if
necessary, but without additional notice to
subscribers. See "The Conversion -Subscription
Rights and the Subscription Offering."
Conditions to Closing of
the Offerings: Consummation of the Offerings is subject to (i)
consummation of the Conversion, which is
conditioned on, among other things, approval of the
Plan by the members of the Bank and the OTS, (ii)
the receipt by the OTS of an update to the Bank's
appraisal of its pro forma market value and
authorization by the OTS to sell Common Stock
within the range set forth in the update to that
appraisal, and (iii) the sale of a minimum of
697,000 shares of Common Stock. See "The
Conversion - Conditions and Termination." There can
be no assurances that all of these conditions will
be met.
Use of Proceeds: Net proceeds from the sale of the Common Stock are
estimated to be between approximately $6.54 million
and $8.96 million depending on the number of shares
of Common Stock sold and the estimated expenses of
the Offerings. The Company intends to use
approximately 50% of the net proceeds from the
Offerings to purchase 100% of the to be outstanding
common stock of the Bank and retain the remainder
as its initial capitalization. The portion of the
net proceeds retained by the Company will initially
be invested in U.S. government and federal agency
securities, high-grade, short term marketable
securities, deposits of, or loans to, the Bank, or
a combination thereof and ultimately may be used to
support the future expansion of operations.
Additionally, the Company intends to fund the ESOP
purchases through a loan to the ESOP from net
proceeds retained by the Company. The portion of
the net proceeds from the Offerings exchanged by
the Company for all of the outstanding capital
stock of the Bank will be used for general
corporate purposes and will increase the Bank's
total capital to support expanded lending, internal
growth and possible external growth through
acquisitions of branch offices, expansion into new
lending markets, and other acquisitions. Net
proceeds received by the Bank may also be used to
make contributions to repay the ESOP
- --------------------------------------------------------------------------------
(iii)
<PAGE>
- --------------------------------------------------------------------------------
loans and will initially be invested in high-grade,
short term investment securities. See "Use of
Proceeds."
Management Purchases: Directors, officers, and their associates,
collectively intend to subscribe for approximately
70,000 shares of Common Stock at the Purchase
Price. See "The Conversion - Shares to be Purchased
by Management Pursuant to Subscription Rights."
Potential Management
Benefits: ESOP. The ESOP is expected to purchase up to 8% of
----
the shares of Common Stock sold in the Conversion,
which will be awarded to employees without payment
by such persons of cash consideration. See
"Management of the Bank - Other Benefits -Employee
Stock Ownership Plan."
Restricted Stock Plan. Within one year following
---------------------
the completion of the Conversion, subject to
stockholder and Board of Director approvals and OTS
review, the Bank intends to adopt a restricted
stock plan (the "RSP") which would acquire an
amount of Common Stock equal to 4.0% of the shares
sold in the Conversion. Assuming a $10.00 per share
grant price and the issuance of Common Stock at the
midpoint of the EVR, the value to participants
could total approximately $328,000 in the
aggregate. No officer may receive more than 25%,
and directors who are not employees may not receive
more than 5% individually or 30% in the aggregate,
of shares purchased by the RSP. See "Pro Forma
Data" and "Management of the Bank - Proposed Future
Stock Benefit Plans - Restricted Stock Plan" and "-
Restrictions on Benefit Plans."
Stock Option Plan. Within one year following the
-----------------
completion of the Conversion, subject to
stockholder and Board of Director approval and OTS
review, the Bank intends to establish a Stock
Option Plan (the "Option Plan"), whereby options
may be granted to purchase additional authorized
but unissued shares of Common Stock that equal in
the aggregate up to 10% of the stock sold in the
Conversion. Alternatively, such Common Stock may be
purchased in the open market by the Company. See
"Pro Forma Data" and "Management of the Bank -
Proposed Future Stock Benefit Plans - Stock Option
Plan."
Independent Valuation: Keller & Company, Inc. ("Keller"), an independent
appraisal firm, has determined that the estimated
pro forma market value of the Bank was within an
EVR from $6,970,000 to $9,430,000 with a midpoint
of $8,200,000 as of September 6, 1996. The
independent valuation will be updated immediately
prior to the consummation of the Offerings. See
"The Conversion -Stock Pricing" and "- Number of
Shares to be Issued in the Conversion."
Risk Factors: See "Risk Factors" for a discussion of the
following factors which should be considered by
prospective investors: potential impact of changes
in interest rates; disparity in insurance premiums
and special assessment; lack of growth in the
Bank"s market areas; expansion of loan portfolio;
adjustable-rate mortgage loans; anti-
- --------------------------------------------------------------------------------
(iv)
<PAGE>
- --------------------------------------------------------------------------------
takeover provisions; voting control; possible
dilutive effect of RSP and stock options and effect
of purchases by the RSP and ESOP; regulatory
oversight; possible adverse income tax consequences
of the distribution of subscription rights; return
on equity after Conversion; and lack of liquidity
for the Common Stock.
Market for Common Stock: Neither the Company nor the Bank has ever issued
capital stock. Consequently, there is no
established market for the Common Stock at this
time. The Company has received conditional approval
from Nasdaq for approval to have Common Stock
quoted on the Nasdaq SmallCap Market under the
symbol ("AFBC"). However, no assurances can be
given that such approval will be forthcoming or
that an active and liquid market for the Common
Stock will develop or be maintained. Accordingly,
prospective purchasers of the Common Stock should
consider the potentially illiquid nature of an
investment in the Common Stock and recognize that
the absence of an established market might make it
difficult to buy or sell the Common Stock. Given
the relatively small size of the offering, it is
not expected that an active and liquid trading
market for the Common Stock will develop or that,
if developed, it will continue, nor is there any
assurance that persons purchasing shares will be
able to sell at a price equal to or above the
Purchase Price. KBW has indicated that, upon
completion of the Conversion, it intends to act as
a market maker for the Common Stock, subject to
compliance with applicable laws and regulations,
although it is not obligated to do so. See "Risk
Factors --Lack of Liquidity for the Common Stock"
and "Market for the Common Stock."
- --------------------------------------------------------------------------------
(v)
<PAGE>
- --------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA
Set forth below are summaries of historical financial and other data
regarding the Bank. This information is derived in part from, and should be
read in conjunction with, the Consolidated Financial Statements and Notes to the
Consolidated Financial Statements of the Bank presented elsewhere in this
Prospectus.
SELECTED FINANCIAL DATA
The following table sets forth certain information concerning the financial
position of the Bank at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Total assets................... $91,852 $83,746 $78,924 $66,261 $64,358
Loans receivable, net(1)....... 78,941 73,057 65,891 54,654 50,002
Mortgage-backed securities..... 537 908 1,129 2,321 3,052
Investments(2)................. 5,428 4,323 2,842 4,621 7,581
Cash and cash equivalents...... 4,017 3,139 7,117 2,749 1,700
Savings deposits............... 80,771 74,698 67,230 59,292 59,145
Retained Earnings.............. 6,200 5,783 5,259 4,221 3,412
Number of:
Full service offices(3)........ 2 2 2 2 2
Real estate loans outstanding.. 1,732 1,673 1,640 1,504 1,450
Deposit accounts............... 11,656 10,832 9,994 9,525 9,657
</TABLE>
____________________________________
(1) Includes loans held for sale.
(2) Includes Federal Home Loan Bank ("FHLB") stock.
(3) In September 1996, the Bank received regulatory approval to open a branch
in Wintersville, Ohio.
SUMMARY OF OPERATIONS
The following table summarizes the Bank's results of operations for each of
the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest income............. $ 6,610 $ 5,927 $ 5,382 $ 5,284 $ 5,340
Interest expense............ 3,801 3,144 2,459 2,696 3,437
Net interest income......... 2,809 2,783 2,923 2,588 1,903
Provision for loan losses... 263 48 57 23 37
Net income.................. 417 715 856 729 436
</TABLE>
- --------------------------------------------------------------------------------
(vi)
<PAGE>
- --------------------------------------------------------------------------------
KEY OPERATING RATIOS
The table below sets forth certain performance and financial ratios of the
Bank for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income
divided by average total assets)................................ 0.48% 0.89% 1.22% 1.09% 0.69%
Return on average equity (net income
divided by average equity)...................................... 6.77 12.84 18.05 19.48 13.81
Net interest rate spread.......................................... 3.13 3.38 4.18 3.74 2.95
Net yield on average interest earning
assets.......................................................... 3.36 3.59 4.33 3.96 3.15
Average interest-earning assets to
average interest-bearing liabilities............................ 104.95 105.09 104.12 105.39 103.56
Net interest income after provision for
possible loan losses, to total other expenses................... 1.19 1.44 1.63 1.54 1.23
Efficiency Ratio(1)............................................... 69.18 62.71 55.94 59.13 68.25
ASSET QUALITY RATIOS:
Non-performing loans to total loans............................... 0.55 0.33 0.65 0.30 0.61
Allowance for loan losses to
non-performing assets........................................... 73.53 32.14 34.87 35.10 28.81
Allowance for loan losses to total
loans........................................................... 0.40 0.26 0.25 0.21 0.23
Non-performing assets to total
assets.......................................................... 0.48 0.69 0.63 0.41 0.64
CAPITAL RATIOS:
Equity to assets at period end.................................... 6.75 6.90 6.66 6.37 5.30
Average equity to average assets ratio............................ 7.10 6.96 6.76 5.58 4.96
</TABLE>
____________________
(1) Operating expenses as a percent of net interest income plus non interest
income.
- --------------------------------------------------------------------------------
(vii)
<PAGE>
- --------------------------------------------------------------------------------
RECENT DEVELOPMENTS
Selected Financial and Other Data
Set forth below are the summaries of historical financial and other
data regarding the Bank. Financial data as of September 30, 1996 and for the
three months ended September 30, 1996 and 1995, are unaudited. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation have been included. The summary of operations
and other data for the three months ended September 30, 1996 are not necessarily
indicative of the results of operations for the fiscal year ended June 30, 1997.
The following table sets forth certain information concerning the
financial position of the Bank at the dates indicated.
<TABLE>
<CAPTION>
At September 30, At June 30,
1996 1996
---------------- -----------
(Dollars in Thousands)
(unaudited)
Total Amount of:
<S> <C> <C>
Cash and cash equivalents................................... $ 3,638 $ 4,017
Loans receivable, net(1).................................... 81,149 78,941
Mortgage-backed securities.................................. 518 536
Investment Securities:
Securities held to maturity................................. 4,300 4,800
Securities available for sale............................... 66 69
Assets........................................................ 93,176 91,852
Deposits...................................................... 79,014 80,771
FHLB advances................................................. 7,368 4,376
Total equity (substantially restricted)....................... 6,051 6,200
Number of:
Real estate loans outstanding............................... 1,644 1,732
Deposit accounts............................................ 11,751 11,656
Full service offices........................................ 2 2
</TABLE>
- --------------
(1) Includes loans held for sale.
- --------------------------------------------------------------------------------
(viii)
<PAGE>
- --------------------------------------------------------------------------------
Summary of Operations
The following table summarizes the Bank's results of operations for
each of the periods indicated.
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
1996 1995
-------- ---------
(Dollars in Thousands)
(unaudited)
<S> <C> <C>
Interest income(1)...................................................... $ 1,754 $ 1,609
Interest expense........................................................ 979 930
------ ------
Net interest income................................................... 775 679
Provision for loan losses............................................... 3 4
------ ------
Net interest income after provision
for loan losses..................................................... 772 675
Non interest income..................................................... 83 58
Non interest expense.................................................... 1,060 493
------ ------
Income (loss) before income taxes (benefit)............................. (205) 240
Income tax expense (benefit)............................................ (56) 90
------ ------
Net income.............................................................. $ (149) $ 150
====== ======
</TABLE>
- -------------
(1) Includes loan origination fees.
- --------------------------------------------------------------------------------
(ix)
<PAGE>
- --------------------------------------------------------------------------------
Key Operating Ratios
The table below sets forth certain ratios of the Bank at the dates or
for the periods indicated.
<TABLE>
<CAPTION>
At or for the Three Months
Ended September 30,(1)
1996 1995
------------ ------------
(unaudited)
Performance ratios:
Return on average assets (net income (loss)
<S> <C> <C>
divided by average total assets)...................................... -0.64% 0.71%
Return on average equity (net income (loss)
divided by average total equity)...................................... -9.49% 10.24%
Average interest-earning assets to average
interest-bearing liabilities.......................................... 103.14% 103.81%
Net interest income after provision for
loan losses to average assets......................................... 0.83% 0.80%
Net interest rate spread................................................ 3.37% 3.17%
Equity Ratios:
Average assets to average equity ratio (average
equity divided by average total assets)............................... 6.79% 6.94%
Equity to assets at period end.......................................... 6.49% 6.75%
Asset Quality Ratios:
Non-performing assets to total assets................................... 0.41% 0.55%
Non-performing loans to net loans....................................... 0.47% 0.49%
Allowance for loan losses, REO and other
repossessed assets to non-performing
assets................................................................ 85.64% 39.88%
Allowance for loan losses to total loans................................ 0.47% 0.49%
Net charge-offs (recoveries) to loans
receivable............................................................ N/A N/A
</TABLE>
- --------------
(1) Annualized where appropriate.
- --------------------------------------------------------------------------------
(x)
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Comparison of Financial Condition at September 30, 1996 and June 30, 1996
Total assets increased by $1.3 million or 1.4% due primarily to loan growth of
$2.2 million or 2.8% in residential mortgages and consumer loans. This increase
was offset by decreases in cash and cash equivalents of $379,000 and investment
securities of $503,000 due to maturities.
Deposits declined by $1.8 million due primarily to declines in certificates of
deposit. Advances from the FHLB increased by $3.0 million or 68.4% as a result
of the decline in deposits.
Total equity decreased $149,000 as a result of a loss for the three months ended
September 30, 1996. The loss for the three months ended September 30, 1996 was
the result of a one time charge of $470,000 in federal insurance premiums for
the recapitalization of the SAIF fund.
Non-Performing Assets and Delinquencies
Loans accounted for on a non-accrual basis increased to $223,000 at September
30, 1996 from $139,000 at June 30, 1996. The increase was a result of
approximately 10 loans (eight were one- to four-family loans and two were a
combination of one- to four-family and commercial loans) added to the
non-accrual loan portfolio. After September 30, 1996, the majority of these
loans were reclassified to performing loans. At September 30, 1996 the Bank had
no repossessed assets or real estate owned. The allowance for loan losses was
$328,000 at September 30, 1996.
Comparison of the Results of Operations for the Three Months Ended September 30,
1996 and 1995
Net Income. Net income decreased by $299,000 or 200% from net income of $150,000
for the three months ended September 30, 1995 to a net loss of $149,000 for the
same three months of fiscal 1997. The return on average assets decreased from
0.71% to (0.64)% for the three months ended September 30, 1995 and 1996,
respectively. The results of operations for the three month period ended
September 30, 1996 were significantly impacted by the one-time charge relating
to the SAIF assessment, See "-- Noninterest Expense."
Net Interest Income. Net interest income increased $94,000 or 14.0% from
$679,000 for the three months ended September 30, 1995 to $775,000 for the three
months ended September 30, 1996. The increase is primarily due to an increase in
the net interest spread from 3.17% for the three months ended September 30, 1995
to 3.37% for the three months ended September 30, 1996 as a result of a decrease
in the cost of interest-bearing liabilities.
Interest Income. Interest income increased $145,000 for the three months ended
September 30, 1996 compared to the same three months ended September 30, 1995.
The increase in interest income is primarily attributed to an increase in the
average balance of interest-earning assets. The average balance in
interest-earning assets increased by 9.0%. This increase in average
interest-earning assets added an additional $145,000 of interest income. The
average yield on interest-earning assets remained constant at 7.93% for both
periods.
Interest Expense. Interest expense increased $49,000 from $930,000 for the three
months ended September 30, 1995 to $979,000 for the three months ended September
30, 1996. The increase in interest expense was attributable to an increase in
interest-bearing liabilities of $7.6 million offset by a slight decrease in the
cost of funds of 19 basis points (100 basis points equals 1%). The average
balance of deposits and advances from the FHLB increased by $4.5 million and
$3.1 million, respectively, from September 30, 1995 to September 30, 1996.
- --------------------------------------------------------------------------------
(xi)
<PAGE>
- --------------------------------------------------------------------------------
Noninterest Income. Noninterest income increased by $25,000 primarily from an
increase in service charges on deposit accounts of $15,000 and gain on the sale
of loans of $7,000. The increase in service charges on deposit accounts is the
result of an increased number of deposit accounts. The increase in gain on the
sale of loans is the result of the Bank beginning a new program to sell
fixed-rate mortgage loans in 1996.
Noninterest Expense. Noninterest expense increased by $567,000 primarily as a
result of a one time charge of $470,000 in federal insurance premiums. On
September 30, 1996, the President signed into law legislation which included the
recapitalization of the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation by a one time charge to SAIF-insured
institutions of 65.7 basis points per one hundred dollars of insurable deposits.
Income Taxes. Income tax expense amounted to $90,000 for the three months ended
September 30, 1995 compared to a tax benefit of $56,000 for the three months
ended September 30, 1996 as a result of pre-tax earnings (loss) for the periods.
Capital Resources
Management monitors risk-based capital and leverage capital ratios in order to
assess compliance with regulatory guidelines. At September 30, 1996, the Bank
exceeded the 8.0% minimum risk based capital requirement and the leveraged
capital ratio of 3.0% of tangible assets.
Subsequent Event
On October 1, 1996, a major area employer, Wheeling Pittsburgh Steel Corporation
experienced a work strike by its employees. It is not known how long the strike
will last. Continuation of the strike for several months could subsequently
cause the Bank to experience an increased provision for possible loan losses
over that experienced in the Bank's most recent fiscal year.
- --------------------------------------------------------------------------------
(xii)
<PAGE>
RISK FACTORS
Before investing in shares of the Common Stock offered hereby,
prospective investors should carefully consider the matters presented below in
addition to those discussed elsewhere in this prospectus.
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 other borrowings. Generally, during periods of increasing
interest rates, the Bank's interest rate sensitive liabilities would reprice
faster than its interest rate sensitive assets, causing a decline in the Bank's
interest rate spread and margin. This would result in an increase in the Bank's
cost of funds that would not be immediately offset by an increase in its yield
on earning assets. An increase in the cost of funds without an equivalent
increase in the yield on interest earning assets would tend to reduce net
interest income. As a result of the increase in interest rates during these
periods, the Bank's net interest rate spread decreased between the fiscal years
ended June 30, 1994 and June 30, 1996 from 4.18% to 3.13%. For additional
discussion of this interest rate risk, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Net Portfolio Value." For
additional information on the Bank's management of its interest bearing
liabilities and interest earning assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management."
Disparity in Insurance Premiums and Special Assessment
Deposits of the Bank are currently insured by the SAIF as administered
by the FDIC. As a member of the SAIF, the Bank paid an insurance premium to the
FDIC equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. Effective September 30, 1995, the FDIC lowered the
insurance premium on BIF insured deposits 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%. Effective January 1, 1996, the annual insurance premium for most
BIF members was lowered to $2,000. These reductions in insurance premiums for
BIF members placed SAIF members at a competitive disadvantage to BIF members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $470,000 pre-tax
expense for this assessment at September 30, 1996. Beginning January 1, 1997,
deposit insurance assessments for SAIF members are expected to be reduced to
approximately .064% of deposits on an annual basis through the end of 1999.
During this same period, BIF members are expected to be assessed approximately
.013% of deposits. Thereafter, assessments for BIF and SAIF members should be
the same. It is expected that these continuing assessments for both SAIF and BIF
members will be used to repay outstanding Financing Corporation bond
obligations. As a result of these changes, beginning January 1, 1997, the rate
of deposit insurance assessed the Bank will decline by approximately 70%. See
"Recent Developments."
The disparity in insurance premiums between those required for the Bank
and BIF members could allow BIF members to attract and retain deposits at higher
interest rates and at a lower effective cost than the Bank. This could put
competitive pressure on the Bank to raise its interest rates paid on deposits,
thus increasing its cost of funds and possibly reducing net interest income.
Although the Bank has other
1
<PAGE>
sources of funds, these other sources may have higher costs than those of
deposits. See "Regulation - Insurance of Deposit Accounts."
Lack of Growth in the Bank's Market Areas
Economic growth in the Bank's market areas remains dependent upon the
local economy. The deposit and loan activity of the Bank is affected by economic
conditions in its market areas. During the early to mid 1980's this area
experienced an economic recession due to significant downsizing in the steel
industry and the population has experienced modest declines during recent years.
Although the Bank has been able to increase its market share in originating
first mortgage loans on residential property within its primary market areas,
total first mortgage loan originations in the Bank's market areas have been
declining. See "Business of the Bank - Competition" and "- Market Areas."
Possible Increase in Loan Loss Provision following Expansion of Loan Portfolio
The Bank currently originates consumer, including automobile, loans and
commercial loans and intends to further diversify its loan portfolio by
moderately increasing the amount of consumer and commercial lending in its
primary market area. Consumer and commercial loans are generally considered to
involve a higher degree of credit risk than one- to four-family residential
mortgage loans. In future periods this higher degree of credit risk may result
in the Bank experiencing an increased provision for possible loan losses over
that experienced in the Bank's most recent fiscal year. See "Business of the
Bank--Lending Activities."
Default Rates on Adjustable-Rate Mortgage Loans After Interest Rate Increases
The Bank primarily originates longer term, adjustable-rate, one- to
four-family mortgage loans within its market areas. The interest rates on these
loans typically adjust every one, three or five years. The Bank requires
borrowers for these loans to qualify at the initial rate. The Bank also offers
these loans with initial rates below the fully indexed rate. In the event
interest rates on these loans increase, related monthly mortgage payments for
borrowers will increase. Should this occur, the Bank may experience higher
default rates from borrowers unable to meet higher payments. See "Business of
the Bank -- One- to Four-Family Residential Loans" and "-- Loan Underwriting
Risks."
Decrease in Profitability Since 1994
For the fiscal years ended June 30, 1994, 1995, and 1996, the Bank
reported net income of approximately $856,000, $715,000 and $417,000,
respectively, and a return on average assets of 1.22%, .89% and .48%,
respectively. Management's strategy to increase profitability will focus on the
origination of adjustable-rate mortgage loans, the sale of first mortgage
primary residence fixed-rate mortgage loans, and the increase in the origination
of shorter term loans while decreasing deposit interest expense and limiting
overhead expenses. However, the future profitability of the Bank, like that of
most financial institutions, may be affected by changes in interest rates as
well as other factors. See "Management's Discussion and Analysis Of Financial
Condition and Results of Operations -- Operating Strategy".
Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation and
Bylaws, particularly a provision limiting voting rights, as well as the Delaware
General Corporation Law and certain federal
2
<PAGE>
regulations, assist the Company in maintaining its status as an independent,
publicly owned corporation and serve to render a hostile takeover more
difficult. These provisions provide for, among other things, supermajority
voting, staggered terms for the Board of Directors, noncumulative voting for
directors, limits on the calling of special meetings, and restrictions on
certain business combinations. In particular, the Company's Certificate of
Incorporation provides that beneficial owners of more than 10% of the Company's
outstanding Common Stock may not vote the shares owned in excess of the 10%
limit for a period of five years from the completion of the Conversion of the
Bank, and no person may, directly or indirectly, offer to acquire or acquire the
beneficial ownership of more than 10% of any class of any equity security of the
Company. The impact of these provisions on a beneficial holder of more than 10%
of the Common Stock is to (1) require divestiture of the amount of stock held in
excess of 10% (if within five years of the Conversion more than 10% of the
Common Stock is beneficially owned by a person) and (2) at any time, limit the
vote on the Common Stock held by the beneficial owner to 10% or possibly reduce
the amount that may be voted below the 10% level. Unless the grantor of a
revocable proxy is an affiliate or an associate of a 10% holder or there is an
arrangement, agreement, or understanding with such 10% holder, these provisions
would not restrict (1) the ability of a 10% holder of revocable proxies to
exercise revocable proxies for which the 10% holder is neither a beneficial nor
record owner, or (2) the ability of a beneficial owner of less than 10% of the
Common Stock to solicit revocable proxies during a public proxy solicitation for
a particular meeting of stockholders and vote such proxies. However, these
provisions may discourage potential proxy contests. Additional restrictions
apply after five years from the completion of the Conversion.
These provisions, although they do not preclude a takeover, may have
the effect of discouraging a future takeover attempt not approved by the
Company's Board of Directors, but pursuant to which stockholders might receive a
substantial premium for their shares over then-current market prices. As a
result, stockholders who might desire to participate in such a transaction might
not have the opportunity to do so. Such provisions will also render the removal
of the Company's Board of Directors and of management more difficult and,
therefore, may serve to perpetuate current management. The Boards of Directors
of the Bank and the Company, however, have concluded that the potential benefits
outweigh the possible disadvantages because they believe that such provisions
encourage potential acquirors to negotiate directly with the Boards of
Directors. The Boards of Directors believe that they are in the best position to
act on behalf of all stockholders. Further, the Board of Directors of the
Company has the ability to waive certain restrictions on acquisition, provided
that the acquisition is approved by a majority of the disinterested Board of
Directors in advance. The Bank has also entered into employment agreements with
the chief executive officer and other executive officers and severance
agreements with certain key employees. These agreements could result in higher
expenses for an acquiror, thereby making an acquisition less attractive to
potential acquirors. See "Certain Restrictions on Acquisition of the Company."
Possible Voting Control by Management and the Board of Directors
The directors and executive officers of the Bank intend to purchase, at
the same price per share as the shares sold to other investors in the
Conversion, approximately 70,000 shares or 8.5% of the shares to be sold in the
Conversion (based upon an offering at the midpoint of the EVR). Assuming that
stockholders approve the Option Plan and RSP, that the stock options to be
granted are exercised by recipients, and that the RSP purchases and awards 4% of
the shares sold in the Conversion, the aggregate beneficial ownership of such
directors and officers would increase after the Conversion to 184,800 shares, or
20.5% (based on an offering at the midpoint of the EVR). In addition, such
officers may acquire beneficial ownership of additional shares of Common Stock
through future ESOP allocations, which amounts cannot be determined at this
time. It is expected that certain directors of the Bank will serve as the
trustees to the ESOP ("ESOP Trustees") and as members of an ESOP Committee. The
ESOP Trustees must vote all allocated shares held in the ESOP as directed by
participating employees.
3
<PAGE>
Unallocated shares (approximately 65,600 shares at the midpoint of the EVR
immediately after Conversion and until allocated) and allocated shares for which
no timely direction is received will be voted by the ESOP Trustees as directed
by the Board of Directors or the ESOP Committee, subject to the ESOP Trustees'
fiduciary duties. In addition, shares sold above the maximum of the EVR may be
sold to the ESOP to fill its subscription (the ESOP currently intends to
purchase up to 8% of the Common Stock) prior to satisfying unfilled orders of
Eligible Account Holders, or the ESOP may purchase shares in the open market.
The proposed purchases of the Common Stock by the Board of Directors,
management, and the ESOP, as well as the potential acquisition of the Common
Stock through the Option Plan and RSP, could render it difficult to obtain
majority support for stockholder proposals opposed by the Company's Board of
Directors and management. Moreover, such voting control could enable the Board
of Directors of the Company and management to block the approval of transactions
requiring the approval of 80% of the stockholders under the Company's
Certificate of Incorporation. See "Management of the Bank - Other Benefits" and
"- Proposed Future Stock Benefit Plans," "Description of Capital Stock," and
"Certain Restrictions on Acquisition of the Company."
Possible Dilutive Effect of RSP and Stock Options and Effect of Purchases by the
RSP and ESOP
Within one year following the completion of the Conversion, subject to
the approval of (1) the Boards of Directors of the Company and the Bank and (2)
stockholders of the Company, the RSP expects to acquire 4% of the total number
of shares sold in the Offerings through the issuance of authorized but unissued
shares or by open market purchases. The issuance of authorized but unissued
shares to the RSP in an amount equal to 4% of the outstanding shares of Common
Stock of the Company would dilute existing stockholder interests by
approximately 3.9%. The RSP and the ESOP may acquire shares of Common Stock in
the open market. In the event the RSP acquires additional shares of Common Stock
in the open market, the funds available for investment by the Company and the
Bank will be reduced by the amount used to acquire such shares. In the event the
ESOP acquires shares of Common Stock in the open market and the purchase price
is different than $10 per share, the funds available for investment will be
affected by the difference between $10 and the purchase price. See "Pro Forma
Data" and "Management of the Bank - Proposed Future Stock Benefit Plans -
Restricted Stock Plan." In addition, the Bank intends to establish a stock
option plan after the Conversion, whereby options may be granted to purchase
additional authorized but unissued shares of Common Stock that equal in the
aggregate up to 10% of the Common Stock sold in the Conversion. Assuming that
options for 10% of the shares sold are granted and exercised and funded through
previously authorized but unissued stock, existing stockholders' interests would
be diluted by approximately 9.1%. See "Management of the Bank Proposed Future
Stock Benefit Plans - Stock Option Plan." Benefit plans such as the RSP and the
Option Plan that are implemented within the first year after the Conversion are
subject to OTS regulation.
Accounting practices require an employer such as the Company to record
compensation expense in an amount equal to the fair value of shares committed to
be released from plans such as the ESOP. If shares of Common Stock appreciate in
price over time, compensation expense related to the ESOP may be materially
increased as a result, although the extent of such an increase in expense cannot
be accurately quantified at this time. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Recent Accounting
Pronouncements."
Possible Negative Impact Caused by Regulatory Oversight
The Bank is subject to extensive regulation, supervision, and
examination by the OTS as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
The Bank is a member of the FHLB of Pittsburgh and is subject to certain limited
4
<PAGE>
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). As the savings and loan holding company of the Bank, the
Company is also subject to regulation and oversight by the OTS. Such regulation
and supervision governs the activities in which an institution may engage and is
intended primarily for the protection of the FDIC insurance funds and depositors
and not for the protection of stockholders. Regulatory authorities have been
granted extensive discretion in connection with their supervisory and
enforcement activities. Any change in the regulatory structure or the applicable
statutes or regulations could have a material impact on the Company and the
Bank, their operations and the Conversion. See "Regulation."
A bill has been introduced to the House Banking Committee that would
consolidate the OTS with the Office of the Comptroller of the Currency ("OCC").
The resulting agency would regulate all federally chartered commercial banks and
thrift institutions. In the event that the OTS is consolidated with the OCC, it
is possible that the thrift charter could be eliminated, requiring thrifts to
convert to commercial bank charters.
Bank holding companies are more limited in their investment authority
than are savings and loan holding companies. Under current law and regulation, a
unitary savings and loan holding company, such as the Company, which has only
one thrift subsidiary that meets the qualified thrift lender ("QTL") test, such
as the Bank, has essentially unlimited investment authority. See "Regulation -
Company Regulation." Legislation has also been proposed which, if enacted, would
limit the non-banking related activities of savings and loan holding companies
to those activities permitted for bank holding companies.
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Bank has received an opinion from Keller that subscription rights
granted to Eligible Account Holders, Supplemental Eligible Account Holders, and
Other Members have no value. However, this opinion is not binding on the
Internal Revenue Service ("IRS"). If the subscription rights are deemed to have
an ascertainable value, receipt of such rights would be taxable (either as
capital gain or ordinary income) probably only to those who exercise the
subscription rights in an amount equal to such value. Additionally, the 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 to Stock Form
on Depositors and Borrowers of the Bank - Tax Effects."
Decreased Return on Equity Immediately After Conversion
As a result of the Conversion, the Company, on a consolidated basis
with the Bank, will have equity that is substantially more than the equity of
the Bank prior to the Conversion. Accordingly, the increase in equity coupled
with the limited loan opportunities in the Bank's market areas is likely to
adversely affect the Company's ability to attain a return on average equity (net
income divided by average equity) at historical levels, absent a corresponding
increase in net income. The Company and the Bank initially intend to invest the
net proceeds in short to medium term investments which generally have lower
yields then residential mortgage loans. There can be no assurance that the
Company will be able to increase net income in future periods in amounts
commensurate with the increase in equity resulting from the Conversion. See,
also, "Pro Forma Data."
Lack of Liquidity for the Common Stock
Neither the Bank nor the Company has ever issued capital stock.
Consequently, there is not, at this time, any market for the Common Stock. The
Company has received conditional approval to have the Common Stock quoted on the
Nasdaq SmallCap Market under the symbol "AFBC." The Company
5
<PAGE>
will seek to encourage and assist at least two market makers to make a market in
the Common Stock. KBW has indicated its intent to make a market in the Common
Stock upon the completion of the Conversion, subject to compliance with
applicable laws and regulations, but is under no obligation to do so. While the
Company anticipates that prior to the completion of the Conversion it will
obtain a commitment from at least one other broker-dealer to make a market in
the Common Stock, there can be no assurance that there will be two or more
market makers for the Common Stock. One of the conditions for Nasdaq quotation
is that at least two market makers make, or agree to make, a market in the
stock.
Due to the relatively small size of the Offerings, an active and liquid
market for the Common Stock may not develop or be maintained. Accordingly,
prospective purchasers should consider the potentially illiquid nature of an
investment in the Common Stock and recognize that the absence of an established
market might make it difficult to buy or sell the Common Stock. See "Market for
the Common Stock."
ADVANCE FINANCIAL BANCORP
The Company is a Delaware corporation organized in September 1996 at
the direction of the Bank to acquire all of the capital stock that the Bank will
issue upon its conversion from the mutual to stock form of ownership. The
Company has not engaged in any significant business to date. The OTS has
approved the Company's application to become a savings and loan holding company
and the Company will retain approximately 50% of the net proceeds from the
issuance of Common Stock as its initial capitalization (ranging from
approximately $6.54 million assuming the sale of 697,000 shares at the minimum
of the EVR to $8.96 million assuming the sale of 943,000 shares at the maximum
of the EVR). The Company will use the balance of the net proceeds to purchase
all of the common stock of the Bank to be issued upon Conversion. Part of the
proceeds retained by the Company will be used to fund the loan to the ESOP.
Prior to the Conversion, the Company will not transact any material business.
Upon consummation of the Conversion, the Company will have no significant assets
other than that portion of the net proceeds of the Offerings retained by the
Company (less the loan to the ESOP) and the shares of the Bank's capital stock
acquired in the Conversion, and will have no significant liabilities. Cash flow
to the Company will be dependent upon earnings from the investment of the
portion of net proceeds retained by it in the Conversion and any dividends
received from the Bank. See "Use of Proceeds."
Management believes that the holding company structure will provide
flexibility for possible diversification of business activities through existing
or newly-formed subsidiaries, or through acquisitions of or mergers with both
savings institutions and commercial banks, as well as other financial services
related companies. Although there are no current arrangements, understandings,
or agreements regarding any such opportunities, the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial condition, to take advantage of any such acquisition and
expansion opportunities that may arise. However, some of these activities could
be deemed to entail a greater risk than the activities permissible for federally
chartered savings associations such as the Bank. The initial activities of the
Company are anticipated to be funded by the portion of the net proceeds retained
by the Company and earnings thereon.
The office of the Company is located at 1015 Commerce Street,
Wellsburg, West Virginia 26070 and its telephone number is (304) 737-3531.
ADVANCE FINANCIAL SAVINGS BANK, f.s.b.
The Bank is a federally chartered mutual savings bank headquartered in
Wellsburg, West Virginia. The Bank was chartered in 1935 under the name Advance
Federal Savings and Loan Association of West Virginia. The Bank obtained its
current name in 1989. The Bank's deposits have been federally
6
<PAGE>
insured since 1935 under the SAIF as administered by the FDIC and its
predecessor, the Federal Savings and Loan Insurance Corporation, and the Bank
became a member of the FHLB System in 1935. At June 30, 1996, the Bank had total
assets of $91.9 million, deposits of $80.8 million, and equity of $6.2 million
or 6.7% of total assets.
The Bank is a community oriented savings institution offering financial
services to meet the needs of the communities it serves. The Bank conducts its
business from its main office located in Wellsburg, West Virginia, and one
branch office located in Follansbee, West Virginia. In addition, in September
1996, the Bank received approval from the OTS to open a new branch office in
Wintersville, Ohio.
The principal sources of funds for the Bank's lending activities are
deposits and the amortization and repayment of loans and sales, maturities, and
calls of securities. The principal source of income is interest on loans and the
principal expense is interest paid on deposits.
The main office of the Bank is located at 1015 Commerce Street,
Wellsburg, West Virginia 26070 and the telephone number of that office is (304)
737-3531.
USE OF PROCEEDS
The Company will purchase all of the capital stock of the Bank to be
issued upon Conversion in exchange for 50% of the net proceeds of the Offerings,
with the remaining net proceeds to be retained by the Company as initial
capital. The Company has received the approval of the OTS to retain 50% of the
net proceeds. The net proceeds retained by the Company will be initially
invested in loans to the Bank, U.S. Government and federal agency securities,
interest earning deposits, high-grade short term marketable securities, or a
combination thereof. The portion of the net proceeds retained by the Company may
ultimately be used to support the future expansion of operations through
acquisitions of other financial service institutions, such as other savings
institutions and commercial banks, acquisitions of branches of financial service
institutions, although no such transactions are currently contemplated,
diversification into other related businesses, or for other business and
investment purposes including the payment of regular and special dividends on,
and repurchase of, the Common Stock. The Company also intends to make a loan
directly to the ESOP to enable the ESOP to purchase Common Stock in the
Conversion. If the Company is not permitted to make the ESOP loan, the ESOP may
borrow funds from an unaffiliated lender with such loan being guaranteed by the
Company. Based upon the issuance of 697,000 shares or 943,000 shares at the
minimum and maximum of the EVR, respectively, the Company would retain $3.3
million or $4.5 million, respectively, of the net proceeds from the Offerings,
out of which the loan to the ESOP to purchase 8% of the Common Stock would be
$558,000 or $754,000, respectively, and the Bank would receive additional
capital of $3.3 million or $4.5 million, respectively. The amount of the ESOP
loan would be reflected as a reduction to the capital of both the Company and
the Bank, whether such loan is obtained from the Company or instead from a third
party and guaranteed by the Company. See "Pro Forma Data."
In the event the ESOP does not purchase Common Stock in the Conversion,
the ESOP may purchase shares of Common Stock in the open market after the
Conversion. In the event the purchase price of the Common Stock is different
than $10.00 per share, the amount of proceeds required for the purchase by the
ESOP and the resulting effect on capital will be affected.
The portion of the net proceeds not retained by the Company will be
added to the Bank's general funds to be used for general corporate purposes,
including, but not limited to, investment in mortgage and other loans, U.S.
Government and federal agency securities, state and municipal obligations,
federal funds, certificates of deposit, mortgage-backed securities, and other
investments. The amount of proceeds added to the Bank's capital will further
strengthen the Bank's capital position. This capital provides an additional
source of funding for longer term assets. Following the Conversion, the amount
of proceeds
7
<PAGE>
will be evaluated as part of the Bank's ongoing review of its asset/liability
mix and may impact the structure of the assets and liabilities of the Bank and
the Company. Neither the Bank nor the Company has any specific plans,
arrangements, or understandings regarding any acquisitions or diversification of
activities at this time, nor have criteria been established to identify
potential candidates for acquisition.
Should the Company subsequently adopt a restricted stock plan, a
portion of the proceeds may be used to fund the purchase by the plan of Common
Stock in an amount up to 4% of the shares sold in the Conversion. The actual
cost of such purchase will depend on the number of shares sold in the Conversion
and the market price at the time of purchase. Based upon the midpoint of the EVR
and on a $10.00 per share purchase price, the cost would be approximately
$328,000. It is expected that a restricted stock plan will be adopted by the
Board of Directors within one year of the Conversion.
The net proceeds may vary because total expenses of the Conversion may
be more or less than those estimated. The net proceeds will also vary if the
number of shares to be issued in the Conversion are adjusted to reflect a change
in the estimated pro forma market value of the Bank. Payments for shares made
through withdrawals from existing Bank deposit accounts will not result in the
receipt of new funds for investment by the Bank but will result in a reduction
of the Bank's deposits and interest expense as funds are transferred from
interest bearing certificates or other deposit accounts.
DIVIDENDS
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Board of Directors of the Company currently intends
to establish a cash dividend policy following Conversion at a rate to be
determined. Dividends will be subject to determination and declaration by the
Board of Directors, which will take into account a number of factors, including
the financial condition of the Company and the Bank, and regulatory restrictions
on the payment of dividends by the Bank to the Company, on which dividends the
Company eventually may be primarily dependent for its source of income. There
can be no assurance that dividends will in fact be paid on the Common Stock or
that, if paid, such dividends will not be reduced or eliminated in future
periods. In addition to or in lieu of recurring or regular dividends, the
Company may pay nonrecurring or special dividends. The Company may pay stock
dividends in lieu of, or in addition to, cash dividends.
It is anticipated that the principal source of income to the Company
will initially consist of the earnings on the capital retained by the Company in
the Conversion. Future declarations of cash dividends by the Company will depend
in part upon dividend payments by the Bank to the Company, which payments are
subject to various restrictions. See "Historical and Pro Forma Capital
Compliance," "The Conversion - Effects of Conversion to Stock Form on Depositors
and Borrowers of the Bank Liquidation Account," and "Regulation - Dividend and
Other Capital Distribution Limitations."
Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders although the source
of such dividends will be, in part, dependent upon dividends from the Bank. The
Company is subject, however, to the requirements of Delaware law, which
generally limit dividends to amounts that will not affect the ability of the
Company, after the dividend has been distributed, to pay its debts in the
ordinary course of business.
In addition to the foregoing, earnings of the Bank appropriated for bad
debt reserves and deducted for federal income tax purposes cannot be used by the
Bank to pay cash dividends to the Company without the payment of federal income
taxes by the Bank at the then current income tax rate on the amount deemed
distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation - Federal Taxation" and Note 11
to the Consolidated Financial Statements included elsewhere herein. The Company
does not contemplate any voluntary distribution by the Bank
8
<PAGE>
that would result in a recapture of the Bank's bad debt reserve or create the
above-mentioned federal tax liabilities.
MARKET FOR THE COMMON STOCK
Neither the Company nor the Bank has ever issued capital stock.
Consequently, there is no established market for the Common Stock at this time.
The Company has received conditional approval to have the Common Stock quoted on
the Nasdaq SmallCap Market under the symbol "AFBC." One of the conditions for
quotation on the Nasdaq SmallCap Market is that at least two market makers make,
or agree to make, a market in the Common Stock. Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements. KBW has indicated that, upon
completion of the Conversion, it intends to act as a market maker for the Common
Stock, but is under no obligation to do so, and will seek to obtain at least one
additional market maker. The Company will seek to encourage and assist two
market makers to make a market in the Common Stock. While the Company
anticipates that prior to the completion of the Conversion it will obtain a
commitment from at least one other broker-dealer to make a market in the Common
Stock, there can be no assurance that there will be two or more market makers.
In the event the Common Stock is not listed on the Nasdaq SmallCap Market, for
example, because a second market maker cannot be secured or retained, the Common
Stock is expected to be quoted and traded on the OTC Bulletin Board or the
National Quotation Bureau, Inc. "Pink Sheets." The development of a liquid
public market depends on the existence of willing buyers and sellers, the
presence of whom are not within the control of the Company, the Bank, Webb, or
any other market maker. Due to the size of the Offerings, it is unlikely that a
stockholder base sufficient to create an active trading market will develop and
be maintained. Therefore, purchasers of the Common Stock should have a long term
investment intent and should recognize that the absence of an active trading
market may make it difficult to sell the Common Stock. There can be no assurance
that persons purchasing shares will be able to sell them promptly or at a price
equal to or above the Purchase Price.
The Company will register its Common Stock under the Securities
Exchange Act of 1934, as amended ("Exchange Act") at the completion of the
Conversion and will be subject to the reporting requirements of the Exchange Act
for at least three years following the Conversion. See "Registration
Requirements."
9
<PAGE>
CAPITALIZATION
The following table presents, as of June 30, 1996, the historical
capitalization of the Bank and the pro forma consolidated capitalization of the
Company after giving effect to the Conversion and other assumptions set forth
below and under "Pro Forma Data," based upon the sale of shares at the minimum,
midpoint, maximum, and 15% above the maximum of the EVR at a price of $10.00 per
share:
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based on the Sale of
-------------------------------------
Historical 697,000 820,000 943,000 1,084,450
Capitalization Shares at Shares at Shares at Shares At
at June 30, $10.00 $10.00 $10.00 $10.00
1996 Per Share Per Share Per Share Per Share
------ --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1) ............................... $ 80,771 $ 80,771 $ 80,771 $ 80,771 $ 80,771
Other Borrowings .......................... 4,376 4,376 4,376 4,376 4,376
-------- -------- -------- -------- --------
Total deposits and other borrowed funds . $ 85,147 $ 85,147 $ 85,147 $ 85,147 $ 85,147
======== ======== ======== ======== ========
Shareholders' Equity:
Preferred Stock, $.10 par value per share,
500,000 shares authorized; none to be
issued ................................. -- -- -- -- --
Common Stock, $.10 par value, 2,000,000
shares authorized; total shares to be
issued as reflected .................... $ -- $ 70 $ 82 $ 94 $ 108
Additional paid in capital ................ -- 6,467 7,668 8,869 10,249
Retained earnings, substantially
restricted ............................... 6,200 6,200 6,200 6,200 6,200
Less:
Common stock acquired by ESOP ............. -- (558) (656) (754) (868)
Common stock acquired by RSP .............. -- (279) (328) (377) (434)
-------- -------- -------- -------- --------
Total stockholders' equity ................ $ 6,200 $ 11,900 $ 12,966 $ 14,031 $ 15,256
======== ======== ======== ======== ========
</TABLE>
- ---------------------
(1) Excludes accrued interest payable on deposits. Withdrawals from savings
accounts for the purchase of stock have not been reflected in these
adjustments. Any withdrawals will reduce pro forma capitalization by the
amount of such withdrawals.
(2) Does not reflect the increase in the number of shares of Common Stock after
the Conversion in the event of implementation of the Option Plan or RSP.
See "Management of the Bank - Proposed Future Stock Benefit Plans - Stock
Option Plan" and "- Restricted Stock Plan."
(3) Assumes that 8% and 4% of the shares issued in the Conversion will be
purchased by the ESOP and RSP, respectively. No shares will be purchased by
the RSP in the Conversion. It is assumed on a pro forma basis that the RSP
will be adopted by the Board of Directors, approved by stockholders of the
Company, and reviewed by the OTS. It is assumed that the RSP will purchase
Common Stock in the open market within one year of the Conversion in order
to give an indication of its effect on capitalization. The pro forma
presentation does not show the impact of (a) results of operations after
the Conversion, (b) changing market prices of shares of Common Stock after
the Conversion, or (c) a smaller than 4% purchase by the RSP. Assumes that
the funds used to acquire the ESOP shares will be borrowed from the Company
for a ten year term at the prime rate as published in The Wall Street
Journal. For an estimate of the impact of the ESOP on earnings, see "Pro
Forma Data." The Bank intends to make contributions to the ESOP sufficient
to service and ultimately retire its debt. The amount to be acquired by the
ESOP and RSP is reflected as a reduction of stockholders' equity. The
issuance of authorized but unissued shares for the RSP in an amount equal
to 4% of the outstanding shares of Common Stock will have the effect of
diluting existing stockholders' interests by 3.9%. There can be no
assurance that stockholder approval of the RSP will be obtained. See
"Management of the Bank - Proposed Future Stock Benefit Plans - Restricted
Stock Plan."
(4) The equity of the Bank will be substantially restricted after the
Conversion. See "Dividends," "Regulation - Dividends and Other Capital
Distribution Limitations," "The Conversion - Effects of Conversion to Stock
Form on Depositors and Borrowers of the Bank -Liquidation Account" and Note
12 and 17 to the Consolidated Financial Statements.
10
<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 $6.5 million and $10.4 million at the minimum
and maximum, as adjusted, of the EVR, based upon the following assumptions: (i)
8% of the stock issued in the Conversion will be sold to the ESOP and $1.4
million will be sold to officers, directors, employees and members of their
immediate families; (ii) Webb will receive a commission of 1.5% of the Common
Stock sold in the Conversion, excluding the sale of shares to the ESOP, and to
officers, directors and employees and members of their immediate families; (iii)
other Conversion expenses, excluding the commission paid to Webb, will be
approximately $357,000; (iv) no shares will be sold in a Syndicated Public
Offering by selected dealers; and (v) 4% of the shares issued in the Conversion
will be sold to the RSP. Because management of the Bank presently intends to
adopt the RSP within the first year following the Conversion, a purchase by the
RSP in the Conversion has been included with the pro forma data to give an
indication of the effect of a 4% purchase by the RSP, at a $10.00 per share
purchase price in the market, even though the RSP does not currently exist and
is prohibited by OTS regulation from purchasing in the Conversion. The pro forma
presentation does not show the effect of (a) results of operations after the
Conversion, (b) changing market prices of shares of Common Stock after the
Conversion, or (c) less than a 4% purchase by the RSP.
The following table sets forth for the periods and as of the dates
indicated, the historical net earnings and equity of the Bank prior to the
Conversion and the pro forma consolidated net earnings and stockholders' equity
of the Company following the Conversion. Unaudited pro forma consolidated net
earnings and stockholders' equity have been calculated for the fiscal year ended
June 30, 1996, as if the Common Stock to be issued in the Conversion had been
sold at July 1, 1995, and the estimated net proceeds had been invested by the
Company and the Bank at 5.78% for the fiscal year ended June 30, 1996, which
rate is equal to the one year U.S. Treasury bill rate in effect during the first
two weeks of September 1996. The one year U.S. Treasury bill rate, rather than
an arithmetic average of the average yield on interest earning assets and
average rate paid on deposits, has been used to estimate income on net proceeds
because it is believed that the one year U.S. Treasury bill rate is a more
accurate estimate of the rate that would be obtained on an initial investment of
net proceeds from the Offerings. In calculating pro forma income, an effective
state and federal income tax rate of 34.00% for both the Bank and the Company
has been assumed for the respective periods, resulting in an after tax yield of
3.81% for the fiscal year ended June 30, 1996. Withdrawals from deposit accounts
for the purchase of the Common Stock are not reflected in the pro forma
adjustments. The computations are based upon the assumptions that 697,000 shares
(minimum of EVR), 820,000 shares (midpoint of EVR), 943,000 shares (maximum of
EVR) or 1,084,450 shares (maximum, as adjusted, of the EVR) are sold at a price
of $10.00 per share.
As discussed under "Use of Proceeds," the Company expects to retain 50% of
the net Conversion proceeds, part of which will be used to lend money to the
ESOP to purchase the Common Stock issued in the Conversion. The ESOP presently
plans to purchase up to 8% of the Common Stock issued in the Conversion. The
following table assumes that the yield on the net proceeds of the Conversion
retained by the Company will be the same as the yield on the net proceeds of the
Conversion transferred to the Bank.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock. Per share amounts have been computed as if the Common Stock had been
outstanding at the beginning of the periods or at the dates shown. Pro forma
stockholders' equity and pro forma stockholders' equity per share have not been
adjusted to reflect the earnings on the estimated net proceeds.
11
<PAGE>
The stockholders' equity information is not intended to represent the fair
market value of the Common Stock, or the current value of the Bank's assets or
liabilities, or the amounts, if any, that would be available for distribution to
stockholders in the event of liquidation. For additional information regarding
the liquidation account, see "The Conversion - Effects of the Conversion to
Stock Form on Depositors and Borrowers of the Bank - Liquidation Account" and
Note 17 to the Consolidated Financial Statements. The pro forma income derived
from the assumptions set forth above should not be considered indicative of the
actual results of operations of the Bank or the Company for any period. Such pro
forma data may be materially affected by a change in the price per share or
number of shares to be issued in the Conversion and by other factors. For
information regarding investment of the proceeds see "Use of Proceeds" and "The
Conversion - Stock Pricing" and "- Number of Shares to be Issued in the
Conversion."
12
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1996
--------------------------------------------------------
697,000 820,000 943,000 1,084,450
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds.................................................... $ 6,970 $ 8,200 $ 9,430 $ 10,845
Less:
Offering expenses............................................... 357 357 357 357
Marketing fees.................................................. 76 93 110 130
Common stock acquired by ESOP................................... 558 656 754 868
Common stock acquired by RSP.................................... 279 328 377 434
------- -------- ------- ---------
Estimated net proceeds.......................................... $ 5,700 $ 6,766 $ 7,832 $ 9,056
======= ======== ======= =========
Net income:
Historical...................................................... $ 417 $ 417 $ 417 $ 417
Pro forma net income on net proceeds............................ 217 258 298 345
Pro forma ESOP adjustment(1).................................... (37) (43) (50) (57)
Pro forma RSP adjustment (2).................................... (37) (43) (50) (57)
-------- -------- ------- ---------
Pro forma net income............................................ $ 561 $ 588 $ 616 $ 648
======== ======== ======= =========
Net income per share (3):
Historical...................................................... $ 0.64 $ 0.55 $ 0.48 $ 0.41
Pro forma net income on net proceeds............................ 0.33 0.34 0.34 0.34
Pro forma ESOP adjustment (1)................................... (0.06) (0.06) (0.06) (0.06)
Pro forma RSP adjustment (2).................................... (0.06) (0.06) (0.06) (0.06)
------- -------- ------- ---------
Pro forma net income(5)......................................... $ 0.87 $ 0.77 $ 0.70 $ 0.64
======= ======== ======= =========
Weighted average shares used in the calculation................... 646,816 760,960 875,104 1,006,370
Stockholders' equity/retained earnings:(4)
Historical(2)................................................... $6,200 $ 6,200 $ 6,200 $6,200
Estimated net proceeds.......................................... 6,537 7,750 8,963 10,358
Less Common Stock acquired by ESOP(1)........................... (558) (656) (754) (868)
Less Common Stock acquired by RSP (2)........................... (279) (328) (377) (434)
------- -------- ------- ---------
Pro forma stockholders' equity.................................. $ 11,900 $ 12,966 $ 14,031 $ 15,256
======= ======== ======= =========
Stockholders' equity per share: (3)
Historical(2)................................................... $8.90 $7.56 $6.57 $5.72
Estimated net proceeds.......................................... 9.38 9.45 9.50 9.55
Less Common Stock acquired by ESOP (1).......................... (0.80) (0.80) (0.80) (0.80)
Less Common Stock acquired by RSP(2)............................ (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma stockholders' equity.................................. $17.08 $15.81 $14.87 $14.07
===== ===== ===== =====
Offering price as a percentage of pro forma stockholders'
equity per share................................................ 58.57% 63.24% 67.21% 71.08%
===== ===== ===== =====
Offering price as a multiple of pro forma earnings
per share....................................................... 11.54x 12.94x 14.21x 15.54x
===== ===== ===== =====
</TABLE>
- ----------------------
(1) Assumes 8% of the shares sold in the Conversion are purchased by the ESOP
under all circumstances, and that the funds used to purchase such shares
are borrowed from the Company. The approximate amount expected to be
borrowed by the ESOP is not reflected as a liability but is reflected as a
reduction of capital. The Bank intends to make annual contributions to the
ESOP over a ten year period in an amount at least equal to the principal
and interest requirement of the debt. The pro forma net income assumes :(i)
that 5,576, 6,560, 7,544, and 8,676 shares at the minimum, mid-point,
maximum and maximum, as adjusted of the Estimated
13
<PAGE>
Valuation Range ("EVR"), were committed to be released during the year
ended June 30, 1996 at an average fair value of $10.00 per share in
accordance with Statement of Position ("SOP") 93-6 of the American
Institute of Certified Public Accountants ("AICPA"); (ii) the effective tax
rate was 34% for such period; and (iii) only the ESOP shares committed to
be released were considered outstanding for purposes of the per share net
earnings. The pro forma stockholders' equity per share calculation assumes
all ESOP shares were outstanding, regardless of whether such shares would
have been released. Because the Company will be providing the ESOP loan,
only principal payments on the ESOP loan are reflected as employee
compensation and benefits expense. As a result, to the extent the value of
the Common Stock appreciates over time, compensation expense related to the
ESOP will increase. For purposes of the preceding tables, it was assumed
that a ratable portion of the ESOP shares purchased in the Conversion were
committed to be released during the period ended June 30, 1996. See Note 5
below. If it is assumed that all of the ESOP shares were included in the
calculation of earnings per share for the period ended at June 30, 1996,
earnings per share would have been $0.80, $0.72, $0.65 and $0.60 at June
30, 1996, respectively, based on the sale of shares at the minimum,
midpoint, maximum and the maximum, as adjusted, of the EVR. See "Management
of the Bank - Other Benefits - Employee Stock Ownership Plan."
(2) Assumes issuance to the RSP of 27,880, 32,800, 37,720, and 43,378 shares at
the minimum, mid-point, maximum, and maximum, as adjusted of the EVR. The
assumption in the pro forma calculation is that (i) shares were purchased
by the Company following the Conversion, (ii) the purchase price for the
shares purchased by the RSP was equal to the purchase price of $10 per
share and (iii) 20% of the amount contributed was an amortized expense
during such period. Such amount does not reflect possible increases or
decreases in the value of such stock relative to the Purchase Price. As the
Bank accrues compensation expense to reflect the five year vesting period
of such shares pursuant to the RSP, the charge against capital will be
reduced accordingly. Implementation of the RSP within one year of
Conversion would require regulatory and stockholder approval at a meeting
of the Company's stockholders to be held no earlier than six months after
the Conversion. For purposes of this table, it is assumed that the RSP will
be adopted by the Boards of Directors of the Company and the Bank, reviewed
by the OTS, and approved the Company's stockholders, and that the RSP will
purchase the shares of Common Stock in the open market within the year
following the Conversion. If the shares to be purchased by the RSP are
assumed at July 1, 1995, to be newly issued shares purchased from the
Company by the RSP at the Purchase Price, at the minimum, midpoint, maximum
and maximum, as adjusted, of the EVR, pro forma stockholders' equity per
share would have been $16.42, $15.20, $14.31, and $13.53 at June 30, 1996,
respectively, and pro forma earnings per share would have been $0.83,
$0.74, $0.68, and $0.62 for the year ended June 30, 1996, respectively. As
a result of the RSP, stockholders' interests will be diluted by
approximately 3.9%. See "Management of the Bank - Proposed Future Stock
Benefit Plans - Restricted Stock Plan" and "Risk Factors - Possible
Dilutive Effect of RSP and Stock Options and Effect of Purchases by the RSP
and ESOP."
(3) Assumes that following the consummation of the Conversion, the Company will
adopt the Option Plan, which if implemented within one year of Conversion
would be subject to regulatory review and Board of Director and stockholder
approval, and that such plan would be considered and voted upon at a
meeting of the Company's stockholders to be held no earlier than six months
after the Conversion. Under the Option Plan, employees and directors could
be granted options to purchase an aggregate amount of Common Stock equal to
10% of the shares issued in the Conversion at an exercise price equal to
the market price of the Common Stock on the date of grant. In the event the
shares issued under the Option Plan were awarded, the interests of existing
stockholders would be diluted. At the minimum, midpoint, maximum and the
maximum, as adjusted, of the EVR, if all shares under the Option Plan were
newly issued at the beginning
14
<PAGE>
of the respective periods and the exercise price for the option shares were
equal to the Purchase Price, the number of outstanding shares of Common
Stock would increase to 711,498, 837,056, 962,614, and 1,107,007,
respectively, pro forma stockholders' equity per share would have been
$15.52, $14.37, $13.53, and $12.79 at June 30, 1996, respectively, and pro
forma earnings per share would have been $0.79, $0.70, $0.64, and $0.58 at
June 30, 1996, respectively.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the Company over its liabilities. The calculations
are based upon the number of shares issued in the Conversion, without
giving effect to SOP 93-6. The amounts shown do not reflect the federal
income tax consequences of the potential restoration to income of the tax
bad debt reserves for income tax purposes, which would be required in the
event of liquidation. The amounts shown also do not reflect the amounts
required to be distributed in the event of liquidation to eligible
depositors from the liquidation account which will be established upon the
consummation of the Conversion. Pro forma stockholders' equity information
is not intended to represent the fair market value of the Common Stock, the
current value of the Bank's assets or liabilities or the amounts, if any,
that would be available for distribution to stockholders in the event of
liquidation. Such pro forma data may be materially affected by a change in
the number of shares to be sold in the Conversion and by other factors.
(5) Pro forma net income per share calculations include the number of shares
assumed to be sold in the Conversion and, in accordance with SOP 93-6,
exclude ESOP shares which would not have been released during the period.
Accordingly, 50,184, 59,040, 67,896, and 78,080 shares have been subtracted
from the shares assumed to be sold at the minimum, mid-point, maximum, and
maximum, as adjusted, of the EVR, respectively, and 691,424, 813,440,
935,456, and 1,075,774 shares are assumed to be outstanding at the minimum,
mid-point, maximum, and maximum, as adjusted of the EVR. See Note 1 above.
15
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Bank's historical and pro forma
capital position relative to its capital requirements as of June 30, 1996. For a
discussion of the assumptions underlying the pro forma capital calculations
presented below, see "Use of Proceeds," "Capitalization," and "Pro Forma Data."
The definitions of the terms used in the table are those provided in the capital
regulations issued by the OTS. For a discussion of the capital standards
applicable to the Bank, see "Regulation - Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma as of June 30, 1996(1)
---------------------------------------------------------
Historical at $6,970,000 $8,200,000
June 30, 1996 Offering Offering
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital............... $6,200 6.75% $8,632 9.16% $9,091 9.60%
TANGIBLE CAPITAL:
Actual or Pro Forma........ $6,209 6.75% $8,641 9.15% $9,100 9.59%
Required................... 1,380 1.50 1,417 1.50 1,424 1.50
----- ----- ----- ----- ----- -----
Excess................... $4,829 5.25% $7,224 7.65% $7,676 8.09%
===== ===== ===== ===== ===== =====
CORE CAPITAL:(3)
Actual or Pro Forma........ $6,209 6.75% $8,641 9.15% $9,100 9.59%
Required................... 2,761 3.00 2,834 3.00 2,847 3.00
----- ----- ----- ----- ----- -----
Excess................... $3,448 3.75% $5,807 6.15% $6,253 6.59%
===== ===== ===== ===== ===== =====
TOTAL RISK-BASED CAPITAL:(4)
Actual or Pro Forma........ $6,534 11.72% $8,966 15.94% $9,425 16.73%
Required................... 4,461 8.00 4,500 8.00 4,508 8.00
----- ----- ----- ----- ----- -----
Excess................... $2,073 3.72% $4,465 7.94% $4,917 8.73%
===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
$9,430,000 $10,844,500
Offering Offering
--------------------------- ---------------------------
Percent Percent
Amount of Assets(2) Amount of Assets(2)
------ --------- ------ ---------
<S> <C> <C> <C> <C>
GAAP Capital............... $9,550 10.03% $10,077 10.53%
TANGIBLE CAPITAL:
Actual or Pro Forma........ $9,559 10.02% $10,086 10.52%
Required................... 1,431 1.50 1,439 1.50
----- ------ ------ -----
Excess................... $8,128 8.52% $ 8,648 9.02%
===== ====== ====== =====
CORE CAPITAL:(3)
Actual or Pro Forma........ $9,559 10.02% $10,086 10.52%
Required................... 2,861 3.00 2,877 3.00
----- ------ ------ -----
Excess................... $6,698 7.02% $ 7,209 7.52%
===== ====== ====== =====
TOTAL RISK-BASED CAPITAL:(4)
Actual or Pro Forma........ $9,884 17.51% $10,411 18.41%
Required................... 4,515 8.00 4,523 8.00
----- ------ ------ ------
Excess................... $5,369 9.51% $ 5,888 10.41%
===== ====== ====== ======
</TABLE>
_____________
(1) Institutions must value available for sale debt securities at amortized
cost rather than at fair value, for purposes of calculating regulatory
capital. Institutions are still required to comply with SFAS No. 115 for
financial reporting purposes. The pro forma data has been adjusted to
reflect reductions in capital that would result from an assumed 8% purchase
by the ESOP and 4% purchase by the RSP as of June 30, 1996. It is assumed
that the Company will retain 50% of net conversion proceeds. See "Use of
Proceeds."
(2) GAAP, adjusted, or risk-weighted assets as appropriate.
(3) The unrealized loss on securities available for sale of $9,000 has been
added to GAAP Capital to arrive at Tangible and Core Capital.
(4) Proposed regulations of the OTS could increase the core capital requirement
to a ratio between 4% and 5%, based upon an association's regulatory
examination rating. See "Regulation - Regulatory Capital Requirements."
Risk-Based Capital includes Tangible Capital plus $325,000 of the Bank's
allowance for loan losses. Risk-weighted assets as of June 30, 1996 totaled
approximately $55.8 million. Net proceeds available for investment by the
Bank are assumed to be invested in interest earning assets that have a 20%
risk-weighting.
16
<PAGE>
ADVANCE FINANCIAL SAVINGS BANK, f.s.b.
Consolidated Statement of Income
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------------------
1996 1995 1994
------ ------ -----
Restated
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C>
Loans $6,152,898 $5,449,416 $4,895,699
Investment securities 216,783 187,916 231,011
Interest-bearing deposits with other institutions 137,850 170,660 98,060
Mortgage-backed securities 68,875 89,733 129,257
Dividends on Federal Home Loan Bank Stock 33,883 29,013 28,273
--------- --------- ---------
Total interest and dividend income 6,610,289 5,926,738 5,382,300
--------- --------- ---------
INTEREST EXPENSE
Deposits 3,627,782 2,978,698 2,248,137
Advances from Federal Home Loan Bank 173,624 165,233 211,302
--------- --------- ---------
Total interest expense 3,801,406 3,143,931 2,459,439
--------- --------- ---------
NET INTEREST INCOME 2,808,883 2,782,807 2,922,861
Provision for loan losses 262,942 48,208 56,511
--------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,545,941 2,734,599 2,866,350
---------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts 194,080 178,297 169,383
Gain on sale of loans 20,364 -- --
Other income 79,490 57,915 60,753
--------- ---------- ---------
Total noninterest income 293,934 236,212 230,136
---------- ---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 885,522 779,285 670,479
Occupancy and equipment 263,986 225,117 222,805
Deposit insurance premiums 170,525 153,784 136,360
Professional fees 95,177 92,938 96,951
Advertising 74,812 65,140 89,275
Data processing charges 144,390 129,975 113,606
Other expenses 512,121 446,963 434,398
--------- --------- ----------
Total noninterest expense 2,146,533 1,893,202 1,763,874
--------- --------- ---------
Income before income taxes and cumulative effect of 693,342 1,077,609 1,332,612
accounting change
Income taxes 275,976 362,901 420,421
---------- ---------- ----------
Income before cumulative effect of accounting change
417,366 714,708 912,191
Cumulative effect of accounting change for
income taxes -- -- (56,476)
--------- --------- ---------
NET INCOME $ 417,366 $ 714,708 $ 855,715
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and, accordingly, has no
results of operations at this time. As a result, the following discussion
principally reflects the operations of the Bank. The Bank's results of
operations are primarily dependent on its net interest income, which is the
difference between the interest income earned on its assets, primarily loans and
investments, and the interest expense on its liabilities, primarily deposits and
borrowings. Net interest income may be affected significantly by general
economic and competitive conditions and policies of regulatory agencies,
particularly those with respect to market interest rates. The results of
operations are also significantly influenced by the level of non-interest
expenses, such as employee salaries and benefits, non-interest income, such as
fees on deposit-related services, and the Bank's provision for loan losses.
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services. Management's
strategy has been to clarify its corporate focus, make certain that resources
are in place to achieve goals and objectives, and review progress toward these
goals and objectives. Management has sought to originate adjustable-rate
mortgage loans and has, more recently, sought to sell most of the fixed-rate
mortgage loans it originates into the secondary market. The Bank has also sought
to increase its origination of shorter term loans.
Operating Strategy
The Bank operates in accordance with the following strategy that is
also discussed under "-- General" and "-- Asset/Liability Management:"
o Originate Adjustable-rate Mortgage Loans. The Bank believes that it has
thus far been successful in originating adjustable-rate mortgage loans
during periods when fixed-rate loans are preferred by many consumers.
The vast majority of the Bank's one- to four-family mortgage loans are
adjustable rate loans and the Bank's one- to four-family mortgage loan
portfolio has increased from $38.1 million at June 30, 1992 to $56.0
million at June 30, 1996. Adjustable-rate mortgage loans enable the
Bank to better manage its interest rate risk.
o Sell Fixed-rate Mortgage Loans. Although the Bank has been successful
in originating adjustable-rate, rather than fixed rate mortgage loans,
it has continued to originate fixed-rate mortgage loans for those
consumers who desire these loans. The Bank has recently begun selling
into the secondary market the vast majority of the fixed-rate loans
that it originates as a means of reducing its sensitivity to changes in
interest rates.
o Originate Shorter Term Loans and Obtain Longer Term Deposits. During
the past several years, the Bank has increased its origination of
shorter term loans such as consumer loans, non-residential real estate
loans, and commercial loans and has also increased its portfolio of
longer term certificates of deposit. Increases in these types of loans
and deposits have reduced the Bank's sensitivity to changes in interest
rates. Further, the increase in these types of loans has enhanced the
yield on a portion of the Bank's loan portfolio.
o Emphasize Personal Service. For more than 60 years, the Bank has met
the financial needs of the communities it serves. Management believes
that the Bank has been able to grow during the
18
<PAGE>
past five years in a competitive market because it continues to
provide highly personalized service to its customers. In addition, the
Bank intends to continue serving its market areas as a community bank
and believes that doing so will continue to differentiate it from many
of its competitors.
o Maintain Asset Quality. Management believes that asset quality is a key
to long-term financial success. During the past five fiscal years,
total non-performing assets as a percentage of total assets has
remained between 0.41% and 0.69%. These percentages have remained
within this range despite increases in the Bank's portfolio of
non-residential real estate loans, automobile loans and commercial
loans as well as growth in the overall loan portfolio.
In the future, the Bank intends to continue its focus on the
origination of adjustable-rate mortgage loans, the sale of first mortgage
primary residence fixed-rate mortgage loans, and to increase the origination of
shorter term loans while decreasing deposit interest expense and limiting
overhead expenses. In this regard, the Bank has monitored current deposit
interest rates in its market area from competitive banks and has determined that
a decrease in interest rates offered for its NOW deposit accounts and Regular
Savings deposit accounts is warranted. The Bank plans to decrease deposit
interest rates for these accounts sometime during the second quarter of 1996.
While the Board anticipates a significant increase in non-interest expense in
the future resulting from operations from a public company and implementation of
new incentive plans, the Board believes that the additional income attributable
to the proceeds of the offering will more than offset such additional expenses.
See "Pro Forma Data". However, there can be no assurance that the Bank's
reliance on this focus will not adversely affect net income, particularly in the
event of changes in interest rates or other market conditions which impair the
Bank's ability to maintain an adequate spread between the yields and costs of
its assets and liabilities. See "-- Asset/Liability Management".
Asset/Liability Management
The Bank's net interest income is sensitive to changes in interest
rates, as the rates paid on its interest-bearing liabilities generally change
faster than the rates earned on its interest-earning assets. As a result, net
interest income will frequently decline in periods of rising interest rates and
increase in periods of decreasing interest rates.
To mitigate the impact of changing interest rates on its net interest
income, the Bank manages its interest rate sensitivity and asset/liability
products through its asset/liability management committee. The asset/liability
management committee meets as necessary to determine the rates of interest for
loans and deposits. Rates on deposits are primarily based on the Bank's need for
funds and on a review of rates offered by other financial institutions in the
Bank's market areas. Interest rates on loans are primarily based on the interest
rates offered by other financial institutions in the Bank's primary market areas
as well as the Bank's cost of funds.
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the Bank has
instituted certain asset and liability management measures, including
underwriting long-term fixed rate loans that are saleable in the secondary
market, offering longer term deposit products and diversifying the loan
portfolio into shorter term consumer and commercial business loans. In addition,
since the mid-1980s, the Bank has primarily originated one year, three year and
five year adjustable-rate mortgage loans for its portfolio.
The Committee manages the interest rate sensitivity of the Bank through
the determination and adjustment of asset/liability composition and pricing
strategies. The Committee then monitors the impact of the interest rate risk and
earnings consequences of such strategies for consistency with the Bank's
19
<PAGE>
liquidity needs, growth, and capital adequacy. The Bank's principal strategy is
to reduce the interest rate sensitivity of its interest earning assets and
attempt to match the maturities of interest earning assets with interest bearing
liabilities, while allowing for a mismatch in an attempt to increase net
interest income.
Net Portfolio Value
In order to encourage savings associations to reduce their interest
rate risk, the OTS adopted a rule incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. However, this rule is not yet in
effect. The IRR component is a dollar amount that will be deducted from total
capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR is measured as the change to
its NPV as a result of a hypothetical 200 basis point ("bp") change in market
interest rates. A resulting change in NPV of more than 2% of the estimated
present value of total assets ("PV") will require the institution to deduct from
its capital 50% of that excess change. The rules provide that the OTS will
calculate the IRR component quarterly for each institution. The following table
presents the Bank's NPV at June 30, 1996, as calculated by the OTS, based on
quarterly information voluntarily provided to the OTS by the Bank.
<TABLE>
<CAPTION>
NPV as % of PV
Net Portfolio Value of Assets
------------------- ---------
Change NPV
in Rates $ Amount $Change(1) %Change(2) Ratio(3) Change(4)
-------- -------- ---------- ---------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 bp 3,504 (5,021) (59)% 4.01% (505) bp
+300 bp 4,912 (3,613) (42) 5.50 (355) bp
+200 bp 6,292 (2,232) (26) 6.91 (215) bp
+100 bp 7,559 (966) (11) 8.15 (91) bp
0 bp 8,525 -- -- 9.06 --
- -100 bp 9,076 551 6 9.54 48 bp
- -200 bp 9,382 857 10 9.78 72 bp
- -300 bp 9,990 1,465 17 10.30 124 bp
- -400 bp 10,830 2,305 27 11.00 195 bp
</TABLE>
- -----------------
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by present value of total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
At June 30, 1996, a change in interest rates of a positive 200 basis
points would have resulted in a 215 basis point decrease in NPV as a percentage
of the present value of the Bank's total assets. Utilizing the OTS IRR
measurement described above, the Bank, at June 30, 1996, would have been
20
<PAGE>
considered by the OTS to have been subject to "above normal" IRR and an
additional $175,000 would have been required to be deducted from risk-based
capital.
Certain assumptions utilized by the OTS in assessing the interest rate
risk of savings associations were employed in preparing the previous table.
These assumptions related to interest rates, loan prepayment rates, deposit
decay rates, and the market values of certain assets under the various interest
rate scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above.
Certain shortcomings are inherent in the preceding NPV tables because
the data reflect hypothetical changes in NPV based upon assumptions used by the
OTS to evaluate the Bank as well as other institutions. Based on the above, net
interest income should decline with instantaneous increases in interest rates
while net interest income should increase with instantaneous declines in
interest rates. Generally, during periods of increasing interest rates, the
Bank's interest rate sensitive liabilities would reprice faster than its
interest rate sensitive assets causing a decline in the Bank's interest rate
spread and margin. This would result from an increase in the Bank's cost of
funds that would not be immediately offset by an increase in its yield on
earning assets. An increase in the cost of funds without an equivalent increase
in the yield on earning assets would tend to reduce net interest income. The
Bank's net interest rate spread decreased between the fiscal years ended June
30, 1994 and June 30, 1996 from 4.18% to 3.13%.
In times of decreasing interest rates, fixed rate assets could increase
in value and the lag in repricing of interest rate sensitive assets could be
expected to have a positive effect on the Bank's net interest income.
21
<PAGE>
Average Balance Sheet, Interest Rates, and Yield
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for or as of the periods indicated. Such yields and
costs are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the periods presented. Average balances are
derived from monthly balances, however, management does not believe the use of
month-end balances has caused any material difference in the information
presented. There have been no tax equivalent adjustments made to the yields.
<TABLE>
<CAPTION>
At June 30, Year Ended June 30,
------------- ---------------------------------------------------------------------
1996 1996 1995
------------- --------------------------------- ---------------------------------
Average Average Average Average
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---------- ------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:......
Loans receivable(1).......... $79,266 7.95% $76,096 $6,153 8.09% $69,378 5,449 7.85%
Investment securities (2).... 8,496 5.51 6,826 388 5.68 7,257 388 5.35
Mortgage-backed
securities.................. 537 8.94 770 69 8.96 971 90 9.27
------- ------- ------ ------- ------
Total interest-earning
assets....................... 88,299 7.72 83,692 6,610 7.90 77,606 5,927 7.64
------ ------
Non-interest-earning assets... 3,553 3,042 2,456
------- ------- -------
Total assets.................. $91,852 $86,734 $80,062
======= ======= =======
Interest-bearing liabilities:
Interest-bearing demand
deposits................... $10,930 2.96 $ 9,975 298 2.99 $ 9,204 279 3.03
Certificates of Deposit...... 50,855 5.33 50,093 2,787 5.56 44,695 2,142 4.79
Savings deposits............. 17,378 3.18 16,572 543 3.28 16,933 558 3.30
Short-term borrowings........ 4,376 5.49 3,105 173 5.57 3,012 165 5.48
------- ----- ------- ------ ------- -----
Total interest-bearing
liabilities................. 83,539 4.58 79,745 3,801 4.77 73,844 3,144 4.26
------ -----
Non-interest bearing
liabilities.................. 2,113 833 648
------- ------- -------
Total Liabilities............. 85,652 80,578 74,492
------- ------- -------
Retained Earnings............. 6,200 6,156 5,570
------- ------- -------
Total liabilities and retained
earnings..................... $91,852 $86,734 $80,062
======= ======= =======
Net interest income........... $2,809 $2,783
====== ======
Interest rate spread (3)...... 3.14% 3.13% 3.38%
Net yield on interest-earning
assets(4).................... 3.38% 3.36% 3.59%
Ratio of average interest earning
assets to average interest-
bearing liabilities......... 105.70% 104.95% 105.09%
<CAPTION>
1994
---------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets:......
Loans receivable(1).......... $60,046 $ 4,896 8.15%
Investment securities (2).... 5,817 357 6.14
Mortgage-backed
securities.................. 1,591 129 8.11
------- -------
Total interest-earning
assets....................... 67,454 5,382 7.98
-------
Non-interest-earning assets 2,694
-------
Total assets.................. $70,148
=======
Interest-bearing liabilities:
Interest-bearing demand
deposits................... $ 9,745 300 3.08
Certificates of Deposit...... 31,578 1,317 4.17
Savings deposits............. 19,102 631 3.30
Short-term borrowings........ 4,362 211 4.84
------- ------
Total interest-bearing
liabilities................. 64,787 2,459 3.80
------
Non-interest bearing
liabilities.................. 618
-------
Total Liabilities............. 65,405
-------
Retained Earnings............. 4,743
-------
Total liabilities and retained
earnings..................... $70,148
=======
Net interest income........... $2,923
======
Interest rate spread (3)...... 4.18%
Net yield on interest-earning
assets(4).................... 4.33%
Ratio of average interest earning
assets to average interest-
bearing liabilities......... 104.12%
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
22
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest earning assets and interest bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by old rate) and (ii) changes in rates (changes in
rate multiplied by old volume). Increases and decreases due to both rate and
volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------
1996 vs 1995 1995 vs 1994
------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable............... $ 528 $ 176 $ 704 $ 761 $ (208) $ 553
Investment securities.......... (23) 23 -- 88 (57) 31
Mortgage-backed securities..... (19) (2) (21) (50) 11 (39)
------ ------ ------ ------ ------ ------
Total interest-earning assets $ 486 $ 197 $ 683 $ 799 $ (254) $ 545
====== ====== ====== ====== ====== ======
Interest expense:
Interest-bearing demand
deposits................... $ 23 $ (4) $ 19 $ (17) $ (4) $ (21)
Certificates of Deposit...... 259 386 645 547 278 825
Savings deposits............. (12) (3) (15) (72) (1) (73)
Short-term borrowings........ 5 3 8 (65) 19 (46)
------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities.................. $ 275 $ 382 $ 657 $ 393 $ 292 $ 685
====== ====== ====== ====== ====== ======
Net change in interest income.. $ 211 $ (185) $ 26 $ 406 $ (546) $ (140)
====== ====== ====== ====== ====== ======
</TABLE>
Financial Condition
Total assets increased by $8.1 million or 9.7% to $91.9 million at June
30, 1996 from $83.7 million at June 30, 1995 and by $4.8 million at June 30,
1995 from $78.9 million at June 30, 1994, primarily due to increases in loans
receivable of $4.5 million and $7.2 million, respectively, as well as increases
of $1.1 million and $1.4 million in securities held to maturity, respectively,
and offset, in 1995, by a decrease in interest-bearing deposits with other
institutions of $3.6 million. The increases in the dollar amount of loans
receivable primarily resulted from increases in the dollar amount of one- to
four-family mortgage loan portfolio and to a lesser extent in the
non-residential real estate, automobile, and commercial loan portfolios.
The Bank's deposits increased by $6.1 million or 8.1% to $80.8 million
at June 30, 1996 and by $7.5 million or 11.1% to $74.7 million at June 30, 1995
from $67.2 million at June 30, 1994. Between 1994 and 1995, the Bank increased
the size of its certificates of deposit portfolio through extensive advertising
of a "yes we can!" slogan in conjunction with providing above-market interest
rates for certificates of deposit with nine month terms. Between 1995 and 1996,
the Bank increased the size of its certificates of deposit portfolio and number
of deposit accounts as a result of the opening of a new branch office in
Follonsbee, West Virginia. During the past several years, the Bank believes its
deposits
23
<PAGE>
have increased due to funds deposited by customers of other local institutions
who experienced higher fees and less personalized service following mergers and
acquisitions of financial institutions located in the Bank's market areas.
The Bank's equity increased by $417,000 or 7.2% to $6.2 million at June
30, 1996 from $5.8 million at June 30, 1995. The Bank's equity increased
$713,000 or 14.1% at June 30, 1995 from $5.1 million at June 30, 1994. The
increases were primarily the result of earnings for the fiscal years ended June
30, 1996 and 1995.
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995
Net Income. Net income decreased by $297,000 or 41.6% for fiscal 1996
to $417,000 from $715,000 for fiscal 1995. Net income for fiscal 1996 was
reduced primarily as a result of an increase of $253,000 in noninterest expense
and an increase in the provision for loan losses of $215,000 partially offset by
an increase of $58,000 in noninterest income and a decrease of $87,000 in income
taxes.
Net Interest Income. Net interest income increased by approximately
$26,000 or 0.9% to $2.81 million for fiscal 1996 from $2.78 million for fiscal
1995. The interest rate spread decreased to 3.13% for fiscal 1996 from 3.38% for
fiscal 1995. The decline in interest rate spread was primarily the result of an
increase in the cost of funds due to higher market interest rates for time
deposits and an increase in the average balance of time deposits. Net interest
income increased between the periods despite this decrease in interest rate
spread due to increases in the average balances of both interest-earning assets
and interest-bearing liabilities.
Interest and Dividend Income. Interest income on loans increased by
approximately $703,000 to $6.2 million for fiscal 1996 from $5.4 million for
fiscal 1995. The increase for fiscal 1996 was largely the result of an increase
of $6.7 million in the average balance of loans outstanding during fiscal 1996,
to $76.1 million, as compared to fiscal 1995 as well as an increase in the
average yield from 7.85% for fiscal 1995 to 8.09% for fiscal 1996.
Interest Expense. Interest expense on deposits increased by
approximately $649,000 or 21.8% to $3.6 million for fiscal 1996 from $3.0
million for fiscal 1995. The increase for fiscal 1996 was substantially due to
an increase in the average cost of time deposits to 5.56% in fiscal 1996 from
4.79% in fiscal 1995 as well as an increase in the average balance of time
deposits to $50.1 million from $44.7 million during this same period. These
average costs and balances on time deposits increased as market interest rates
increased in fiscal 1996 and the Bank offered higher interest rates to attract
and retain time deposits. Interest expense on FHLB advances increased by $8,000
to $173,000 for fiscal 1996 compared to $165,000 for fiscal 1995, as the amount
of, and rate paid on, borrowed funds increased.
Provision for Loan Losses. The provision for loan losses increased
$215,000 or 445.4% to $263,000 for fiscal 1996 from $48,000 for fiscal 1995. The
Bank's ratio of non-performing loans to total loans was 0.55% and 0.33% at June
30, 1996 and 1995, respectively. The increase in the amount of the provision for
fiscal 1996 was based on management's decision to increase the allowance from
$198,000 at June 30, 1995 to $325,000 at June 30, 1996, as well as take a
$145,000 charge-off during fiscal 1996. The increase in the provision for loan
losses was in part the result of a larger loan portfolio and a significant
increase from 1995 to 1996 in automobile loans ($1.6 million), non-residential
real estate loans ($2.1 million) and commercial loans ($1.0 million). Consumer
and commercial loans are generally considered to involve a higher degree of
credit risk than one-to four family residential mortgage loans.
24
<PAGE>
This higher degree of credit risks may result in the Bank experiencing an
increased provision for possible loan losses over that experienced in the Bank's
most recent fiscal year. The $145,000 charge-off during 1996 was related
primarily to one loan. See "Business of the Bank -- Analysis of Allowance for
Loan Losses."
Noninterest Income. Noninterest income increased by $58,000 to $294,000
during fiscal 1996 from $236,000 for fiscal 1995. This increase was primarily
due to a $16,000 increase in service charges on deposit accounts and a $20,000
gain on the sale of education loans during the year ended June 30, 1996. The
increase in service charges on deposit accounts was primarily the result of an
increase in the number of deposit accounts.
Noninterest Expense. Noninterest expense increased to $2.1 million or
13.4% for fiscal 1996 from $1.9 million during fiscal 1995. Compensation and
benefits expenses increased by $106,000 or 13.7% to $886,000 for fiscal 1996
from $779,000 for fiscal 1995. The increase in compensation and benefits
expenses in fiscal 1996 was primarily the result of cost of living increases,
the hiring of additional personnel and increased benefit plan expense. Occupancy
and equipment expenses increased by $39,000 or 17.3% to $264,000 for fiscal 1996
due to purchases of data processing equipment and renovation of the branch
office. Deposit insurance premiums, professional fees, advertising, data
processing charges, and other noninterest expense also experienced an aggregate
increase of $108,000 or 12.2% over fiscal 1995 due primarily to increases
related to the growth in the certificate of deposit portfolio and increased
deposit related services.
Income Taxes. Income taxes decreased by approximately $87,000 or 24.0%
to $276,000 for fiscal 1996 from $363,000 for fiscal 1995. The decrease in
fiscal 1996 compared to fiscal 1995 was primarily the result of the decrease in
net income before taxes.
Comparison of Operating Results for the Years Ended June 30, 1995 and 1994
Net Income. Net income decreased by $141,000 or 16.5% for fiscal 1995
to $715,000 from $856,000 for fiscal 1994 primarily as a result of a decrease in
net interest income of $140,000 and an increase in noninterest expense of
$129,000 or 7.3% partially offset by a decrease in income taxes of $58,000 and a
$56,000 addition to net income in fiscal 1994 due to an accounting change that
was not repeated in fiscal 1995.
Net Interest Income. Net interest income decreased to $2.8 million for
fiscal 1995 from $2.9 million for fiscal 1994, a decrease of 4.8%. The decrease
in net interest income for fiscal 1995 was due to an increase of $684,000 in
interest expense that was only partially offset by a $544,000 increase in
interest and dividend income.
Despite an increase in average balances of interest-earning assets and
interest-bearing liabilities in fiscal 1994, the interest rate spread decreased
in fiscal 1995 to 3.38% from 4.18% for fiscal 1994, resulting in reduced net
interest income. The decrease in the interest rate spread was primarily due to
an increase in the cost of interest-bearing liabilities and a decrease in the
yield on interest earning assets.
Interest and Dividend Income. Interest income on loans increased by
approximately $554,000 or 11.3% to $5.4 million for fiscal 1995. This increase
was due to a $9.3 million or 15.5% increase in the average balance of loans in
fiscal 1995 as compared to fiscal 1994 offset by a 30 basis point or 3.7%
decline in the yield earned on loans between these two periods due to a decrease
in market interest rates.
25
<PAGE>
Interest on deposits with other institutions increased by $73,000 or 74.0% to
$171,000 for fiscal 1995, interest income on mortgage-backed securities
decreased by $40,000 for fiscal 1995 and interest income on investment
securities decreased by $43,000 or 18.7% to $188,000 for fiscal 1995. These
changes reflect, in part, the decision of management to increase liquidity by
shifting assets from less liquid but higher yielding mortgage-backed and
investment securities to more liquid but lower yielding deposits with other
institutions.
The yield on the average balance of interest earning assets was 7.64%
and 7.98%, respectively, for fiscal 1995 and 1994.
Interest Expense. Interest expense on deposits increased by
approximately $731,000 or 32.5% for fiscal 1995 from $2.2 million for fiscal
1994. The increase for fiscal 1995 was substantially due to an increase of $13.1
million or 41.5% in the average balance of time deposits from $31.6 million in
fiscal 1994 to $44.7 million in fiscal 1995 as well as an increase in the cost
of time deposits of 62 basis points or 14.9% from 4.17% in fiscal 1994 to 4.79%
in fiscal 1995 due to rising market interest rates. Interest on FHLB of
Pittsburgh advances decreased $46,000 or 21.8% during fiscal 1995 to $165,000
from $211,000 for fiscal 1994 resulting from a reduction in average borrowings.
Provision for Loan Losses. The provision for loan losses decreased
$8,000 or 14.7% to $48,000 for fiscal 1995 from $57,000 for fiscal 1994. The
Bank's ratio of non-performing loans to total loans was 0.33% and 0.65% at June
30, 1995 and 1994, respectively.
Noninterest Income. Noninterest income increased $6,000 during fiscal
1995 from $230,000 for fiscal 1994. Service charges on deposit accounts
increased $9,000 and other income decreased $3,000.
Noninterest Expense. Noninterest expense increased $129,000 or 7.3% for
fiscal 1995 from $1.8 million during fiscal 1994. Compensation and benefits
expense increased $109,000 or 16.2% from fiscal 1994 primarily due to cost of
living increases and additional personnel. Data processing charges increased
$16,000 or 14.4% for fiscal 1995 from $114,000 for fiscal 1994 due to an
increased number of accounts and new services being provided. FDIC deposit
insurance premium expense increased $17,000 or 12.8% in fiscal 1995 as the
average balance of deposits increased in fiscal 1995.
Income Taxes. Income taxes decreased by approximately $58,000 or 13.7%
to $363,000 for fiscal 1995 from $420,000 for fiscal 1994. The decrease in
fiscal 1995 compared to fiscal 1994 was primarily the result of a decrease in
net income before taxes.
Liquidity and Capital Resources
The Bank is required by OTS regulations to maintain, for each calendar
month, a daily average balance of cash and eligible liquid investments of not
less than 5% of the average daily balance of its net withdrawable savings and
borrowings (due in one year or less) during the preceding calendar month. This
liquidity requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10%. The Bank's average liquidity ratio was 10.79%,
9.39%, and 13.97% at June 30, 1996, 1995, and 1994, respectively.
The Bank's sources of liquidity include cash flows from operations,
principal and interest payments and prepayments on loans, maturities and
prepayments of securities, deposit inflows, and borrowings from the FHLB of
Pittsburgh. During fiscal 1996, 1995, and 1994, the primary source of
26
<PAGE>
funds was cash flows from deposit growth. Cash flow from net deposit growth was
$6.1 million, $7.5 million, and $7.9 million, for fiscal years ending June 30,
1996, 1995, and 1994, respectively. Cash flow used to fund loan growth during
these same periods totalled $7.7 million, $7.5 million, and $11.2 million,
respectively. Cash flow from the sale of student loans was $1.4 million for
fiscal year 1996.
In addition, from time-to-time the Bank borrows funds from the FHLB of
Pittsburgh to supplement its cash flows. At June 30, 1996, the Bank had
outstanding borrowings from the FHLB of $4.4 million. See Note 10 to the
Consolidated Financial Statements.
As of June 30, 1996, the Bank had $69,000 of securities classified as
available for sale and $4.8 million of investment securities classified as held
to maturity. The equity of the Bank at June 30, 1996 was reduced by $9,450 which
represents the net unrealized loss on securities classified as available for
sale. See Notes 1 and 2 to the Consolidated Financial Statements.
The Bank has received regulatory approval to open a branch office
during 1997 in Wintersville, Ohio. Refurbishing and related expenses for the
proposed branch (estimated at approximately $500,000) are not expected to have a
material impact on the capital or liquidity of the Bank. However, the opening
and operation of the branch will result in additional noninterest expense
relating to hiring additional staff and other related expenses.
The Bank is subject to federal regulations that impose certain minimum
capital requirements. At June 30, 1996, the Bank exceeded these capital
requirements. See "Historical and Pro Forma Capital Compliance."
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to the
savings and loan industry, and similar matters. Further, the disparity in
insurance premiums described herein could result in the Bank losing deposits to
BIF members that have lower costs of funds and therefore are able to pay higher
rates of interest on deposits. Subsequent to June 30, 1996, a one-time
assessment was imposed on the Bank and the disparity in insurance premiums was
reduced. See "Recent Developments" and "Risk Factors -- Disparity in Insurance
Premiums and Special Assessment." Management monitors projected liquidity needs
and determines the level desirable, based in part on the Bank's commitments to
make loans and management's assessment of the Bank's ability to generate funds.
Recent Accounting Pronouncements
FASB Statement on Disclosures About Fair Value of Financial
Instruments. In December 1991, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 107. The Statement
requires the disclosure of the fair value of financial instruments in the
footnotes to the financial statements. The Statement is effective for the Bank
for fiscal years ending after December 15, 1995.
FASB Statement on Accounting by Creditors for Impairment of a Loan. In
May 1993, FASB issued SFAS No. 114. SFAS No. 114 addresses the accounting by
creditors for impairment of a loan by specifying how allowances for credit
losses related to certain loans should be determined. A loan is considered
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. SFAS No.
27
<PAGE>
114 generally requires creditors to account for impaired loans, except those
loans that are accounted for at fair value or at the lower of cost or fair
value, at the present value of the expected future cash flows discounted at the
loan's effective interest rate. The Statement also addresses the accounting by
creditors for loans that are restructured in a troubled debt restructuring
involving a modification of terms of a receivable including those involving a
receipt of assets in partial satisfaction of a receivable. This Statement is
effective for fiscal years beginning after December 15, 1994. In October 1994,
FASB amended certain provisions of SFAS No. 114 by the issuance of SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." SFAS No. 118 amends SFAS No. 114 by eliminating provisions
describing how a creditor should report income on an impaired loan and
increasing disclosure requirements as to information on recorded investments in
certain impaired loans and how a creditor recognizes related interest income.
The effective date of SFAS No. 118 is the same as for SFAS No. 114. The adoption
of SFAS No. 114 and the amendment by SFAS No. 118 did not have a material effect
on the Bank's financial statements.
FASB Statement on Accounting for the Impairment of Long-Lived Asset and
for Long-Lived Assets to be Disposed of. In March 1995, FASB issued SFAS No.
121, which will become effective for fiscal years beginning after December 15,
1995. This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability is evaluated based upon the estimated
future cash flows expected to result from the use of the asset and its eventual
disposition. If expected cash flows are less than the carrying amount of the
asset, an impairment loss is recognized. Additionally, this Statement requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell.
However, based on existing conditions, and a preliminary review, management
believes that the impact of adopting this Statement will not be material to the
Bank's financial statements.
FASB Statement on Accounting for Mortgage Servicing Rights. In May
1995, FASB issued SFAS No. 122, which will become effective, on a prospective
basis, for fiscal years beginning after December 31, 1995. This Statement
requires mortgage banking enterprises to recognize as separate assets rights to
service mortgage loans, however those servicing rights are acquired. When
mortgage loans, acquired either through a purchase transaction or by
origination, are sold or securitized with servicing rights retained, an
allocation of the total cost of the mortgage loans should be made between the
mortgage servicing rights and the loans based on their relative fair values. In
subsequent periods, all mortgage servicing rights capitalized must be
periodically evaluated for impairment based on the fair value of those rights,
and any impairments recognized through a valuation allowance. However, based on
existing conditions, and a preliminary review, management believes that the
impact of adopting this Statement will not be material to the Bank's financial
statements. Effective January 1, 1997, this Statement will be superseded by SFAS
No. 125, which is discussed below.
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB encouraged all entities to adopt the fair value
based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Under the intrinsic value based method, compensation cost is the
excess of the market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities
28
<PAGE>
electing to continue use of the accounting treatment of APB Opinion No. 25 must
make certain pro forma disclosures as if the fair value based method had been
applied. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995. Pro
forma disclosures must include the effects of all awards granted in fiscal years
beginning after December 15, 1994. The Bank expects to continue to use the
"intrinsic value based method" as prescribed by APB Opinion No. 25. Accordingly,
the impact of adopting this Statement will not be material to the Bank's
financial statements.
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. In June 1996, FASB issued SFAS No.
125, which will be effective, on a prospective basis, for fiscal years beginning
after December 31, 1996. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends the "available for sale" and
"trading" approach of SFAS No. 115 to non-security financial assets that can be
contractually prepaid or otherwise settled in such a way that the holder of the
asset would not recover substantially all of its recorded investment. In
addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from being
classified as held to maturity if the security can be prepaid or settled in such
a manner that the holder of the security would not recover substantially all of
its recorded investment. The extension of the SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 are effective
for financial assets held on or acquired after January 1, 1997. Effective
January 1, 1997, SFAS No. 125 will supersede SFAS No. 122, which is discussed
above. Management has not yet determined the effect, if any, SFAS No. 125 will
have on the Company's financial statements.
In December 1994, the Accounting Standards Division of the American
Institute of Certified Public Accountants ("AICPA") approved SOP 94-6,
Disclosure of Certain Significant Risks and Uncertainties. SOP 94-6 requires
additional disclosure in financial statements about the risk and uncertainties
existing as of the date of those financial statements in the following areas:
nature of operations, use of estimates in the preparation of financial
statements, certain significant estimates and current vulnerability due to
certain concentrations. The standard is effective for financial statements
issued for fiscal years ending after December 15, 1995. Management does not
believe that the adoption of SOP 94-6 will have a material impact on the
financial position of the Bank.
In November 1993, the AICPA issued SOP 93-6 Employers' Accounting for
Employee Stock Ownership Plan. SOP 93-6 addresses accounting for shares of stock
issued to employees by an employee stock ownership plan. SOP 93-6 requires that
the employer record compensation expense in an amount equal to the fair value of
shares committed to be released from the ESOP to employees. SOP 93-6 is
effective for fiscal years beginning after December 15, 1993 and relates to
shares purchased by an ESOP after December 31, 1992. Management has determined
that, assuming the Common Stock appreciates over time, the adoption of SOP 93-6
will likely increase compensation expense relative to the ESOP, as compared with
prior guidance that required recognition of compensation expense based on the
cost of the shares acquired by the ESOP. The amount of any such increase,
however, cannot be determined at this time because the expense will be based on
the fair value of the shares committed to be released to employees, which amount
is not determinable.
29
<PAGE>
Effect of Inflation and Changing Prices
The Bank's financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike industrial companies, virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services.
BUSINESS OF THE COMPANY
The Company is a Delaware corporation organized in September 1996 at
the direction of the Bank to acquire all of the capital stock that the Bank will
issue upon the Bank's conversion from the mutual to stock form of ownership. The
Company is not an operating company and has not engaged in any significant
business to date. Management believes that the holding company structure and
retention of proceeds from the Offerings will, should it decide to do so,
facilitate diversification into other non-banking activities and possible future
acquisitions of other financial institutions such as savings institutions and
commercial banks, and thereby further its expansion into existing and new market
areas and also enable the Company to repurchase its own stock. However, there
are no present plans, arrangements, agreements, or understandings, regarding any
such activities.
Upon consummation of the Conversion, the Company will be a unitary
savings and loan holding company which, under existing laws, generally would not
be restricted in the types of business activities in which it may engage,
provided that the Bank retains a specified amount of its assets in
housing-related investments. The Company will not initially conduct any active
business. The Company does not intend to employ any persons other than officers,
but will utilize the support staff of the Bank from time to time.
BUSINESS OF THE BANK
General
The Bank attracts deposits from the general public and uses such
deposits primarily to originate loans secured by first mortgages on one- to
four-family residences in its market areas. One-to four-family loans secured by
first mortgages totalled $56.0 million, or 69.1%, of the Bank's total loan
portfolio at June 30, 1996. To a lesser extent, the Bank originates consumer
loans and non-residential real estate loans which totalled $10.1 million, or
12.4%, and $8.3 million, or 10.3%, respectively, of the total loan portfolio at
June 30, 1996. The Bank also originates construction loans and other commercial
loans.
The principal sources of funds for the Bank's lending activities are
deposits, the repayment and maturity of loans and sale, maturity, and call of
securities, and FHLB advances. The principal source of income is interest on
loans and the principal expense is interest paid on deposits.
Market Areas
The Bank operates two offices. The main office is located in
Wellsburg, West Virginia, and the branch office is located in Follansbee, West
Virginia, both of which are in Brooke County. Wellsburg
30
<PAGE>
is located approximately 37 miles west of Pittsburgh, Pennsylvania and 16 miles
north of Wheeling, West Virginia on U.S. Route 22. The Pittsburgh International
Airport is located approximately 45 minutes from Wellsburg. The Bank's primary
market area for lending and deposits consists of Brooke and Hancock Counties of
West Virginia and portions of Jefferson County, Ohio and Washington County,
Pennsylvania. Regulatory approval to open a new branch office in Wintersville,
Ohio, located in Jefferson County, has been received by the Bank.
The Bank's market areas are characterized by (1) median household and
per capita income above that of West Virginia but below that of the United
States, (2) housing values below those of West Virginia and the United States,
and (3) an employment rate below that of West Virginia and the United States.
Economic growth in the Bank's market areas remains dependent upon the local
economy. The deposit and loan activity of the Bank is significantly affected by
economic conditions in its market areas. However, the economies of the Bank's
market areas have been relatively stable. Major area employers include Weirton
Steel Corporation, Wheeling Pittsburgh Steel Corporation, American Electric
Power and Koppers Industries.
The Bank serves its market area with a wide selection of residential
loans and other retail financial services. Management considers the Bank's
reputation for customer service as its major competitive advantage in attracting
and retaining customers in its market area. The Bank also believes it benefits
from its community orientation, as well as its established deposit base and
level of core deposits.
Lending Activities
General. The Bank's loan portfolio predominantly consists of mortgage
loans secured by one- to four-family residences. At June 30, 1996, the Bank's
loan portfolio totalled $81.1 million. Loans secured by first mortgages on one-
to four-family residences totalled $56.0 million, or 69.1%, of the Bank's total
loan portfolio at June 30, 1996. The Bank has not purchased loans in several
years and is primarily a portfolio lender. Recently, the Bank has adopted a
strategy to sell first mortgage primary residence, one- to four-family
fixed-rate loans in the secondary market. At June 30, 1996, such loans held for
sale totalled $1.4 million. For its mortgage loan portfolio, the Bank originates
fixed-rate (other than first mortgage primary residence loans) and
adjustable-rate mortgage loans. At June 30, 1996, adjustable-rate residential
one- to four-family mortgage loans totalled approximately 66.8% of the Bank's
residential mortgage loans.
Loan originations are generally obtained from existing customers,
members of the local community, and referrals from real estate brokers, lawyers,
accountants, and current and past customers within the Bank's lending area. The
Bank also advertises on an extensive basis in the local print media and
periodically advertises on radio and television. Mortgage loans originated by
the Bank in its portfolio generally include due-on-sale clauses that provide the
Bank with the contractual right to deem the loan immediately due and payable in
the event that the borrower transfers ownership of the property without the
Bank's consent.
31
<PAGE>
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF LOANS:
- -------------
REAL ESTATE LOANS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction............. $ 1,901 2.35% $ 2,402 3.21% $ 4,038 5.86% $ 1,929 3.42% $ 1,962 3.79%
1-4 Family(1)............ 55,975 69.05 52,711 70.40 48,051 69.67 41,315 73.25 38,079 73.54
Multi-family............. 1,697 2.09 1,737 2.32 1,367 1.98 849 1.51 885 1.71
Non-residential.......... 8,327 10.27 6,232 8.32 5,519 8.00 3,381 5.99 3,079 5.95
Consumer Loans:
Home improvement......... 1,119 1.38 1,313 1.75 899 1.30 690 1.22 538 1.04
Automobile............... 6,178 7.62 4,598 6.14 3,750 5.44 3,935 6.98 3,377 6.52
Share.................... 1,125 1.39 1,026 1.37 809 1.17 818 1.45 734 1.42
Education................ 128 0.16 1,571 2.10 1,608 2.33 1,538 2.73 1,600 3.09
Other.................... 1,512 1.87 1,230 1.64 957 1.39 1,008 1.79 796 1.54
Commercial loans........... 3,100 3.82 2,058 2.75 1,967 2.86 942 1.66 732 1.40
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans........... 81,062 100.00% 74,878 100.00% 68,965 100.00% 56,405 100.00% 51,782 100.00%
====== ====== ====== ====== ======
Less:
Loans in process......... (1,549) (1,327) (2,598) (1,344) (1,466)
Deferred loan
origination fees
and costs............... (247) (296) (302) (288) (195)
Allowance for possible loan
losses.................. (325) (198) (174) (119) (119)
------- ------- ------- ------- -------
Total loans, net...... $78,941 $73,057 $65,891 $54,654 $50,002
======= ======= ======= ======= =======
</TABLE>
- ------------------------
(1) Includes $1,375,000 of one- to four-family mortgages held for sale at June
30, 1996 and home equity and second mortgage loans.
32
<PAGE>
Loan Maturity Tables
The following table sets forth the estimated maturity of the Bank's
loan portfolio, including loans held for sale, at June 30, 1996. The table does
not include the effects of possible prepayments or scheduled repayments. All
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
1-4 Family Non-
Residential Multi-family residential
Real Estate Real Estate Real Estate Construction Consumer Commercial Total
----------- ----------- ----------- ------------ -------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-performing........... $ 214 $ 55 $ 77 $ -- $ 87 $ 9 $ 442
Amounts due:
Within 1 year............ 2,959 -- 1 -- 471 1,354 4,785
Over 1 to 2 years........ 58 -- 370 -- 1,185 227 1,840
Over 2 to 3 years........ 243 -- 22 -- 2,050 230 2,545
Over 3 to 5 years........ 534 28 319 50 5,008 869 6,808
Over 5 to 10 years....... 8,466 402 1,738 -- 1,121 290 12,017
Over 10 to 15 years...... 18,333 612 3,404 -- 103 85 22,537
Over 15 years............ 25,168 600 2,396 1,851 37 36 30,088
------- ------ ------- ------- ------ ------ --------
Total amount due......... 55,975 1,697 8,327 1,901 10,062 3,100 81,062
-------- ------- ------- ------- -------- ------- --------
Less:
Allowance for loan losses (75) (8) (41) -- (85) (116) (325)
Loans in process......... (162) -- (30) (1,217) (55) (85) (1,549)
Net deferred loan fees... (247) -- -- -- -- -- (247)
------- ------- ------- ------- ------- ------- ---------
Loans receivable, net.... $ 55,491 $ 1,689 $ 8,256 $ 684 $ 9,922 $ 2,899 $ 78,941
======= ======= ====== ====== ======= ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans,
including loans held for sale, contractually due after June 30, 1997, and shows
the amount of such loans which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
At June 30, 1996
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One- to four-family.................. $19,494 $33,520 $53,014
Multi-family......................... 699 998 1,697
Non-residential real estate.......... 4,220 4,106 8,326
Construction......................... 195 1,706 1,901
Consumer............................. 9,589 -- 9,589
Commercial........................... 1,456 281 1,737
------- ------ -------
Total.............................. $35,653 $40,611 $76,264
====== ====== ======
</TABLE>
33
<PAGE>
The following table shows the total loan originations, repayments, and
sales activity by the Bank for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
1996 1995 1994
---- ---- ----
(In Thousands)
Total gross loans receivable
<S> <C> <C> <C>
at beginning of period........... $ 74,878 $ 68,965 $ 56,405
Loans originated:
1 to 4 family residential........ 6,306 7,194 10,494
Construction..................... 2,962 3,212 4,778
Multi-family..................... 408 50 837
Non-residential real estate...... 2,013 1,320 2,287
Consumer......................... 8,083 6,008 3,619
Commercial....................... 7,789 6,114 4,666
------ ------ ------
Total loans originated............. 27,561 23,898 26,681
Total loans sold................... 1,488 -- --
Loan principal repayments.......... 19,889 17,985 14,121
------ ------ ------
Net loan activity.................. 6,184 5,913 12,560
------ ------ ------
Total gross loans receivable
at end of period................. $ 81,062 $ 74,878 $ 68,965
======= ======= =======
</TABLE>
One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Bank's primary market areas. The Bank
generally originates owner-occupied one- to four-family residential mortgage
loans in amounts up to 80% of the lesser of the appraised value or selling price
of the mortgaged property without requiring mortgage insurance. The Bank will
originate a mortgage loan in an amount up to 95% of the lesser of the appraised
value or selling price of a mortgaged property, however, mortgage insurance is
required for the amount in excess of 80% of such value. Non-owner- occupied
residential mortgage loans are originated up to 80% of the lesser of the
appraised value or selling price of the property on a fixed-rate basis only. The
Bank also originates construction permanent loans on one- to four-family
residences. The Bank retains most of the mortgage loans that it originates.
Adjustable-rate mortgage loans, which can adjust annually or every three or five
years over the life of the loan depending on the terms of the loan, can have
maturities of up to 30 years. Fixed-rate loans can have maturities of up to 30
years depending on the terms of the loan.
For all adjustable-rate mortgage loans, the Bank requires the borrower
to qualify at the initial rate. The Bank's adjustable-rate mortgage loans
provide for periodic interest rate adjustments of plus or minus 1% to 2% with a
maximum adjustment over the term of the loan as set forth in the loan agreement
34
<PAGE>
and usually ranges from 6% to 7% above the initial interest rate depending on
the terms of the loan. Adjustable-rate mortgage loans reprice every year, every
three years or every five years, and provide for terms of up to 30 years with
most loans having terms of between 15 and 30 years. The Bank offers
adjustable-rate loans with initial interest rates set below the fully indexed
rate.
The Bank offers adjustable-rate mortgage loans indexed to the weekly
average of the one year U.S. Treasury bill. Interest rates charged on mortgage
loans are competitively priced based on market conditions and the Bank's cost of
funds. Generally, the Bank's standard underwriting guidelines for mortgage loans
conform to the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines and
most of the Bank's loans are salable in the secondary market. However, it is the
current policy of the Bank to remain a portfolio lender for its adjustable rate
loans.
The Bank's one- to four-family residential loan portfolio also includes
second mortgage loans and home equity loans secured by second mortgages.
Non-residential Real Estate Loans. Non-residential real estate loans
consist of loans made for the purpose of purchasing the non-residential real
estate used as collateral and includes loans secured by mixed residential and
commercial use property, professional office buildings, churches and
restaurants. At June 30, 1996, non-residential real estate loans totalled $8.3
million, or 10.3% of total loans. Loans secured by non-residential property may
be originated in amounts up to 80% of the appraised value for a maximum term of
15 years.
Consumer Loans. The Bank offers consumer loans in order to provide a
wider range of financial services to its customers. Federal savings associations
are permitted to make secured and unsecured consumer loans up to 35% of their
assets. In addition, savings associations have lending authority above the 35%
limitation for certain consumer loans, such as home improvement, automobile and
savings account or passbook loans. Consumer or other loans totalled $10.1
million, or 12.4% of the Bank's total loans, of which loans secured by
automobiles totalled $6.2 million, or 7.6% of the Bank's total loans at June 30,
1996. The Bank originates automobile loans with terms of up to six years for
both new and used automobiles. Most of these automobile loans are originated
directly by the Bank. During the past two years, the Bank has begun to originate
automobile loans indirectly by purchasing such loans from automobile dealers
with whom the Bank provides floor plan financing. Indirect automobile loans are
underwritten by the Bank and a fee is remitted to the automobile dealer upon the
successful underwriting and closing of the loan. The fee is rebated to the Bank,
on a pro rata basis, if the loan is repaid within the first six months. The Bank
does not have recourse against the automobile dealer in the event of a default
by the borrower. The Bank originates each indirect auto loan in accordance with
its underwriting standards and procedures, which are intended to assess the
applicant's ability to repay the amounts due on the loan and the adequacy of the
financed vehicle as collateral.
Commercial Loans. Commercial loans, other than commercial real estate
loans, consist of, among other things, commercial lines of credit (which include
automobile floor plan lines of credit), commercial vehicle loans, and working
capital loans and are typically secured by residential or commercial property,
receivables or inventory, vehicles comprising the automobile floor plan, or some
other form of collateral. Floor plan financing involves continuing financing for
an automobile dealer that is secured by automobiles physically located on the
dealer's lot. The Bank holds the title to the automobiles during the pendency of
the loan. Floor plan financing typically involves high loan origination volume
and repayment within 30 days of origination.
Construction Lending. The Bank makes construction loans primarily for
the construction of single-family dwellings. The aggregate outstanding balance
of such loans on June 30, 1996 was $1.9
35
<PAGE>
million, representing 2.35% of the Bank's net loan portfolio. Approximately half
of these loans were made to persons who are constructing properties for the
purpose of occupying them. Such loans may also be made to builders to construct
properties for sale. Loans made to builders are generally "pure construction"
loans which require the payment of interest at fixed rates during the
construction period and the payment of the principal in full at the end of the
construction period. Loans made to individual property owners are either pure
construction loans or "construction-permanent" loans which generally provide for
the payment of interest only during a construction period, after which the loans
convert to a permanent loan at fixed or adjustable interest rates having terms
similar to other one- to four-family residential loans.
Construction loans made to builders who are building to resell have a
maximum loan-to-value ratio of 80% of the appraised value of the property.
Construction loans to individuals who intend to occupy the finished premises
generally have a maximum loan-to-value ratio of 80%.
Loan Underwriting Risks. Adjustable-rate mortgage loans decrease the
risks associated with changes in interest rates by periodically repricing, but
involve other risks because as interest rates increase, the underlying payments
by the borrower increase, thus increasing the potential for default. At the same
time, the marketability of the underlying collateral may be adversely affected
by higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the maximum periodic interest rate adjustment permitted by the
adjustable-rate mortgage loan documents, and, therefore is potentially limited
in effectiveness during periods of rapidly rising interest rates. These risks
have not had an adverse effect on the Bank.
While non-residential real estate and consumer or other loans provide
benefits to the Bank's asset/liability management program by reducing the Bank's
exposure to interest rate changes, due to their generally shorter terms, and
producing higher yields, such loans may entail significant additional credit
risks compared to owner-occupied residential mortgage lending. However, the Bank
believes that the higher yields and shorter terms compensate the Bank for the
increased credit risk associated with such loans.
Commercial lending entails significant additional risks when compared
with one- to four-family residential lending. For example, commercial loans
typically involve larger loan balances to single borrowers or groups of related
borrowers, the payment experience on such loans typically is dependent on the
successful operation of the project and these risks can be significantly
impacted by the cash flow of the borrowers and supply and demand conditions in
the market for commercial office, retail, and warehouse space. In periods of
decreasing cash flows, the commercial borrower may permit a lapse in general
maintenance of the property causing the value of the underlying collateral to
deteriorate.
In addition, due to the type and nature of the collateral, and, in some
cases the absence of collateral, consumer lending generally involves more credit
risk when compared with one- to four-family residential lending. Consumer
lending collections are typically dependent on the borrower's continuing
financial stability, and thus, are more likely to be adversely effected by job
loss, divorce, illness, and personal bankruptcy. In most cases, any repossessed
collateral for a defaulted consumer loan will not provide an adequate source of
repayment of the outstanding loan balance. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower and is
usually turned over to a collection agency.
Construction lending is generally considered to involve a higher level
of credit risk than one- to four-family residential lending since the risk of
loss on construction loans is dependent largely upon the accuracy of the initial
estimate of the individual property's value upon completion of the project and
the
36
<PAGE>
estimated cost (including interest) of the project. If the cost estimate proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project.
Loan Approval Authority and Underwriting. The Bank has established
various lending limits for its officers and maintains a Loan Committee. A report
of all mortgage loans originated is presented to the Board of Directors monthly.
The President and Vice President of the Bank each have the authority to approve
all applications for consumer loans up to $35,000 for secured loans and up to
$2,500 for unsecured loans, on an aggregate basis, exclusive of mortgage
balances on owner-occupied residential property. Five other officers have
authority to approve secured consumer credit applications in varying amounts up
to $35,000, on an aggregate basis, respectively, exclusive of mortgage balances
on owner-occupied residential property.
The Loan Committee considers all applications for commercial loans up
to $100,000, whether secured or unsecured, and all consumer loans in amounts
above the lending limit established above, up to $100,000. All loans in excess
of those limits set for the Loan Committee require the consideration and
approval of the entire Board of Directors.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is generally ordered, income and certain other
information is verified and, if necessary, additional financial information is
requested. An appraisal from a licensed fee appraiser of the real estate
intended to be used as security for the proposed loan is obtained. For
construction/permanent loans, funds advanced during the construction phase are
held in a loan-in-process account and disbursed based upon various stages of
completion in accordance with the results of inspection reports that are based
upon physical inspection of the construction by a loan officer. For real estate
loans, each title is reviewed by the attorney for the Bank to determine the
necessity for title insurance. Historically, the Bank has not required title
insurance except in those instances where the attorney has seen a need for title
insurance. Borrowers must also obtain fire and casualty insurance (for loans on
property located in a flood zone, flood insurance is required) prior to the
closing of the loan. The Bank is named as mortgagee/loss payee of this
insurance.
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all approved mortgage loans which generally expire within 30 days
of the date of issuance. The Bank charges no commitment fees or points to lock
in rates or to secure commitments. In some instances, after a review of the
rate, terms, and circumstances, commitments may be renewed or extended beyond
the 30 day limit. At June 30, 1996, the Bank had $1.5 million of outstanding
commitments to originate loans and $1.6 million in undisbursed funds related to
construction loans. Management believes that less than 2% of loan commitments
expire. Furthermore, at June 30, 1996, the Bank had $2.0 million in unused
equity lines of credit.
Loans to One Borrower. Regulations limit loans-to-one borrower or
affiliated group of borrowers in an amount equal to 15% of unimpaired capital
and unimpaired surplus of the Bank. The Bank is authorized to lend up to an
additional 10% of unimpaired capital and unimpaired surplus if the loan is fully
secured by readily marketable collateral. At June 30, 1996, the Bank's lending
limit for loans to one borrower was approximately $1.0 million.
At June 30, 1996, the largest loan of the Bank was a commercial real
estate loan that was secured by a strip mall shopping center and totalled
$919,000. At that date, the Bank held a residential mortgage loan with a balance
of $181,000 that was secured by the single family residence of one of the
guarantors to that $919,000 loan. At June 30, 1996, a customer of the Bank had
loans totalling $759,000 that were
37
<PAGE>
secured by commercial property such as trucks and commercial real estate of
which the largest loan totalled $300,000 and was secured by a golf course. At
June 30, 1996, the Bank also had outstanding two loans aggregating $660,000 to
an automobile dealer consisting of a $450,000 commercial loan secured by
automobiles covered under a floor plan and a $210,000 home mortgage loan. At
June 30, 1996, all of the loans discussed above were secured by property located
within the Bank's lending market areas, were performing in accordance with their
contractual terms, and were within the Bank's lending limit.
Non-Performing and Problem Assets
Loan Delinquencies. The Bank's collection procedures provide that when
a mortgage loan is 30 days past due, a delinquent notice is sent to the borrower
and a late charge is imposed in accordance with the mortgage or Deed of Trust
agreement. If payment is still delinquent after 90 days, the borrower will
receive a notice of default establishing a date by which the borrower must bring
the account current or foreclosure proceedings will be instituted. Late charges
are also imposed in accordance with the mortgage or Deed of Trust agreement. If
the delinquency continues, similar subsequent efforts are made to eliminate the
delinquency. If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, the account is turned over to an attorney
for foreclosure. Management meets regularly to determine when foreclosure
proceedings should be initiated and the borrower is notified when foreclosure
has been commenced. At June 30, 1996, nonaccrual loans and loans past due
greater than 90 days totalled $442,000 or 0.48% of total assets.
Loans are reviewed on a monthly basis and are placed on non-accrual
status when considered doubtful of collection by management. Generally, loans
past due 90 days or more as to principal or interest and, in the opinion of
management, are not adequately secured to insure the collection of the entire
outstanding balance of the loan including accrued interest are placed on
non-accrual status. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Subsequent cash payments
are generally applied to interest income unless, in the opinion of management,
the collection of principal and interest is doubtful. In those cases, subsequent
cash payments would be applied to principal.
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, accruing loans which are past due more than 90 days
as to principal or interest payments, and foreclosed assets. As of the dates
indicated, the Bank had no loans categorized as troubled debt restructuring.
38
<PAGE>
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S> <C> <C> <C> <C> <C>
One-to four-family.......................... $ 82 $ 86 $ 7 $ 73 $ 170
Multi-family................................ 55 -- -- -- --
Non-residential............................. -- -- -- -- --
Construction................................ -- -- -- -- --
Consumer...................................... 2 2 2 2 91
Commercial.................................... -- -- 6 -- --
----- ----- ----- ------ ------
Total non-accrual loans................... 139 88 15 75 261
------ ------ ------ ------ ------
Accruing loans greater than 90 days past due:
Mortgage loans:
One-to four-family........................ 132 136 132 21 48
Multi-family.............................. -- -- -- -- --
Commercial................................ 77 -- 177 -- --
Construction.............................. -- -- -- -- --
Consumer...................................... 85 24 122 57 --
Commercial.................................... 9 -- -- 15 5
----- ------ ------ ------ ------
Total accruing loans greater than 90 days
past due.................................... 303 160 431 93 53
------ ------ ------ ------ -------
Total non-performing loans.................... 442 248 446 168 314
Real estate acquired in settlement of loans... -- 334 53 102 99
Other non-performing assets................... -- -- -- -- --
----- ----- ----- ----- -----
Total non-performing assets................... $ 442 $ 582 $ 499 $ 270 $ 413
====== ====== ====== ====== ======
Total non-performing loans to total loans..... 0.55% 0.33% 0.65% 0.30% 0.61%
===== ===== ===== ===== =====
Total non-performing loans to total assets.... 0.48% 0.30% 0.57% 0.25% 0.49%
===== ===== ===== ===== =====
Total non-performing assets to total assets... 0.48% 0.69% 0.63% 0.41% 0.64%
===== ===== ===== ===== =====
</TABLE>
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was $35,000 for the
year ended June 30, 1996 and $31,000 was collected and included in the Bank's
interest income from non-accrual loans for the year ended June 30, 1996.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered substandard if it is inadequately
protected by the current equity and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that does not
currently warrant classification in one of the aforementioned categories.
39
<PAGE>
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
In accordance with its classification of assets policy, the Bank
regularly reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at June 30, 1996, the Bank had
classified $19,415 of assets as substandard, $1,000 of assets as doubtful, $0 as
loss, and $172,000 of assets as special mention.
Real Estate Acquired in Settlement of Loans. Real estate acquired in
settlement of loans is classified separately on the balance sheet at the lower
of the recorded investment in the property or its fair value minus estimated
costs of sale. Prior to foreclosure, the value of the underlying collateral is
written down by a charge to the allowance for possible loan losses, if
necessary. Any subsequent write-downs are charged against operating expenses.
Operating expenses of such properties, net of related income and losses on their
disposition are included in other expenses. At June 30, 1995, foreclosed real
estate consisted of a former bank building owned by the Bank that was
transferred to property, plant and equipment for the purpose of loan file
storage during fiscal 1996 and one residential property that was sold at a loss
of $23,000 in fiscal 1996. The bank had no real estate acquired in settlement of
loans at June 30, 1996.
Allowances for Loan Losses. Management regularly performs an analysis
to identify the inherent risk of loss in its loan portfolio. This analysis
includes evaluation of concentrations of credit, past loss experience, current
economic conditions, amount and composition of the loan portfolio (including
loans being specifically monitored by management), estimated fair value of
underlying collateral, loan commitments outstanding, delinquencies, and other
factors.
The 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 that it considers to be adequate to provide for the inherent
risk of loss in its loan portfolio, there can be no assurance that future losses
will not exceed estimated amounts or that additional provisions for loan losses
will not be required in future periods. In addition, the Bank's determination as
to the amount of its allowance for loan losses is subject to review by the OTS,
as part of its examination process, which may result in the establishment of an
additional allowance based upon the judgment of the OTS after a review of the
information available at the time of the OTS examination.
40
<PAGE>
Analysis of Allowance for Loan Losses
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding(1).............. $81,062 $74,878 $68,965 $56,405 $51,782
====== ====== ====== ====== ======
Average loans outstanding............... $76,096 $69,378 $60,046 $56,533 $50,163
====== ====== ====== ====== ======
Allowance balance (at beginning
of period)............................. $ 198 $ 174 $ 119 $ 119 $ 89
Provision:
Mortgages............................. -- 37 36 14 3
Consumer.............................. 33 11 7 8 28
Commercial............................ 230 -- 14 1 6
Charge-offs:
Mortgages............................. -- (22) -- -- (3)
Consumer(2)........................... (4) (16) (1) (25) (9)
Commercial(2)......................... (141) -- (8) -- --
Recoveries:
Mortgages............................. -- -- -- -- 3
Consumer.............................. 9 6 7 2 2
Commercial............................ -- 8 -- -- --
----- ----- ----- ----- -----
Allowance balance (at end of period).... $ 325 $ 198 $ 174 $ 119 $ 119
====== ====== ====== ====== ======
Allowance for loan losses as a percent
of total loans outstanding............ 0.40% 0.26% 0.25% 0.21% 0.23%
Net loans charged off as a percent of
average loans outstanding............. (0.19)% (0.05)% (0.01)% (0.04)% (0.02)%
</TABLE>
- ------------
(1) Includes $1,375,000 in loans held for sale.
(2) The charge-offs constitute two secured loans aggregating $145,000 from
one borrower who declared bankruptcy in 1996. The Bank filed an
objection to the bankruptcy, though there is no assurance that the Bank
will receive any recovery on either loan.
41
<PAGE>
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses by category as prepared by the Bank. In management's opinion, the
allocation has, at best, a limited utility. It is based on management's
assessment as of a given point in time of the risk characteristics of each of
the component parts of the total loan portfolio and is subject to changes as and
when the risk factors of each such component part change. The allocation is not
indicative of either the specific amounts or the loan categories in which future
charge-offs may be taken, nor should it be taken as an indicator of future loss
trends. In addition, by presenting the allocation, management does not mean to
imply that the allocation is exact or that the allowance has been precisely
determined from the allocation. The allocation of the allowance to each category
is not necessarily indicative of future loss in any particular category and does
not restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ------ ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgages:
One- to four-family.. $ 75 69.05% $ 88 70.40% $ 65 69.67%
Multi-family......... 8 2.09 8 2.32 6 1.98
Non-residential...... 41 10.27 34 8.32 45 8.00
Construction......... -- 2.35 -- 3.21 -- 5.86
Consumer............... 85 12.42 47 13.00 45 11.63
Commercial............. 116 3.82 21 2.75 13 2.86
---- ------ ---- ------ --- ------
Total.............. $ 325 100.00% $ 198 100.00% $174 100.00%
==== ====== ==== ====== === ======
</TABLE>
42
<PAGE>
Investment Activities
General. The Bank is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short term
securities and certain other investments. See "Regulation - Federal Home Loan
Bank System" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources." The Bank has
maintained a liquidity portfolio in excess of regulatory requirements. Liquidity
levels may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its expectation of
future yield levels, as well as management's projections as to the short term
demand for funds to be used in the Bank's loan origination and other activities.
The Bank classifies its investments as securities available for sale or
investments securities held to maturity in accordance with SFAS No. 115. At June
30, 1996, the Bank's investment portfolio policy allowed investments in
instruments such as U.S. Treasury obligations, U.S. federal agency or federally
sponsored agency obligations, municipal obligations, mortgage-backed securities,
banker's acceptances, certificates of deposit, federal funds, including FHLB
overnight and term deposits (up to six months), as well as investment grade
corporate bonds, commercial paper and the mortgage derivative products described
below. The Board of Directors may authorize additional investments.
The Bank's securities available for sale and investment securities held
to maturity portfolios at June 30, 1996 did not contain securities of any issuer
with an aggregate book value in excess of 10% of the Bank's equity, excluding
those issued by the United States Government or its agencies.
Mortgage-Backed Securities. To supplement lending activities, the Bank
has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages, the principal
and interest payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, Government National Mortgage
Association ("GNMA"), and FNMA.
The Bank's mortgage-backed securities were classified as held to
maturity at June 30, 1996 and were all issued by GNMA or FHLMC, representing
participating interests in direct pass-through pools of long-term mortgage loans
originated and serviced by the issuers of the securities. Expected maturities
will differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC and GNMA make up a majority of the pass-through
certificates market.
43
<PAGE>
The Bank has also invested in collateralized mortgage obligations
("CMOs"), a type of mortgage-backed security, and as of June 30, 1996 did not
hold any CMOs. CMOs have been developed in response to investor concerns
regarding the uncertainty of cash flows associated with the prepayment option of
the underlying mortgagor and are typically issued by government agencies,
government sponsored enterprises, and special purpose entities established by
financial institutions and other similar institutions. Some CMO instruments are
most like traditional debt instruments because they have stated principal
amounts and traditionally defined interest rate terms. Purchasers of certain
other CMO instruments are entitled to the excess, if any, of the issuer's cash
inflows, including reinvestment earnings, over the cash outflows for debt
servicing and administrative expenses. CMOs may include instruments designated
as residual interests, which represent an equity ownership interest in the
underlying collateral, subject to the first lien of the investors in the other
classes of the CMO and may be riskier than many regular CMO interests.
At June 30, 1996, the Bank held mortgage-backed securities in its
investment securities held to maturity portfolio with an amortized cost of
$537,000. The average yield on mortgage-backed securities at June 30, 1996 was
8.94%.
Securities Portfolio. The following table sets forth the carrying value
of the Bank's securities at the dates indicated. At June 30, 1996, the
approximate fair value of the Bank's securities available for sale was $68,000
resulting in a net unrealized loss of $9,000.
<TABLE>
<CAPTION>
At June 30,
------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
U.S. Government and agency securities......... $4,800 $3,737 $2,299
Securities available for sale................. 68 84 106
Interest-bearing deposits in other financial
institutions................................ 3,068 2,334 5,976
FHLB Stock.................................... 560 502 436
------ ------ ------
Total....................................... $8,496 $6,657 $8,817
===== ===== =====
</TABLE>
44
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for the Bank's securities portfolio at June 30, 1996 by contractual
maturity. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
At June 30, 1996
-------------------------------------------------------------------------------------------------
Less than 1 to 5 to Over 10
1 year 5 years 10 years years
---------------------- ---------------------- ---------------------- ----------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
agencies securities........... $ 1,000 5.93% $2,500 6.47% $ 300 7.27% $1,000 7.95%
Securities available for sale... -- -- 45 11.50 23 9.92 -- --
Interest-bearing deposits in
other financial
institutions.................. 3,068 5.37 -- -- -- -- -- --
FHLB stock (1)................. 560 6.38 -- -- -- -- -- --
------- ------ ------ ------ ------ ---- ------ ----
Total........................... $ 4,628 5.61% $2,545 6.57% $323 7.48% $1,000 7.95%
======= ====== ====== ====== ====== ==== ====== ----
<CAPTION>
-------------------------------
Total
Securities
-------------------------------
Carrying Market
Value Yield Value
----- ------ -----
<S> <C> <C> <C>
U.S. Government and
agencies securities........... $4,800 6.71% $4,762
Securities available for sale... 68 10.97 68
Interest-bearing deposits in
other financial
institutions.................. 3,068 5.37 3,068
FHLB stock (1)................. 560 6.38 560
------ ----- ------
Total........................... $8,496 6.25% $8,458
====== ====== ======
</TABLE>
_________________________________
(1) Recorded at cost.
45
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. The Bank also derives funds from the (1)
amortization and prepayment of loans, (2) sales, maturities, and calls of
securities, (3) sales of fixed-rate first mortgage primary residence one- to
four-family loans, and (4) operations. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions. The Bank may also borrow funds from the FHLB as a source of funds.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market areas through the offering of a selection
of deposit instruments including savings accounts, NOW accounts, money market
accounts, and time deposits or certificate of deposit accounts. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate, among other factors.
The interest rates paid by the Bank on deposits are set by the
President and at the direction of the asset/liability management committee. The
Bank determines the interest rate to offer the public on new and maturing
accounts by reviewing the market interest rates offered by competitors, the
Bank's need for funds, and the current cost of money. The Bank reviews, weekly,
the interest rates being offered by other financial institutions within its
market areas.
Savings, money market, and NOW accounts constituted $28.3 million, or
35.0%, of the Bank's deposit portfolio at June 30, 1996. Non-interest bearing
deposits constituted $1.6 million or 2.0% of the Bank's deposit portfolio at
June 30, 1996. Certificates of deposit constituted $50.9 million or 63.0% of the
deposit portfolio of which $7.8 million or 15.3% of the deposit portfolio were
certificates of deposit with balances of $100,000 or more. As of June 30, 1996,
the Bank had no brokered deposits.
The following table sets forth the savings activity of the Bank during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Net increase before interest credited................... $3,150 $5,014 $6,058
Interest credited....................................... 2,923 2,454 1,880
----- ----- -----
Net increase in deposits................................ $6,073 $7,468 $7,938
===== ===== =====
</TABLE>
46
<PAGE>
Deposit Portfolio. Deposits in the Bank as of June 30, 1996, were
represented by various types of deposit programs described below.
<TABLE>
<CAPTION>
Balance as of
Interest June 30, Percent of
Category Term Rate (1) 1996 Deposits
-------- ---- -------- ---- --------
(In thousands)
<S> <C> <C> <C> <C>
Transaction Accounts(2):
- -----------------------
NOW accounts.................... (3) $ 6,373 7.90%
Super NOW accounts.............. 3.30% 1,665 2.06
Regular savings................. 3.25% 13,806 17.09
Passbook plus................... (4) 3,572 4.42
Money Market accounts........... 2.75% 2,893 3.58
Non interest-bearing accounts... 1,607 1.99
------- -----
Total transaction accounts.. 29,916 37.04
------- -----
Certificates of Deposit:
- -----------------------
Fixed Term, Fixed Rate........ 31-32 days 3.30% 3,054 3.78
Fixed Term, Fixed Rate........ 01-03 months 4.50% 235 0.29
Fixed Term, Fixed Rate........ 04-06 months 4.75% 2,842 3.52
Fixed Term, Fixed Rate........ 07-09 months 5.10% 12,435 15.40
Fixed Term, Fixed Rate........ 11-12 months 5.20% 5,722 7.08
Fixed Term, Fixed Rate........ 15 months 5.30% 2,762 3.42
Fixed Term, Fixed Rate........ 18 months 5.35% 1,136 1.41
Fixed Term, Fixed Rate........ 21 months 5.35% 2,120 2.62
Fixed Term, Fixed Rate........ 24 months 5.45% 2,819 3.49
Fixed Term, Fixed Rate........ 30 months 5.65% 3,368 4.17
Fixed Term, Fixed Rate........ 31-48 months 5.75% 2,164 2.68
Fixed Term, Fixed Rate........ 49-96 months 5.90% 4,438 5.49
Jumbo certificates............ 7,760 9.61
----- ----
Total certificate accounts.. 50,855 62.96
------ -----
Total deposits................................................. $80,771 100.00%
====== ======
</TABLE>
_____________________________
(1) Rates are effective as of June 30, 1996.
(2) No minimum term is specified for transaction accounts.
(3) NOW accounts with balances less than $200 earn 2.75%, over $200 earn
3.00%
(4) Passbook Plus rates are tiered: Tier 1: $5,000-10,000, 3.35%, Tier 2:
$10,001 - 25,000, 3.40%, Tier 3: $25,001 -75,000, 3.45%, Tier 4:
$75,001 -100,000, 3.50%, Tier 5: 100,001 and over, 3.55%.
47
<PAGE>
Time Deposits Maturity. The following table sets forth the amount and
maturities of time deposits at June 30, 1996.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------------------
12 month 12 month 12 month
period ended period ended period ended After
June 30, June 30, June 30, June 30,
Interest Rate 1997 1998 1999 2000 Total
- ------------- ------ ------ ------ ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
4.00% or less.. $ 2,393 $ 127 $ 13 $ 521 $ 3,054
4.01 - 6.00%... 31,102 3,870 1,454 832 37,258
6.01 - 8.00%... 3,600 2,431 1,327 3,155 10,513
8.01 - 10.00%.. 30 -- -- -- 30
------- ------ ------ ------ -------
Total $37,125 $6,428 $2,794 $4,508 $50,855
======= ====== ====== ====== =======
</TABLE>
Time Deposits. The following table indicates the amount of the Bank's
time deposits of $100,000 or more by time remaining until maturity as of June
30, 1996.
Maturity Period Time Deposits
--------------- -------------
(In Thousands)
Within three months......................... $ 2,496
More than three through six months.......... 1,445
More than six through nine months........... 853
Over nine months............................ 2,966
-------
Total.................................. $ 7,760
======
Borrowings
The Bank may obtain advances from the FHLB of Pittsburgh to supplement
its supply of lendable funds. Advances from the FHLB of Pittsburgh are typically
secured by a pledge of the Bank's stock in the FHLB of Pittsburgh and a portion
of the Bank's first mortgage loans. Each FHLB borrowing has its own interest
rate, which may be fixed or variable, and range of maturities. The Bank, if the
need arises, may also access the Federal Reserve Bank discount window to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. At June 30, 1996, the Bank had $4.4 million in borrowings
outstanding from the FHLB of Pittsburgh. See Note 10 to the Notes to
Consolidated Financial Statements. At June 30, 1996, the Bank had no other
borrowings outstanding.
48
<PAGE>
The following table sets forth information concerning FHLB advances
during the periods indicated (includes both short- and long-term advances).
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1996 1995
-------- ----------
(In Thousands)
FHLB advances:
<S> <C> <C>
Average balance outstanding.......................................... 3,105 3,012
Maximum amount outstanding at
any month-end during the period.................................... 4,644 3,395
Weighted average interest rate
during the period.................................................. 5.57% 5.48%
Total FHLB advances at end of period.................................... 4,376 2,843
</TABLE>
Competition
The Bank has been able to maintain its position in mortgage loan
originations, market share, and deposit accounts throughout its market areas by
virtue of its local presence, competitive pricing, and referrals from existing
customers. The Bank is one of many financial institutions serving its market
areas. The deposit base of the Bank's market areas is sought by many of these
financial institutions.
The competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Bank's market areas. Competition for funds
also includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
other insured financial institutions such as commercial banks, thrift
institutions, credit unions, multi-state regional banks, and mortgage bankers,
many of whom have far greater resources then the Bank.
Subsidiary Activity
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. At June 30, 1996, the
Bank had one wholly-owned subsidiary, Advance Financial Service Corporation of
West Virginia ("Service Corporation"). The Service Corporation was formed in
1989 to hold stock in the Bank's outside data processing servicer. The Bank's
investment in its subsidiary totalled $15,000 at June 30, 1996. As of June 30,
1996, the Service Corporation had not conducted any operations other than to
hold the stock of that servicer.
49
<PAGE>
Properties
The Bank operates from its main office and one branch office. The
Bank's total investment in office property and equipment was $3.2 million with a
net book value of $2.1 million at June 30, 1996.
<TABLE>
<CAPTION>
Net Book Value
Of Real Property
or Leasehold
Year Leased Improvements
Location Leased or Owned or Acquired and Equipment
- -------- --------------- ----------- -------------
MAIN OFFICE:
<S> <C> <C> <C>
1015 Commerce Street Owned 1984 $1,231,762
Wellsburg, West Virginia
27060
BRANCH OFFICE:
1409 Main Street Leased (1) 1996 $ 649,207
Follansbee, West Virginia
26037
</TABLE>
- -----------------------
(1) The Bank holds a 40 year lease on the land upon which its branch office is
located. The Bank owns the branch building.
The Bank owns property in Wintersville, Ohio upon which it expects to
construct and open a branch office during 1997. The branch is expected to have a
net book value of approximately $500,000 when it is opened.
In addition, the Bank owns property at 901 Main Street, Follansbee,
West Virginia, which was formerly a branch office, and property at 727 Charles
Street, Wellsburg, West Virginia, which was formerly the location of the main
office. At June 30, 1996, the net book value of the properties was $182,678 and
$35,821, respectively.
Personnel
At June 30, 1996, the Bank had 33 full-time and three part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
Legal Proceedings
The Bank, from time to time, is a party to routine litigation, which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Bank. There were no lawsuits
pending or known to be contemplated against the Bank or the Company at June 30,
1996 that would have a material effect on the operations or income of the Bank
or the Company.
50
<PAGE>
REGULATION
Set forth below is a brief description of certain laws which relate to
the regulation of the Bank and the Company. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. After the Conversion, the Company will be a unitary savings
and loan holding company subject to regulatory oversight by the OTS. As such,
the Company is required to register and file reports with the OTS and is subject
to regulation and examination by the OTS. In addition, the OTS will have
enforcement authority over the Company and its non-savings association
subsidiaries, should such subsidiaries be formed, which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for the
benefit of stockholders of the Company. The Company will also be required to
file certain reports with, and otherwise comply with, the rules and regulations
of the OTS and the Securities and Exchange Commission ("SEC").
QTL Test. As a unitary savings and loan holding company, the Company
generally will not be subject to activity restrictions, provided the Bank
satisfies the QTL test. If the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to restrictions applicable to bank holding companies and
those activities specified by the OTS as permissible for a multiple savings and
loan holding company, unless such other associations each also qualify as a QTL
or were acquired in a supervised acquisition. See "- Qualified Thrift Lender
Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval.
Federal Securities Law. The Company has filed with the SEC a
registration statement under the Securities Act for the registration of the
Common Stock to be issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock will be registered with the SEC under the
Exchange Act. The Company will then be subject to the information, proxy
solicitation, insider trading restriction, and other requirements under the
Exchange Act.
Bank Regulation
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal and state
statutory and regulatory requirements. The Bank is also subject to certain
reserve requirements promulgated by the Board of Governors of the Federal
Reserve System ("Federal Reserve System").
51
<PAGE>
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
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. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
United States Congress could have a material adverse impact on the Company and
the Bank and their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). If an institution has no tangible capital, the FDIC has the
authority, should it initiate proceedings to terminate an institution's deposit
insurance, to suspend the insurance of any such institution. However, if a
savings association has positive capital when it includes qualifying intangible
assets, the FDIC cannot suspend deposit insurance unless capital declines
materially, the institution fails to enter into and remain in compliance with an
approved capital plan, or the institution is operating in an unsafe or unsound
manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The FDIC
may also prohibit an insured depository institution from engaging in any
activity the FDIC determines to pose a serious threat to the SAIF. The
management of the Bank is unaware of any practice, condition, or violation that
might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
Under this system, a savings association pays within a range of 23 cents to 31
cents per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates on a semi-annual basis if it determines
that such action is necessary to cause the balance in the SAIF to reach the
designated reserve ratio of 1.25% of SAIF-insured deposits within a reasonable
period of time. The SAIF was substantially underfunded at June 30, 1996. In
addition, the FDIC may impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC. The Bank's federal deposit insurance premium expense for the year
ended June 30, 1996 amounted to approximately $171,000. By comparison, at June
30, 1996, members of the BIF were required to pay substantially lower, or
virtually no, federal deposit insurance premiums. Subsequent to June 30, 1996,
the deposit insurance assessment system was revised. See "Recent Developments"
and "Risk Factors -- Disparity in Insurance Premiums and Special Assessment."
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. The Bank's capital ratios are set forth under "Historical and Pro Forma
Capital Compliance."
52
<PAGE>
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The OTS has adopted a rule requiring a deduction from capital for
institutions with certain levels of interest rate risk. This rule is not yet in
effect.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established pursuant
to the Bank's Plan. See "The Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Bank -Liquidation Account."
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of June
30, 1996, the Bank was a Tier 1 institution.
In the event the Bank's capital fell below its fully phased-in
requirement or the OTS notified it that it was in need of more than normal
supervision, the Bank would become a Tier 2 or Tier 3 institution and as a
result, its ability to make capital distributions could be restricted. Tier 2
institutions, which are institutions that before and after the proposed
distribution meet their current minimum capital requirements, may only make
capital distributions of up to 75% of net income over the most recent four
quarter period. Tier 3 institutions, which are institutions that do not meet
current minimum capital requirements and propose to make any capital
distribution, and Tier 2 institutions that propose to make a capital
distribution in excess of the noted safe harbor level, must obtain OTS approval
prior to making such distribution. In addition, the OTS could prohibit a
proposed capital distribution by any institution,
53
<PAGE>
which would otherwise be permitted by the regulation, if the OTS determines that
such distribution would constitute an unsafe or unsound practice. The OTS has
proposed rules relaxing certain approval and notice requirements for
well-capitalized institutions.
A savings association is prohibited from making a capital distribution
if, after making the distribution, the savings association would be
undercapitalized (i.e., not meet any one of its minimum regulatory capital
requirements). Further, a savings association cannot distribute regulatory
capital that is needed for the liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender ("QTL") test. If the Bank maintains an appropriate level
of qualified thrift investments ("QTIs") (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualifies as a QTL, it will continue to enjoy full borrowing
privileges from the FHLB of Pittsburgh. The required percentage of QTIs is 65%
of portfolio assets (defined as all assets minus intangible assets, property
used by the institution in conducting its business and liquid assets equal to
10% of total assets). Certain assets are subject to a percentage limitation of
20% of portfolio assets. In addition, savings associations may include shares of
stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is
determined on a monthly basis in nine out of every 12 months. As of June 30,
1996, the Bank was in compliance with its QTL requirement with approximately 75%
of its assets invested in QTIs.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital and
collateral in specified amounts must usually be provided by affiliates in order
to receive loans from the Bank. Affiliates of the Bank include the Company and
any company which would be under common control with the Bank. In addition, a
savings association may not extend credit to any affiliate engaged in activities
not permissible for a bank holding company or acquire the securities of any
affiliate that is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At June 30, 1996, the Bank's required liquid
asset ratio was 5%. Monetary penalties may be imposed upon associations for
violations of liquidity requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At June 30, 1996, the Bank had $560,000 in FHLB
stock, at cost, which was in compliance with this requirement. The FHLB imposes
various limitations on advances such as limiting the amount of certain types of
real estate related collateral to 30% of a member's capital and limiting total
advances to a member.
54
<PAGE>
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended June 30, 1996, dividends paid by the
FHLB of Pittsburgh to the Bank totalled $34,000.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At June 30,
1996, the Bank's reserve met the minimum level required by the Federal Reserve
System.
Savings associations have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings associations to exhaust all other sources before borrowing from the
Federal Reserve System. The Bank had no borrowings from the Federal Reserve
System at June 30, 1996.
TAXATION
Federal Taxation
Savings associations are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), in the same general manner as
other corporations. However, prior to August 1996, savings associations such as
the Bank, which met certain definitional tests and other conditions prescribed
by the Code could benefit from certain favorable provisions regarding their
deductions from taxable income for annual additions to their bad debt reserve.
The amount of the bad debt deduction that a qualifying savings institution could
claim with respect to additions to its reserve for bad debts was subject to
certain limitations. The Bank reviewed the most favorable way to calculate the
deduction attributable to an addition to its bad debt reserve on an annual
basis.
In August 1996, the Code was revised to equalize the taxation of
thrifts and banks. Thrifts, such as the Bank, no longer have a choice between
the percentage of taxable income method and the experience method in determining
additions to bad debt reserves. Thrifts with $500 million of assets or less may
still use the experience method, which is generally available to small banks
currently. Larger thrifts must use the specific charge off method regarding bad
debts. Any reserve amounts added after 1987 will be taxed over a six year period
beginning in 1996; however, bad debt reserves set aside through 1987 are
generally not taxed. An institution may delay recapturing into income its
post-1987 bad debt reserves for an additional two years if it meets a
residential-lending test. This law is not expected to have a material impact on
the Bank. At June 30, 1996, the Bank had $347,000 of post 1987 bad-debt
reserves.
Under the percentage of taxable income method, the bad debt deduction
attributable to "qualifying real property loans" could not exceed the greater of
(i) the amount deductible under the experience method, or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equaled the
amount by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeded the
sum of the surplus, undivided profits and reserves at the beginning of the
taxable year. The amount of the bad debt deduction attributable to qualifying
real property loans computed using the percentage of taxable income method was
permitted only to the extent that the institution's reserve for losses on
qualifying real property loans at the close of
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<PAGE>
the taxable year did not exceed 6% of such loans outstanding at such time. The
Bank used the percentage of taxable income method for the tax years ended
December 31, 1994 and 1993.
Under the experience method, the bad debt deduction may be based on (i)
a six-year moving average of actual losses on qualifying and non-qualifying
loans, or (ii) a fill-up to the institution's base year reserve amount, which is
the tax bad debt reserve determined as of December 31, 1987. The Bank used the
experience method for the tax year ended December 31, 1995. See Notes 11 and 12
to the Consolidated Financial Statements.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage of taxable income bad debt deduction thus computed was reduced by the
amount permitted as a deduction for non-qualifying loans under the experience
method. The availability of the percentage of taxable income method permitted
qualifying savings associations to be taxed at a lower effective federal income
tax rate than that applicable to corporations generally (approximately 31.3%
assuming the maximum percentage bad debt deduction).
If an association's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period, which is
immediately accruable for financial reporting purposes. As of June 30, 1996, at
least 60% of the Bank's assets were qualifying assets as defined in the Code. No
assurance can be given that the Bank will meet the 60% test for subsequent
taxable years.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction including the Bank's supplemental reserves for losses will not be
available for the payment of cash dividends or for distribution to stockholders
(including distributions made on dissolution or liquidation), unless the Bank
includes the amount in income, along with the amount deemed necessary to pay the
resulting federal income tax. As of June 30, 1996, the Bank had approximately
$1.0 million of accumulated earnings, representing its base year tax reserve,
for which federal income taxes have not been provided. If such amount is used
for any purpose other than bad debt losses, including a dividend distribution or
a distribution in liquidation, it will be subject to federal income tax at the
then current rate.
Generally, for taxable years beginning after 1986, the Code also
requires most corporations, including savings associations, to utilize the
accrual method of accounting for tax purposes. Further, for taxable years ending
after 1986, the Code disallows 100% of a savings association's interest expense
deemed allocated to certain tax-exempt obligations acquired after August 7,
1986. Interest expense allocable to (i) tax-exempt obligations acquired after
August 7, 1986 which are not subject to this rule, and (ii) tax-exempt
obligations issued after 1982 but before August 8, 1986, are subject to the rule
which applied prior to the Code disallowing the deductibility of 20% of the
interest expense.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net operating loss
carryovers of which the Bank currently has none. AMTI is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, the Bank's 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 adjustment and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986 and before January
1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain
modifications) over $2 million is imposed on corporations, including the Bank,
whether or not an AMT
56
<PAGE>
is paid. Under pending legislation, the AMT rate would be reduced to zero for
taxable years beginning after December 31, 1994, but this rate reduction would
be suspended for taxable years beginning in 1995 and 1996 and the suspended
amounts would be refunded as tax credits in subsequent years.
The Company may exclude from its income 100% of dividends received from
the Bank as a member of the same affiliated group of corporations. A 70%
dividends received deduction generally applies with respect to dividends
received from corporations that are not members of such affiliated group, except
that an 80% dividends received deduction applies if the Company and the Bank own
more than 20% of the stock of a corporation paying a dividend. The above
exclusion amounts, with the exception of the affiliated group figure, were
reduced in years in which the Bank availed itself of the percentage of taxable
income bad debt deduction method.
The Bank's federal income tax return was last examined by the IRS for
the year ended December 31, 1991.
State Taxation
West Virginia Taxation. The State of West Virginia has a corporate
income tax which subjects the Bank's West Virginia taxable income to tax at a
9.00% rate. West Virginia taxable income is computed by applying certain
modifications to federal taxable income. The primary modification consists of an
allowance factor calculated by dividing the average amount of Federal
obligations and securities, West Virginia obligations, and loans secured by
residential real property located within the State of West Virginia by the
Bank's average total assets for the year.
The State of West Virginia also has a business franchise tax payable on
the average amount of unappropriated retained earnings of the Bank reduced by an
allowance factor, as discussed above. The adjusted retained earnings amount is
subject to tax at a 0.75% rate. Due to allowable credits for property taxes paid
on the Bank's capital, the Bank has not incurred a business franchise tax
liability.
The City of Wellsburg and the City of Follansbee, West Virginia have a
business and occupation ("B & O") tax which subjected the Bank's taxable B & O
income to tax at a $0.426 per $100 in value and $0.489 per $100 in value,
respectively. Taxable B & O income is calculated by applying certain
modifications, consisting primarily of deductions of income derived from
Federal, state and local obligations and from loans secured by real estate, to
the Bank's gross income.
The Bank also files personal and real property tax returns with the
County Assessor's Office in Brooke County, West Virginia.
Delaware Taxation. As a Delaware corporation with no operations in the
State of Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual fee to the State of
Delaware. The Company is also subject to an annual franchise tax imposed by the
State of Delaware.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of those persons who
currently serve as Directors of the Bank. The Board of Directors is divided into
three classes, each of which contains approximately one-third of the Board. The
directors are elected by the stockholders of the Company for staggered
three-year terms, or until their successors are elected and qualified. One class
of directors, consisting of Stephen M. Gagliardi and James R. Murphy has a term
of office expiring at the first annual meeting following the Conversion. A
second class, consisting of George H. Johnson, William E. Watson
57
<PAGE>
and Gary Young has a term of office expiring at the annual meeting to be held
one year thereafter. A third class, consisting of John R. Sperlazza and Noreen
Mechling has a term of office expiring at the annual meeting to be held two
years thereafter.
The following individuals hold the executive offices in the Company set
forth below opposite their names.
<TABLE>
<CAPTION>
Name Age (1) Positions Held With the Company
- ---- ------- -------------------------------
<S> <C> <C>
Stephen M. Gagliardi 48 President, Chief Executive Officer, and Director
Noreen Mechling 62 Treasurer, Chief Financial Officer, and Director
Steve D. Martino 41 Vice President
</TABLE>
- ----------------
(1) At June 30, 1996.
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation, or removal by the Board of Directors. Additional
information concerning the business experience and compensation of the directors
and executive officers of the Company is set forth under "Management of the Bank
- - Biographical Information."
MANAGEMENT OF THE BANK
Directors and Executive Officers
The Board of Directors of the Bank is composed of seven members each of
whom serves for a term of three years. The Bank's proposed Charter and Bylaws
require that directors be divided into three classes, as nearly equal in number
as possible, each class to serve for a three-year period, with approximately
one-third of the directors elected each year. Executive officers are elected
annually by the Board of Directors and serve at the Board's discretion.
The following table sets forth information with respect to the
directors and executive officers of the Bank, all of whom will continue to serve
in the same capacities after the Conversion.
<TABLE>
<CAPTION>
Current
Director Term
Name Age (1) Position Since Expires
- ---- ------- -------- ----- -------
<S> <C> <C> <C> <C>
Stephen M. Gagliardi 48 President, Chief Executive 1983 1997
Officer, and Director
James R. Murphy 73 Director 1962 1997
George H. Johnson 74 Director 1977 1998
William E. Watson 59 Director 1991 1998
Gary Young 58 Director 1975 1998
Noreen Mechling 62 Director, Senior Vice 1994 1999
President, and Chief
Financial Officer
John R. Sperlazza 58 Director 1973 1999
Steve D. Martino 41 Senior Vice President and
Chief Operating Officer
</TABLE>
- ---------------
(1) At June 30, 1996.
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<PAGE>
Biographical Information
The business experience of each director and executive officer of the
Bank is set forth below. All directors and executive officers have held their
present positions for a minimum of five years unless otherwise stated.
Stephen M. Gagliardi is the President and Chief Executive Officer of
the Bank and has served in these capacities with the Company since its
formation. Mr. Gagliardi is the past Director of the West Virginia Appraiser
Licensing and Certification Board and past President of the Brooke County Rotary
and the Brooke County United Way. Mr. Gagliardi is Trustee and Treasurer of the
Christ Episcopal Church of Wellsburg.
James R. Murphy has been a director of the Bank since 1962 and a
director of the Company since its formation. Mr. Murphy is a majority
stockholder of Murphy Consolidated Industries. Mr. Murphy has been employed with
this building contractor for 50 years.
George H. Johnson has been a director of the Bank since 1977 and a
director of the Company since its formation. Mr. Johnson is a retired employee
of Koppers Co., Inc., a coal, tar and chemicals company. Mr. Johnson is also a
director of Municipal Mutual of West Virginia.
William E. Watson has been a director of the Bank since 1991 and a
director of the Company since its formation. Mr. Watson is an attorney in
Wellsburg, West Virginia and has practiced law since 1961. Mr. Watson serves as
counsel for the Bank. Mr. Watson is the Chancellor (General Counsel) of the West
Virginia Conference United Methodist Church, Chairman of the Board of Trustees
of West Virginia Wesleyan College and Chairman of the Administrative Board of
Wellsburg United Methodist Church.
Gary Young has been a director of the Bank since 1975 and a director
of the Company since its formation. Mr. Young is the Park Director of the Brooke
Hills Park in Wellsburg, West Virginia. Mr. Young is a member of the Royal Order
of Moose, Brooke County Sportsman Club and Colliers
Sportsman Club.
Noreen Mechling has been a director of the Bank since 1994 and a
director of the Company since its formation. Ms. Mechling has been an employee
of the Bank since 1975 and currently serves as Senior Vice President and Chief
Financial Officer.
John R. Sperlazza has been a director of the Bank since 1973 and a
director of the Company since its formation. For the past four years, Mr.
Sperlazza has been a co-owner of J&J Properties, a real estate rental company,
and has been employed with JJ&R Enterprises, a real estate rental company, and
Mark's Carry Out. Prior to that time Mr. Sperlazza retired as a co-owner of
trucking, mining and coal companies.
Steven D. Martino has been with the Bank since 1982. Mr. Martino has
been a Vice President since 1986 and obtained his current titles in July 1996.
Mr. Martino is the current President of the Wellsburg Chamber of Commerce and is
the current Campaign Chairman of the Brooke County United Way. He is also a real
estate appraiser licensed by the State of West Virginia.
Meetings and Committees of the Board of Directors
The Bank's Board of Directors conducts its business through meetings of
the Board and through activities of its committees. During the fiscal year ended
June 30, 1996, the Board of Directors held 24 regular meetings and one special
meeting. No director attended fewer than 75% of the total meetings
59
<PAGE>
of the Board of Directors of the Bank and committees on which such director
served during the fiscal year ended June 30, 1996.
The Audit Committee of the Bank is comprised of Directors Watson,
Johnson and Murphy. The President also attends these meetings but is excused
during certain portions. The Audit Committee is responsible for developing and
maintaining the Bank's audit program. The committee also meets with the Bank's
outside auditors to discuss the results of the annual audit and any related
matters. The Audit Committee met one time during the 1996 fiscal year.
The Nominating Committee consists of the entire board of directors and
meets annually to select nominees to the Bank's Board of Directors.
Director Compensation
Members of the Board of Directors received fees of $400 per meeting
attended during the 1996 calendar year with up to four, regardless of
attendance. Board members receive $35 for attendance at each committee meeting.
The Bank paid a total of $71,000 in director fees for the year ended June 30,
1996.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by the President and Chief Executive
Officer of the Bank. No other executive officer of the Bank had a salary and
bonus during the year ended June 30, 1996 that exceeded $100,000 for services
rendered in all capacities to the Bank.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------
Other Annual All Other
Name and Principal Position Salary Bonus Compensation(1) Compensation(2)
- --------------------------- ------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Stephen M. Gagliardi $81,111 $10,000 $16,500 $8,305
President and Chief Executive
Officer
</TABLE>
- -------------
(1) Consists of $9,450 in Board of Directors' fees and $7,050 in expense
associated with the use of a company automobile.
(2) Consists of a contribution of $241 for term life insurance, a matching
contribution of $2,526 to the 401(k) Plan, and a profit sharing
contribution of $5,538.
Employment Agreements. The Bank intends to enter into employment
agreements with Stephen M. Gagliardi, President and Chief Executive Officer and
three other officers of the Bank. Mr. Gagliardi's salary under the employment
agreement will be based on his then current salary. Mr. Gagliardi's employment
agreement will be for a term of three years. The agreements will be terminable
by the Bank for "just cause" as defined in the agreements. If the Bank
terminates the employee without just cause, the employee will be entitled to a
continuation of the employee's salary from the date of termination through the
remaining term of the agreement. Mr. Gagliardi's employment agreement will
contain a provision stating that in the event of the termination of employment
in connection with any future change in control of the Bank, as defined in the
agreement, Mr. Gagliardi will be paid in a lump sum an amount equal to 2.99
times Mr. Gagliardi's five year average annual cash compensation. In addition,
the Bank intends to enter into severance agreements with three other officers,
which will provide a severance payment upon termination without just cause in
the event of a change in control, as
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<PAGE>
defined in the agreements. The agreements may be renewed annually by the Board
of Directors upon a determination of satisfactory performance within the Board's
sole discretion.
Other Benefits
Employee Stock Ownership Plan. The Bank has established an employee
stock ownership plan, the ESOP, for the exclusive benefit of participating
employees, to be implemented upon the completion of the Conversion.
Participating employees are employees who have completed one year of service
with the Bank and have attained the age 21. The Bank will submit to the IRS an
application for a letter of determination as to the tax-qualified status of the
ESOP. Although no assurances can be given, the Bank expects that the ESOP will
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by tax-deductible contributions made by the
Bank in cash or the Common Stock. Benefits may be paid either in shares of the
Common Stock or in cash. In accordance with the Plan, the ESOP may borrow funds
with which to acquire up to 10% of the Common Stock to be issued in the
Conversion (8% if the Bank adopts the RSP within one year after the consummation
of the Conversion and the RSP purchases 4% of the Common Stock sold in the
conversion), and intends to borrow funds from the Company. See "Proposed Future
Stock Benefit Plans - Restrictions on Benefit Plans." The loan is expected to be
for a term of ten years at an annual interest rate equal to the prime rate as
published in The Wall Street Journal. Presently it is anticipated that the ESOP
will purchase up to 8% of the Common Stock to be issued in the Offerings (i.e.,
approximately $656,000, based on the midpoint of the EVR), however, no assurance
may be given that ESOP purchases, if any, will not change. This loan will be
secured by the shares purchased and earnings thereon. Shares of Common Stock
purchased with such loan proceeds will be held in a suspense account for
allocation among participants as the loan is repaid. The Bank anticipates
contributing approximately $66,000 annually (based on a 65,600 share purchase)
to the ESOP to meet principal obligations under the ESOP loan, as proposed. It
is anticipated that all such contributions will be limited to an amount that is
tax-deductible.
Shares sold above the maximum of the EVR (i.e., more than 943,000
shares) may be sold to the ESOP before satisfying remaining unfilled orders of
Eligible Account Holders to fill the ESOP's subscription or the ESOP may
purchase some or all of the shares covered by its subscription after the
Conversion in the open market.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation. All
participants must be employed at least 1,000 hours in a plan year or terminate
service as a result of retirement, death or disability in order to receive an
allocation for such plan year. Participant benefits become 100% vested after
five years of service. Employment prior to the adoption of the ESOP shall be
credited for the purposes of vesting. Vesting will be accelerated upon
retirement, death, disability, change in control of the Company, or termination
of the ESOP. Forfeitures will be reallocated to participants on the same basis
as other contributions in the plan year. Benefits may be payable in the form of
a lump sum upon retirement, death, disability, or separation from service. The
Bank's contributions to the ESOP are discretionary and may cause a reduction in
other forms of compensation. Therefore, benefits payable under the ESOP cannot
be estimated.
The Board of Directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
Board of Directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees as
directed by the Board of Directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
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<PAGE>
401(k) Savings Plan. The Bank sponsors a tax-qualified defined
contribution savings plan ("401(k) Plan") for the benefit of its employees.
Employees become eligible to participate under the 401(k) Plan after reaching
age 20 1/2 and completing one year (including 1,000 hours) of service. Under the
401(k) Plan, employees may voluntarily elect to defer compensation, not to
exceed applicable limits under the Code (i.e., $9,500 in calendar 1995). The
Bank matches 50% of the first 6% of employee contributions. The Bank does not
match more than 6% of the employee's base salary. Matching contributions vest
over a 6 year period beginning after the first year at a rate of 20% per year,
or become 100% vested upon termination of employment due to death, disability,
or retirement. The Bank may make additional contributions. Employee
contributions are immediately vested. The Bank intends to amend the 401(k) Plan
to permit voluntary investments of plan assets by participants in the Common
Stock in the Conversion and thereafter.
Benefits are payable upon termination of employment, retirement, death,
disability, or plan termination. Normal retirement age under the 401(k) Plan is
age 65. Additionally, funds under the 401(k) Plan may be distributed upon
application to the plan administrator upon severe financial hardship in
accordance with uniform guidelines which comply with those specified by the
Code. It is intended that the 401(k) Plan operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the requirements of Section 401(a) of the Code.
Costs associated with the 401(k) Plan were $56,000 for the year ended
June 30, 1996. Contributions to the 401(k) Plan by the Bank for employees may be
reduced in the future or eliminated as a result of contributions made to the
Employee Stock Ownership Plan. See "- Employee Stock Ownership Plan."
Proposed Future Stock Benefit Plans
Stock Option Plan. The Boards of Directors of the Company intend to
adopt a stock option plan (the "Option Plan") within one year of the Conversion,
subject to approval by the Company's stockholders at a stockholders meeting to
be held no sooner than six months after the Conversion. The Option Plan would be
in compliance with the OTS regulations then in effect. See "- Restrictions on
Benefit Plans." In accordance with OTS regulations, a number of shares equal to
10% of the aggregate shares of Common Stock to be issued in the Offerings (i.e.,
82,000 shares based upon the sale of 820,000 shares at the midpoint of the EVR)
would be reserved for issuance by the Company upon exercise of stock options to
be granted to officers, directors, and employees of the Company and the Bank
from time to time under the Option Plan. The purpose of the Option Plan would be
to provide additional performance and retention incentives to certain officers,
directors, and employees by facilitating their purchase of a stock interest in
the Company. The Option Plan, which would become effective upon stockholder
approval of the Option Plan, would provide for a term of 10 years, after which
no awards could be made, unless earlier terminated by the Board of Directors
pursuant to the Option Plan. The options would vest over a five year period
(i.e., 20% per year), beginning one year after the date of grant of the option.
Options would be granted based upon several factors, including seniority, job
duties and responsibilities, job performance, the Bank's performance, and a
comparison of awards given by other institutions converting from mutual to stock
form.
The Company would receive no monetary consideration for the granting of
stock options under the Option Plan, however, the Company would receive the
option price for each share issued to optionees upon the exercise of such
options. Shares issued as a result of the exercise of options will be either
authorized but unissued shares or shares purchased in the open market by the
Company, however, no purchases in the open market will be made that would
violate applicable regulations restricting purchases by the Company. The
exercise of options and payment for the shares received would contribute to the
equity of the Company.
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<PAGE>
If the Option Plan is implemented more than one year after the
Conversion, the Option Plan will comply with such OTS regulations and policies
that are applicable at such time.
Restricted Stock Plan. The Board of Directors of the Bank and the
Company intend to adopt a restricted stock plan (the "RSP") within one year of
the Conversion, the objective of which is to enable the Bank to retain personnel
and directors of experience and ability in key positions of responsibility. The
Company expects to hold a stockholders' meeting no sooner than six months after
the Conversion in order for stockholders to vote to approve the RSP. The RSP
will be implemented in accordance with applicable OTS regulations. See "-
Restrictions on Benefit Plans." Awards would be granted based upon a number of
factors, including seniority, job duties and responsibilities, job performance,
the Bank's performance, and a comparison of awards given by other institutions
converting from mutual to stock form. The RSP would be managed by a committee of
non-employee directors (the "RSP Trustees"). The RSP Trustees would have the
responsibility to invest all funds contributed by the Bank to the trust created
for the RSP (the "RSP Trust").
The Bank will contribute sufficient funds to the RSP so that the RSP
Trust can purchase, in the aggregate, up to 4% of the amount of Common Stock
that is sold in the Conversion. The shares purchased by the RSP would be
authorized but unissued shares or would be purchased in the open market. In the
event the market price of the Common Stock is greater than $10.00 per share, the
Bank's contribution of funds will be increased. Likewise, in the event the
market price is lower than $10.00 per share, the Bank's contribution will be
decreased. In recognition of their prior and expected services to the Bank and
the Company, as the case may be, the officers, employees, and directors
responsible for implementation of the policies adopted by the Board of Directors
and the profitable operation of the Bank will, without cost to them, be awarded
stock under the RSP. Based upon the sale of 820,000 shares of Common Stock in
the Offerings at the midpoint of the EVR, the RSP Trust is expected to purchase
up to 32,800 shares of Common Stock.
In accordance with applicable OTS regulations, the shares granted under
the RSP will be in the form of restricted stock vesting over a five year period
(i.e., 20% per year) beginning one year after the date of grant of the award.
Compensation expense in the amount of the market value of the Common Stock on
the date an award is granted will be recognized pro rata over the years during
which the shares are payable. Until they have vested, such shares may not be
sold, pledged, or otherwise disposed of and are required to be held in escrow.
The RSP Trustees shall vote all shares held by the RSP trust prior to vesting
and delivery of shares to participants.
If the RSP is implemented more than one year after the Conversion, the
RSP will comply with such OTS regulations and policies that are applicable at
such time.
Restrictions on Benefit Plans. OTS regulations provide that in the
event the Bank implements or adopts stock option or management and/or employee
stock benefit plans within one year from the date of Conversion, such plans must
comply with the following restrictions: (1) the plans must be fully disclosed in
the prospectus, (2) for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares issued in the
Conversion, (3) for restricted stock plans, the shares may not exceed 3% of the
shares issued in the Conversion (4% for institutions with 10% or greater
tangible capital), (4) the aggregate amount of stock purchased by the ESOP in
the Conversion may not exceed 10% (8% for well-capitalized institutions
utilizing a 4% restricted stock plan), (5) no individual employee may receive
more than 25% of the available awards under any plan, (6) directors who are not
employees may not receive more than 5% individually or 30% in the aggregate of
the awards under any plan, (7) all plans must be approved by a majority of the
total votes eligible to be cast at any duly called meeting of the Company's
stockholders held no earlier than six months following the Conversion, (8) for
stock option plans, the exercise price must be at least equal to the market
price of the stock at the time of grant, (9) for restricted stock plans, no
stock issued in a conversion may be used
63
<PAGE>
to fund the plan, (10) neither stock option awards nor restricted stock awards
may vest earlier than 20% as of one year after the date of stockholder approval
and 20% per year thereafter, and vesting may be accelerated only in the case of
disability or death (or if not inconsistent with applicable OTS regulations in
effect at such time, in the event of a change in control), (11) the proxy
material must clearly state that the OTS in no way endorses or approves of the
plans, and (12) prior to implementing the plans, all plans must be submitted to
the Regional Director of the OTS within five days after stockholder approval
with a certification that the plans approved by the stockholders are the same
plans that were filed with and disclosed in the proxy materials relating to the
meeting at which stockholder approval was received. Plans adopted and
implemented more than one year after the Conversion would not necessarily be
subject to these limitations. In addition, should the rules and regulations of
the OTS be liberalized, the Bank and the Company reserve the right to adopt
plans qualifying under the more liberal rules.
Compensation Committee Interlocks and Insider Participation
The compensation committee consists of the entire Board of Directors.
Mr. Gagliardi and Ms. Mechling do not participate in matters concerning their
own compensation.
Certain Related Transactions
The Bank, like many financial institutions, has followed a policy of
granting various types of loans to officers and directors. Such loans a) have
been made in the ordinary course of business, b) were made on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the Bank's other
customers, and c) do not involve more than the normal risk of collectibility or
present other unfavorable features. All loans by the Bank to its directors and
executive officers are subject to OTS regulations restricting loans and other
transactions with affiliated persons of the Bank. Loans to officers and
directors of the Bank and their affiliates, amounted to approximately $615,000
or 9.9% of the Bank's equity at June 30, 1996. Assuming the Conversion had
occurred as of June 30, 1996, and assuming the sale of 820,000 shares at the
midpoint of the EVR, loans to officers and directors of the Bank at that date
would have totalled approximately 4.7% of pro forma stockholders' equity of the
Company.
THE CONVERSION
The Boards of Directors of the Bank and the Company and the OTS have
approved the Plan subject to the Plan's approval by the Members of the Bank
entitled to vote on the matter and subject to the satisfaction of certain other
conditions imposed by the OTS in its approval. OTS approval, however, does not
constitute a recommendation or endorsement of the Plan by the OTS.
General
On September 3, 1996, the Board of Directors of the Bank adopted the
Plan, pursuant to which the Bank would be converted from a federally chartered
mutual savings and loan association to a federally chartered stock savings bank,
with the concurrent formation of the Company. It is currently intended that all
of the capital stock of the Bank will be held by the Company. The OTS has
approved the Plan subject to its approval by the members of the Bank entitled to
vote on the matter at a special meeting (the "Special Meeting") called for that
purpose and subject to the satisfaction of certain other conditions imposed by
the OTS in its approval.
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The OTS has approved the Company's application to become a savings and
loan holding company and to acquire all of the Common Stock of the Bank to be
issued in the Conversion. Pursuant to such OTS approval, the Company plans to
retain 50% of the net proceeds from the sale of the Common Stock and to use the
remaining 50% to purchase all of the to be issued and outstanding capital stock
of the Bank.
The Conversion will be accomplished through adoption of the proposed
Federal Stock Charter and Bylaws to authorize the issuance of capital stock by
the Bank, at which time the Bank will change its name to Advance Financial
Savings Bank and will become a wholly owned subsidiary of the Company. The
Conversion will be accounted for at historical cost in a manner similar to a
pooling of interests. Under the Plan, the Common Stock is being offered for sale
by the Company. As part of the Conversion, the Company is conducting a
Subscription Offering of the Common Stock for holders of subscription rights
and, depending upon market conditions at or near the completion of the
Subscription Offering, may also, or in lieu thereof, conduct a Public Offering.
Shares of Common Stock not subscribed for in the Subscription and Public
Offerings may be offered on a best efforts basis by a selling group of
broker-dealers in a Syndicated Public Offering. The Plan provides that the
Conversion must be completed within 24 months after the date of the approval of
the Plan by the members of the Bank.
In the event that the Bank is unable to complete the sale of Common
Stock and effect the Conversion within 45 days after the end of the Subscription
Offering, the Bank may request an extension of the period by the OTS. No
assurance can be given that the extension would be granted if requested. Due to
the volatile nature of market conditions, no assurances can be given that the
Bank's valuation would not substantially change during any such extension. If
the EVR of the Common Stock must be amended, no assurance can be given that such
amended EVR would be approved by the OTS. Therefore, it is possible that if the
Conversion cannot be completed within the requisite period, the Bank may not be
permitted to complete the Conversion. A substantial delay caused by an extension
of the period may also significantly increase the expense of the Conversion. No
sales of the Common Stock may be completed in the Offerings unless the Plan is
approved by the members of the Bank.
Completion of the Offerings is subject to market conditions and other
factors beyond the Bank's control. No assurance can be given as to the length of
time following approval of the Plan at the Special Meeting that will be required
to complete the Offerings. If delays are experienced, significant changes may
occur in the estimated pro forma market value of the Bank upon Conversion
together with corresponding changes in the offering price and the net proceeds
realized by the Bank from the sale of the Common Stock. In the event the
Conversion is terminated, the Bank would be required to charge all Conversion
expenses against current income and any funds collected by the Bank in the
Offerings would be promptly returned to each potential investor, plus interest
at the prescribed rate.
Reasons for the Conversion
The principal factors considered by the Bank's Board of Directors in
reaching the decision to pursue a mutual-to-stock conversion are the future of
mutual institutions generally and the numerous competitive disadvantages which
the Bank faces if it continues in mutual form. These disadvantages relate to a
variety of factors, including growth opportunities, employee retention, and
regulatory uncertainty.
In the opinion of management, if the Bank is to continue to grow and
prosper, the mutual form of organization is the least desirable form from a
competitive standpoint. The only realistic growth opportunity available to the
Bank as a mutual is branching. The opportunities for a mutual to expand through
mergers are extremely scarce. The only realistic merger possibilities are mutual
to mutual mergers. As the number of mutual companies dwindles, so do the
opportunities for such mergers. Although the Bank does not have any specific
acquisitions planned at this time, the Conversion will
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position the Bank to take advantage of any acquisition opportunities that may
present themselves. Because a conversion to stock form is a time-consuming and
complex process, the Bank cannot wait until an acquisition is imminent to begin
the conversion process.
As an increasing number of the Bank's competitors convert to stock form
and can use stock based compensation programs, the Bank, as a mutual, is at a
disadvantage in attracting and retaining qualified management. The Bank believes
that the ESOP for all employees and the Stock Option Plan and the RSP for
directors, officers, and certain employees are important tools in achieving such
goals, even though the Bank will be required to wait until after the Conversion
to implement the Stock Option Plan and the RSP. See "Management of the Bank -
Proposed Future Stock Benefit Plans."
Another benefit of the conversion will be an increase in capital.
Notwithstanding the Bank's current capital position, the importance of higher
levels of capital cannot be ignored in the current interest rate environment.
For the last few years, thrift institutions have enjoyed very favorable net
interest margins as interest rates dropped to very low levels. In more recent
months, interest rates generally have been rising. As has been amply
demonstrated in the past, changing accounting principles, interest rate shifts,
and changing regulations can threaten even well-capitalized institutions. As a
mutual institution, the Bank can only increase capital through retained earnings
or the issuance of subordinated debentures, which do not count as Tier I capital
for regulatory capital purposes. Capital that may seem unnecessary now may help
the Bank withstand future threats to its capital.
In view of the competitive disadvantage and the ongoing debate about
the future of mutual institutions in the wake of regulatory consolidation and
other forces, the Bank is choosing to reject the uncertainty inherent in the
mutual structure in favor of the more widely used, recognized, and understood
stock form of ownership.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank
Voting Rights. Depositor and borrower members will have no voting
rights in the converted Bank and will therefore not be able to elect directors
of the Bank or to otherwise participate in the conduct of the affairs of the
Bank or the Company unless they hold Common Stock. Currently, these rights are
accorded to depositor and certain borrower members of the Bank. Although the
Bank holds annual meetings of members for the election of directors and for
other purposes, very few members exercise their voting rights. Accordingly,
voting control of the Bank has been effectively exercised by the Board of
Directors through their individual votes and through proxies given by a limited
number of members. Following the Conversion, the Bank will become a wholly owned
subsidiary of the Company, which will hold all voting rights in the Bank. Voting
rights in the Company will be vested exclusively in the Company's stockholders.
Stockholders will be entitled to vote on any matter to be considered by the
stockholders of the Company and will be entitled to one vote for each share of
the Common Stock owned. See "Certain Restrictions on Acquisition of the Company"
with respect to limitations applicable to the rights of stockholders to exercise
cumulative voting.
Savings Accounts and Loans. The Bank's savings accounts, balances of
the individual accounts, and the existing FDIC insurance coverage will not be
affected by the Conversion. Furthermore, the Conversion will not affect the loan
accounts, the balances of these accounts, or the obligations of the borrowers
under their individual contractual arrangements with the Bank.
Tax Effects. A discussion of the material taxes applicable to the Bank
is included above under "Taxation." A summary of the material tax effects of the
Conversion on the Bank and its members is set forth below. The Bank has received
an opinion from its counsel, Malizia, Spidi, Sloane & Fisch, P.C., Washington,
D.C., that the Conversion will constitute a nontaxable reorganization under
Section 368(a)(1)(F) of the Code. Among other things, the opinion, filed as an
exhibit to the registration
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statement of which this prospectus is a part, provides that: (i) the Conversion
will qualify as a reorganization under Section 368(a)(1)(F) of the Code, and no
gain or loss will be recognized by the Bank in either its mutual form or its
stock form, or by the Company, by reason of the proposed Conversion; (ii) no
gain or loss will be recognized by the Bank upon the receipt of money from the
Company for stock of the Bank, and no gain or loss will be recognized by the
Company upon the receipt of money for the Common Stock; (iii) the assets of the
Bank in either its mutual or its stock form will have the same basis before and
after the Conversion; (iv) the holding period of the assets of the Bank will
include the period during which the assets were held by the Bank in its mutual
form prior to conversion; (v) no gain or loss will be recognized by the Eligible
Account Holders, Supplemental Eligible Account Holders, and Other Members of the
Bank upon the issuance to them of withdrawable savings accounts in the stock
association in the same dollar amount as their savings accounts in the Bank plus
an interest in the liquidation account of the stock association in exchange for
their savings accounts in the Bank; (vi) the receipt by Eligible Account
Holders, Supplemental Eligible Account Holders, and Other Members of
non-transferable subscription rights to purchase shares of the Common Stock
under the Plan is taxable to Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members to the extent the subscription rights have
value; (vii) the basis of each account holder's savings accounts in the Bank
after the Conversion will be the same as the basis of his or her savings
accounts in the Bank prior to the Conversion, decreased by the fair market value
of the non-transferable subscription rights received and increased by the
amount, if any, of gain recognized on the exchange; (viii) the basis of each
account holder's interest in the liquidation account will be zero; (ix) the
holding period of the Common Stock acquired through the exercise of subscription
rights shall begin on the date on which the subscription rights are exercised;
(x) the Bank will succeed to and take into account the earnings and profits or
deficit in earnings and profits of the Bank, in its mutual form, as of the date
of Conversion; (xi) the Bank, immediately after Conversion, will succeed to the
bad debt reserve accounts of the Bank, in its mutual form, and the bad debt
reserves will have the same character in the hands of the Bank after Conversion
as if no distribution or transfer had occurred; and (xii) the creation of the
liquidation account will have no effect on the Bank's taxable income,
deductions, or addition to reserve for bad debts either in its mutual or stock
form.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based in part
on the assumption that the exercise price of the subscription rights to purchase
Common Stock will be approximately equal to the fair market value of that stock
at the time of the completion of the proposed Conversion. With respect to the
subscription rights, the Bank has received an opinion of Keller which, based on
certain assumptions, concludes that the subscription rights to be received by
Eligible Account Holders, Supplemental Eligible Account Holders, and Other
Members do not have any economic value at the time of distribution or at the
time the subscription rights are exercised, whether or not a public offering
takes place. Such opinion is based on the fact that such rights are: (i)
acquired by the recipients without payment therefor, (ii) non-transferable,
(iii) of short duration, and (iv) afford the recipients the right only to
purchase Common Stock at a price equal to its estimated fair market value, which
will be the same price at which shares of Common Stock for which no subscription
right is received in the Subscription Offering may be offered in the Public
Offering. If the subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders, or Other Members are deemed to have an
ascertainable value, receipt of such rights would be taxable probably only to
those Eligible Account Holders, Supplemental Eligible Account Holders, or Other
Members who exercise the subscription rights in an amount equal to such value
(either as a capital gain or ordinary income), and the Bank could recognize gain
on such distribution.
The Bank is subject to West Virginia taxation and has received the
opinion of S.R. Snodgrass, A.C. that the Conversion will be treated for West
Virginia state tax purposes similar to the Conversion's treatment for federal
tax purposes.
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Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane
& Fisch, P.C., Keller, and S.R. Snodgrass, A.C. have no binding effect or
official status, and no assurance can be given that the conclusions reached in
any of those opinions would be sustained by a court if contested by the IRS or
the West Virginia tax authorities. Eligible Account Holders, Supplemental
Eligible Account Holders, and Other Members are encouraged to consult with their
own tax advisers as to the tax consequences in the event the subscription rights
are deemed to have an ascertainable value.
Liquidation Account. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each eligible Account Holder and
Supplemental Eligible Account Holder of the Bank is entitled to a liquidating
distribution from the liquidation account, pro rata to the value of his or her
accounts, of the Bank remaining after liquidation payment of claims of all
creditors (including the claims of all account holders to the withdrawal value
of their accounts). Each account holder's pro rata share of such liquidating
distribution would be in the same proportion as the value of his or her deposit
accounts was to the total value of all deposit accounts in the Bank at the time
of liquidation.
Upon a complete liquidation after the Conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
other general creditors of the Bank. Therefore, except as described below, a
depositor's claim would be solely in the amount of the balance in his or her
deposit account plus accrued interest. A depositor would not have an interest in
the residual value of the assets of the Bank above that amount, if any.
The Plan and OTS rules provide for the establishment, upon the
completion of the Conversion, of a special "liquidation account" for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders in an
amount equal to the equity of the Bank as of the date of its latest statement of
financial condition contained in the final prospectus. Each Eligible Account
Holder and Supplemental Eligible Account Holder, if he or she continues to
maintain his or her deposit account at the Bank, would be entitled pursuant to a
complete liquidation of the Bank after Conversion, to an interest in the
liquidation account prior to any payment to stockholders of the Bank. Each
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account held in the Bank on the qualifying date, August
31, 1995. Each Supplemental Eligible Account Holder would have a similar
interest as of the qualifying date, September 30, 1996. The interest as to each
deposit account would be in the same proportion of the total liquidation account
as the balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such qualifying dates. However, if the
amount in the deposit account on any annual closing date of the Bank (June 30)
is less than the amount in such account on the respective qualifying dates, then
the interest in this special liquidation account would be reduced from time to
time by an amount proportionate to any such reduction, and the interest would
cease to exist if such deposit account were closed. The interest in the special
liquidation account will never be increased despite any increase in the related
deposit account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction the Bank is not the surviving
institution shall be considered a complete liquidation. In such transactions,
the liquidation account shall be assumed by the surviving institution.
Subscription Rights and the Subscription Offering
In accordance with OTS regulations, non-transferable subscription
rights to purchase shares of the Common Stock have been granted to all persons
and entities entitled to purchase the Common Stock in the Subscription Offering
under the Plan. The amount of the Common Stock which these parties may purchase
will be determined, in part, by the total amount of Common Stock to be issued
and by the availability of the Common Stock for purchase under the categories
set forth in the Plan. If the
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Subscription Offering extends beyond __________, 1997 (45 days following the
Expiration Date of the Subscription Offering), subscribers will be resolicited.
Subscription priorities have been established for the allocation of stock to the
extent that the Common Stock is available after satisfaction of all
subscriptions of all persons having prior rights and subject to the maximum and
minimum purchase limitations set forth in the Plan and as described below under
"- Limitations on Purchases of Shares." The following priorities have been
established:
Eligible Account Holders. Each Eligible Account Holder (depositors of
the Bank with account balances of at least $50 on August 31, 1995) will receive
non-transferable subscription rights on a priority basis to purchase that number
of shares of Common Stock which is equal to the greater of 10,000 shares
($100,000) sold in the Conversion, one-tenth of one percent (0.10%) of the total
offering, or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of the qualifying deposit of
the Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Eligible Account Holders, but in no event shall this
number be greater than the maximum purchase limitation specified in the Plan. If
the allocation made in this paragraph results in an oversubscription, shares of
Common Stock shall be allocated among subscribing Eligible Account Holders so as
to permit each such account holder, to the extent possible, to purchase a number
of shares of Common Stock sufficient to make his or her total allocation equal
to 100 shares of Common Stock or the total amount of his or her subscription,
whichever is less. Any shares of Common Stock not so allocated shall be
allocated among the subscribing Eligible Account Holders on an equitable basis,
in the proportion that the amounts of their respective qualifying deposits bear
to the total qualifying deposits of all subscribing Eligible Account Holders. If
the amount so allocated exceeds the amount subscribed for by any one or more
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Eligible Account Holders whose subscriptions are still
not fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied. Subscription rights received by
officers and directors in this category based on their increased deposits in the
Bank in the one-year period preceding August 31, 1995, are subordinated to the
subscription rights of other Eligible Account Holders.
Tax-Qualified Employee Benefit Plans. Tax-qualified employee benefit
plans of the Bank ("Employee Plans") have been granted subscription rights to
purchase up to 10% of the total shares issued in the Conversion. The ESOP is an
Employee Plan and intends to purchase up to 8% of the Common Stock issued in the
Conversion.
The right of Employee Plans to subscribe for the Common Stock is
subordinate to the right of the Eligible Account Holders to subscribe for the
Common Stock. However, in the event the Offerings result in the issuance of
shares above the maximum of the EVR (i.e., more than 943,000 shares), the
Employee Plans have a priority right to fill their subscription (the ESOP, the
only Employee Plan, currently intends to purchase up to 8% of the Common Stock
issued in the Conversion). The Employee Plans may, however, determine to
purchase some or all of the shares covered by their subscriptions after the
Conversion in the open market or, if approved by the OTS, out of authorized but
unissued shares in the event of an oversubscription.
Supplemental Eligible Account Holders. Each Supplemental Eligible
Account Holder (depositors who are not Eligible Account Holders of the Bank with
account balances of at least $50 on September 30, 1996) will receive
non-transferable subscription rights to purchase that number of shares of
Conversion Stock which is equal to the greater of 10,000 shares ($100,000) sold
in the Conversion, one-tenth of one percent (0.10%) of the total offering, or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. These
non-transferable subscription rights shall be granted only in the event
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that the Eligibility Record Date is more than 15 months prior to the date of the
latest amendment to the Application filed prior to OTS approval. If the
allocation made pursuant to this paragraph results in an oversubscription,
shares of Common Stock shall be allocated among subscribing Supplemental
Eligible Account Holders so as to permit each such account holder, to the extent
possible, to purchase a number of shares of Common Stock sufficient to make his
or her total allocation (including the number of shares of Common Stock, if any,
allocated in accordance with the subscription rights of Eligible Account
Holders) equal to 100 shares of Common Stock or the total amount of his or her
subscription, whichever is less. Any shares of Common Stock not so allocated
shall be allocated among the subscribing Supplemental Eligible Account Holders
on an equitable basis, related to the amounts of their respective qualifying
deposits as compared to the total qualifying deposits of all subscribing
Supplemental Eligible Account Holders.
The rights of Supplemental Eligible Account Holders to subscribe for
the Common Stock is subordinate to the rights of the Eligible Account Holders
and Employee Plans to subscribe for the Common Stock.
Other Members. Other Members (depositors and borrowers who are entitled
to vote at a special meeting of members called to vote on the Conversion) who
are not Eligible Account Holders or Supplemental Eligible Account Holders, will
receive non-transferable subscription rights to purchase up to the greater of
10,000 shares ($100,000), or one tenth of one percent (0.10%) of the total
offering, subject to maximum and minimum purchase limitations and exclusive of
an increase in the total number of shares issued due to an increase in the
maximum EVR of up to 15%, to the extent such stock is available following
subscriptions by Eligible Account Holders, Employee Plans, and Supplemental
Eligible Account Holders. If the allocation made pursuant to this paragraph
results in an oversubscription when added to the shares of Common Stock
subscribed for by the Eligible Account Holders, the Employee Plans, and the
Supplemental Account Holders, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares of Common
Stock sufficient to make his or her total allocation equal to 100 shares of
Common Stock or the total number of shares covered by the subscription of the
Other Member. Any remaining shares will be allocated among the subscribing Other
Members whose subscriptions remain unsatisfied on a 100 shares (or whatever
lesser amount is available) per order basis until all orders have been filled or
the remaining shares have been allocated.
Members in Non-Qualified States. The Company will make reasonable
efforts to comply with the securities laws of all states in the United States in
which persons entitled to subscribe for the Common Stock pursuant to the Plan
reside. However, no person will be offered or allowed to purchase any Common
Stock under the Plan if he or she resides in a foreign country or in a state of
the United States with respect to which any of the following apply: (i) a small
number of persons otherwise eligible to subscribe for shares under the Plan
reside in such state or foreign country; (ii) the granting of subscription
rights or offer or sale of shares of Common Stock to such persons would require
the Bank, the Company, or its employees to register, under the securities laws
of such state or foreign country, as a broker or dealer or to register or
otherwise qualify its securities for sale in such state or foreign country; or
(iii) such registration or qualification would be impracticable for reasons of
cost or otherwise. No payments will be made in lieu of the granting of
subscription rights to any such person.
Restrictions on Transfer of Subscription Rights and Shares. The OTS
conversion regulations prohibit any person with subscription rights, including
Eligible Account Holders, Supplemental Eligible Account Holders, and Other
Members of the 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 or her account. Each person subscribing for shares will
be required to certify that such person is purchasing shares solely for his or
her own account and that
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such person has no agreement or understanding regarding the sale or transfer of
such shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of the
Conversion.
The Bank and the Company will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
Expiration Date. The Subscription Offering will expire at 4:00 p.m.,
Eastern Time, on ____________, 1996, unless the Subscription Offering is
extended, at the discretion of the Board of Directors, up to an additional 45
days with the approval of the OTS, if necessary, but without additional notice
to subscribers (the "Expiration Date"). Subscription rights will become void if
not exercised prior to the Expiration Date.
Public Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the Subscription Offering, the Company
may offer shares pursuant to the Plan, to selected persons in a Public Offering
on a best-efforts basis through Webb in such a manner as to promote a wide
distribution of the Common Stock. Any orders received in connection with the
Public Offering, if any, will receive a lower priority than orders properly made
in the Subscription Offering by persons exercising Subscription Rights. Common
Stock sold in the Public Offering will be sold at $10.00 per share and hence
will be sold at the same price as all other shares in the Conversion. The
Company and the Bank have the right to reject orders, in whole or in part, in
their sole discretion in the Public Offering.
No person (or persons acting through a single account) will be
permitted to purchase more than 10,000 shares or $100,000 of Common Stock in the
Public Offering. No person, together with any associate or group of persons
acting in concert, will be permitted to purchase more than 15,000 shares or
$150,000 of Common Stock in the Public Offering. To order Common Stock in
connection with the Public Offering, if any, an executed stock order and account
withdrawal authorization (if applicable) must be received by Webb prior to the
termination of the Public Offering. The date by which orders must be received in
the Public Offering ("Public Offering Expiration Date") will be set by the
Company at the time of commencement of the Public Offering; provided however, if
the Offerings are extended beyond __________, 1997, each purchaser will have the
opportunity to maintain, modify, or rescind his or her order. In such event, all
funds received in the Public Offering will be promptly returned with interest to
each purchaser unless he or she affirmatively indicates otherwise.
In the event the Company determines to conduct a Public Offering,
persons to whom a Prospectus is delivered may order shares of Common Stock by
submitting a completed stock order and account withdrawal authorization
(provided by Webb, if applicable) and an executed certification along with
immediately available funds (which may be obtained by debiting a Webb account)
to Webb by not later than the Public Offering Expiration Date (as established by
the Company). Promptly upon receipt of available funds, together with a properly
executed stock order and account withdrawal authorization, if applicable, and
certification, Webb will forward such funds to the Bank to be deposited in a
subscription escrow account.
If an order in the Public Offering is accepted, promptly after the
completion of the Conversion, a certificate for the appropriate amount of shares
will be forwarded to Webb as nominee for the beneficial owner. In the event that
an order is not accepted or the Conversion is not consummated, the Bank will
promptly refund with interest the funds received to Webb which will then return
the funds to purchasers'
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accounts. If the aggregate pro forma market value of the Company and the Bank,
as converted, is less than $6,970,000 or more than $10,844,500, each purchaser
will have the right to modify or rescind his or her order.
If a Public Offering is held, the opportunity to order shares of Common
Stock in the Public Offering 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.
Syndicated Public Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the Subscription Offering and Public
Offering, the Company may offer shares pursuant to the Plan, to the general
public in a Syndicated Public Offering on a best efforts basis through a
syndicate of selected dealers to be formed and managed by Webb. Neither Webb nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Public Offering. The Syndicated
Public Offering, if any, will be conducted in such a manner as to promote a wide
distribution of the Common Stock. Any orders received in connection with the
Syndicated Public Offering, if any, will receive a lower priority than orders
properly made in the Subscription Offering. Common Stock sold in the Syndicated
Public Offering will be sold at $10.00 per share and hence will be sold at the
same price as all other shares in the Conversion. The Company and the Bank have
the right to reject orders, in whole or in part, in their sole discretion in the
Syndicated Public Offering.
No person (or persons acting through a single account) will be
permitted to purchase more than 10,000 shares or $100,000 of Common Stock in the
Syndicated Public Offering. No person, together with any associate or group of
persons acting in concert, will be permitted to purchase more than 15,000 shares
or $150,000 of Common Stock in the Syndicated Public Offering. To order Common
Stock in connection with the Syndicated Public Offering, if any, an executed
stock order and account withdrawal authorization (if applicable) must be
received prior to the termination of the Syndicated Public Offering. The date by
which orders must be received in the Syndicated Public Offering ("Public
Offering Expiration Date") will be set by the Company at the time of
commencement of the Syndicated Public Offering; provided however, if the
Offerings are extended beyond __________, 1997, each purchaser will have the
opportunity to maintain, modify, or rescind his or her order. In such event, all
funds received in the Syndicated Public Offering will be promptly returned with
interest to each purchaser unless he or she affirmatively indicates otherwise.
In the event the Company determines to conduct a Syndicated Public
Offering, persons to whom a Prospectus is delivered may order shares of Common
Stock by submitting a completed stock order and account withdrawal authorization
and an executed certification along with immediately available funds by not
later than the Public Offering Expiration Date. Promptly upon receipt of
available funds, together with a properly executed stock order and account
withdrawal authorization, if applicable, and certification, such funds will be
forwarded by Webb or the selected dealer to the Bank to be deposited in a
subscription escrow account.
If an order in the Syndicated Public Offering is accepted, promptly
after the completion of the Conversion, a certificate for the appropriate amount
of shares will be forwarded to Webb or the selected dealer as nominee for the
beneficial owner. In the event that an order is not accepted or the Conversion
is not consummated, the Bank will promptly refund with interest the funds
received to Webb or the selected dealer which will then return the funds to
purchasers' accounts. If the aggregate pro forma market value of the Company and
the Bank, as converted, is less than $6,970,000 or more than $10,844,500, each
purchaser will have the right to modify or rescind his or her order.
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<PAGE>
If a Syndicated Public Offering is held, the opportunity to order
shares of Common Stock in the Syndicated Public Offering 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.
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an Order Form or stock order and account withdrawal authorization
("Stock Order"), if applicable, in the case of the Public Offering or Syndicated
Public Offering. Any person receiving an Order Form or Stock Order who desires
to subscribe for shares of Common Stock must do so prior to the Expiration Date
or, if applicable, the Public Offering Expiration Date, by delivering (by mail
or in person ) to the Bank a properly executed and completed Order Form or Stock
Order, together with full payment of the Purchase Price for all shares for which
subscription is made; provided, however, that if the Employee Plans subscribe
for shares during the Subscription Offering, the Employee Plans will not be
required to pay for the shares at the time they subscribe but rather may pay for
the shares upon consummation of the Conversion. Except for institutional
investors, all subscription rights under the Plan will expire on the Expiration
Date, whether or not the Bank has been able to locate each person entitled to
such subscription rights. The Bank and Company shall have the right, in their
sole discretion, to permit institutional investors to submit contractually
irrevocable orders in the Public Offering at any time prior to the completion of
the Conversion. Once tendered, subscription orders cannot be revoked without the
consent of the Bank and the Company unless the Conversion is not completed
within 45 days of the Expiration Date.
In the event an Order Form or Stock Order (i) is not delivered and is
returned to the Bank by the United States Postal Service or the Bank is unable
to locate the addressee; (ii) is not received or is received after the
Expiration Date or the Public Offering Expiration Date; (iii) is defectively
completed or executed; (iv) is not accompanied by the full required payment for
the shares subscribed for (including instances where a savings account or
certificate balance from which withdrawal is authorized is insufficient to fund
the amount of such required payment, but excluding subscriptions by the Employee
Plans) or, in the case of an institutional investor in the Public Offering, by
delivering irrevocable orders together with a legally binding commitment to pay
the full purchase price prior to 48 hours before the completion of the
Conversion; or (v) is not mailed pursuant to a "no mail" order placed in effect
by the account holder, the subscription rights for the person to whom such
rights have been granted will lapse as though such person failed to return the
completed Order Form or Stock Order within the time period specified. However,
the Company may, but will not be required to, waive any irregularity on any
Order Form or Stock Order or require the submission of corrected Order Forms or
Stock Orders or the remittance of full payment for subscribed shares by such
date as the Company may otherwise specify. The waiver of an irregularity on an
Order Form or Stock Order in no way obligates the Company to waive any other
irregularity on any other Order Form or Stock Order. Waivers will be considered
on a case by case basis. The Bank and the Company reserve the right in their
sole discretion to accept or reject orders received on photocopies or facsimile
Order Forms or Stock Orders, or whose payment is to be made by wire transfer or
payment from private third parties. The interpretation by the Bank or Company of
the terms and conditions of the Plan and of the acceptability of the Order Forms
or Stock Orders will be final, subject to the authority of the OTS.
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date or, if applicable, the Public Offering Expiration
Date, in accordance with Rule 15c2-8 of the Exchange Act, no Prospectus will be
mailed any later than five days prior to such date or hand delivered any later
than two days prior to such date . Execution of the Order Form or Stock Order
will confirm receipt or delivery in accordance with Rule 15c2-8. Order Forms or
Stock Orders will only be distributed with a Prospectus.
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Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares, computed on the basis of the Purchase Price, will be required
to accompany all properly completed Order Forms, on or prior to the expiration
date specified on the Order Form unless such date is extended by the Bank or the
Company. Employee Plans subscribing for shares during the Subscription Offering
may pay for such shares upon consummation of the Conversion. Payment for shares
of Common Stock may be made (i) in cash, if delivered in person, (ii) by check
or money order, or (iii) for shares of Common Stock subscribed for in the
Subscription Offering, by authorization of withdrawal from savings accounts
(including certificates of deposit) maintained with the Bank. Appropriate means
by which such withdrawals may be authorized are provided in the Order Form. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be used by a subscriber for any purpose other than to purchase the Common
Stock for which a subscription has been made until the Conversion has been
completed or terminated. In the case of payments authorized to be made through
withdrawal from savings accounts, all sums authorized for withdrawal will
continue to earn interest at the contract rate until the Conversion has been
completed or terminated. Interest penalties for early withdrawal applicable to
certificate accounts will not apply to withdrawals authorized for the purchase
of shares, however, if a partial withdrawal results in a certificate account
with a balance less than the applicable minimum balance requirement, the
certificate shall be canceled at the time of withdrawal, without penalty, and
the remaining balance will earn interest at the passbook savings account rate
subsequent to the withdrawal. In the case of payments made in cash or by check
or money order, such funds will be placed in a segregated account and interest
will be paid by the Bank at the passbook savings account rate from the date
payment is received until the Conversion is completed or terminated. An executed
Order Form, once received by the Company, may not be modified, amended, or
rescinded without the consent of the Bank, unless the Conversion is not
completed within 45 days after the conclusion of the Subscription Offering, in
which event subscribers may be given the opportunity to increase, decrease, or
rescind their subscription for a specified period of time. In the event that the
Conversion is not consummated for any reason, all funds submitted pursuant to
the Offerings will be promptly refunded with interest as described above.
As indicated above, Webb may enter into agreements with broker-dealers
(selected dealers) to assist in the sale of the shares in the Syndicated Public
Offering. See also "- Plan of Distribution" and "- Marketing Arrangements." No
orders may be placed or filled by or for a selected dealer during the
Subscription Offering. After the close of the Subscription Offering, Webb will
instruct selected dealers as to the number of shares to be allocated to each
selected dealer. Only after the close of the Subscription Offering and upon
allocation of shares to selected dealers may selected dealers take orders from
their customers. During the Subscription and Public Offerings, selected dealers
may only solicit indications of interest from their customers to place orders
with the Company as of a certain date ("Order Date") for the purchase of shares
of Common Stock. When and if Webb and the Company believe that enough
indications of interest and orders have been received in the Subscription
Offering and the Public Offering to consummate the Conversion, Webb will
request, as of the Order Date, selected dealers to submit orders to purchase
shares for which they have previously received indications of interest from
their customers. Selected dealers will send confirmations of the orders to such
customers on the next business day after the Order Date. Selected dealers will
debit the accounts of their customers on the "Settlement Date" which date will
be three business days from the Order Date. Customers who authorize selected
dealers to debit their brokerage accounts are required to have the funds for
payment in their account on but not before the Settlement Date. On the
Settlement Date, selected dealers will remit funds to the account established by
the Bank for each selected dealer. After payment has been received by the Bank
from selected dealers, funds will earn interest at the passbook savings account
rate until the consummation of the Conversion. Funds will be promptly returned,
with interest, in the event the Conversion is not consummated as described
above.
However, selected dealers who do not hold or receive funds for
customers or carry accounts of, or for, customers will (1) instruct their
customers who wish to subscribe in the Offerings to make their
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<PAGE>
checks payable to the Bank and (2) will transmit customer checks directly to the
Bank by noon of the next business day after receipt by such selected dealer.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of Common Stock in the Offerings, provided that such IRAs are
not maintained on deposit at the Bank. Persons with IRAs maintained at the Bank
must have their accounts transferred to an unaffiliated institution or broker to
purchase shares of Common Stock in the Offerings. Instructions on how to
transfer self-directed IRAs maintained at the Bank can be obtained from the
Conversion Information Center ((304)_________ - _________) located at the Bank's
main office.
Federal regulations prohibit the Bank from lending funds or extending
credit to any person to purchase the Common Stock in the Conversion.
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Conversion will be mailed to the persons entitled thereto at the
address noted on the Order Form, as soon as practicable following consummation
of the Conversion. Any certificates returned as undeliverable will be held until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for the Common Stock are
available and delivered to subscribers, subscribers may not be able to sell the
shares of stock for which they subscribed.
Restriction on Sales Activities
The Common Stock will be offered in the Offerings principally by the
distribution of this prospectus and through activities conducted at a Conversion
Information Center located at the Bank. The Conversion Information Center is
expected to operate during normal business hours throughout the Offerings. It is
expected that a registered representative employed by Webb will be working at,
and supervising the operation of, the Conversion Information Center. Webb will
be responsible for overseeing the mailing of materials relating to the
Offerings, responding to questions regarding the Conversion and the Offerings
and processing Order Forms and Stock Orders. It is expected that Bank and
Company personnel will be present in the Conversion Information Center to assist
Webb with clerical matters and to answer questions related solely to the
business of the Bank.
Directors and executive officers of the Company may participate in the
solicitation of offers to purchase Common Stock in jurisdictions where such
participation is not prohibited. Other employees of the Company and the Bank may
participate in the Offerings in ministerial capacities or providing clerical
work in effecting a sales transaction. Such other employees have been instructed
not to solicit offers to purchase Common Stock or provide advice regarding the
purchase of Common Stock. Questions of prospective purchasers will be directed
to executive officers of the Company or registered representatives of Webb. The
Company will rely on Rule 3a4-1 promulgated under the Exchange Act, and sales of
Common Stock will be conducted in accordance with Rule 3a4-1, so as to permit
officers, directors, and employees to participate in the sale of Common Stock.
No officer, director, or employee of the Company or the Bank will be compensated
in connection with such person's solicitations or other participation in the
Offerings by the payment of commissions or other remuneration based either
directly or indirectly on transactions in the Common Stock.
Limitations on Purchases of Shares
The Plan provides for certain additional limitations to be placed upon
the purchase of the Common Stock by eligible subscribers and others in the
Conversion. Each purchaser must purchase a minimum of 25 shares; provided,
however, that the minimum number of shares requirement shall not apply if the
number of shares of Conversion Stock purchased times the price per share exceeds
$500. No person (or persons through a single account) may subscribe for or
purchase more than 10,000 shares
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<PAGE>
of Common Stock ($100,000) and no person (or persons through a single account),
together with any associate or group of persons acting in concert, may subscribe
for or purchase more than 15,000 shares of Common Stock ($150,000), except for
the Employee Plans which may purchase up to 10% of the Common Stock issued in
the Conversion, but currently intend to purchase 8% of the Common Stock issued
in the Conversion. Depending on market conditions and the results of the
Offerings, the Board of Directors, in its sole discretion, may increase or
decrease the purchase limitation without the approval of the members of the Bank
and without resoliciting subscribers, provided that the maximum purchase
limitation may not be increased to a percentage in excess of 5%. The OTS
regulations governing the Conversion limit the number of shares that officers
and directors and their associates may purchase. In the aggregate, the officers
and directors or their associates may not purchase more than 34% of the shares
of the Common Stock issued pursuant to the Conversion. For purposes of the Plan,
the directors are not deemed to be acting in concert solely by reason of their
Board membership.
Requests to purchase additional shares of Common Stock under the Plan
will be allocated by the Board of Directors on a pro rata basis giving priority
in accordance with the priority rights set forth above and in the Plan. Pro rata
reduction within each subscription rights category will be made in allocating
shares to the extent that the maximum purchase limitation is exceeded.
In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the EVR of up to 15% (the "Adjusted
Maximum"), the additional shares will be allocated in the following order of
priority: (i) to fill the Employee Plans' subscription of up to 8% of the
Adjusted Maximum number of shares; (ii) in the event that there is an
oversubscription by Eligible Account Holders, to fill unfulfilled subscriptions
of Eligible Account Holders exclusive of the Adjusted Maximum; (iii) in the
event that there is an oversubscription by Supplemental Eligible Account
Holders, to fill unfulfilled subscriptions to Supplemental Eligible Account
Holders exclusive of the Adjusted Maximum; and (iv) in the event that there is
an oversubscription by Other Members, to fill unfulfilled subscriptions of Other
Members exclusive of the Adjusted Maximum.
The term "associate" of a person is defined in the Plan to mean (i) any
corporation or organization (other than the Bank or a majority-owned subsidiary
of the Bank) of which such person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities, (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, (excluding tax-qualified employee stock benefit
plans or tax-qualified employee stock benefit plans in which a person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity and except that, for purposes of aggregating total shares that may be
held by officers and directors, the term "Associate" does not include any
tax-qualified employee stock benefit plan), and (iii) any relative or spouse of
such person or any relative of such spouse, who has the same home as such person
or who is a director or officer of the Bank, or any of its parents or
subsidiaries. For example, a corporation of which a person serves as an officer
would be an associate of such person, and therefore, all shares purchased by
such corporation would be included with the number of shares which such person
individually could purchase under the above limitations.
The term "officer" is defined in the Plan to mean an executive officer
of the Bank and may include the Bank's Chairman of the Board, Chief Executive
Officer, President, Senior Vice Presidents, Vice Presidents in charge of
principal business functions, Secretary and Treasurer and any other person
performing similar functions. All references herein to an officer shall have the
same meaning as used for an officer in the Plan.
Each person purchasing shares of the Common Stock in the Conversion
will be deemed to confirm that such purchase does not conflict with the maximum
purchase limitation. In the event that such purchase limitation is violated by
any person (including any associate or group of persons affiliated
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<PAGE>
or otherwise acting in concert with such persons), the Bank will have the right
to purchase from such person at the Purchase Price per share all shares acquired
by such person in excess of such purchase limitation or, if such excess shares
have been sold by such person, to receive the difference between the Purchase
Price per share paid for such excess shares and the price at which such excess
shares were sold by such person. This right of the Bank to purchase such excess
shares will be assignable by the Bank.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the Bank.
For certain restrictions on the Common Stock purchased by directors and
officers, see "- Restrictions on Transferability by Directors and Officers." In
addition, under guidelines of the National Association of Securities Dealers,
Inc. ("NASD"), members of the NASD and their associates are subject to certain
restrictions on the transfer of securities purchased in accordance with
subscription rights and to certain reporting requirements upon purchase of such
securities.
Plan of Distribution
The Company and the Bank have entered into an Agency Agreement with
Webb under which Webb will assist, on a best efforts basis, in the distribution
of the Common Stock in the Conversion. Webb is a broker-dealer registered with
the NASD. Specifically, Webb will assist in the Subscription Offering in the
following manner: (i) training and educating the Company's and the Bank's
employees regarding the mechanics and regulatory requirements of the stock
conversion process; (ii) conducting information meetings for potential
subscribers, if necessary; (iii) managing the sales efforts in the Offerings;
and (iv) keeping records of all stock subscriptions. Selected dealers may also
be used in the Offerings. See "- Marketing Arrangements."
Materials for the Offerings have been initially distributed to eligible
subscribers by mail, with additional copies available at the Conversion
Information Center. In the Subscription Offering, officers of the Company may be
available to answer questions about the Conversion. Such officers will not be
permitted to make statements about the Bank or the Company unless such
information is also set forth in this Prospectus, and they will not be
authorized to render investment advice. All subscribers for the shares to be
offered will be instructed to send payment directly to the Bank, where such
funds will be held in a segregated special escrow account and not released until
the closing of the Conversion or its termination.
Marketing Arrangements
The Bank and the Company have engaged Webb as a financial and marketing
advisor in connection with the Offerings and Webb has agreed to act as an
underwriter on a best efforts basis to solicit subscriptions and purchase orders
for shares of Common Stock in the Offerings. Webb will receive, as compensation,
a fee of 1.5% of the total dollar amount of Common Stock sold in the Offerings,
excluding subscriptions by directors, officers and employees of the Bank and the
Company and their immediate family members, and the ESOP. Webb will also be
reimbursed for its legal fees and expenses up to $30,000. The Bank and the
Company have agreed to indemnify Webb, to the extent allowed by law, for
reasonable costs and expenses in connection with certain claims or liabilities,
including certain liabilities under the Securities Act. Webb has received fees
totalling $25,000 for consulting and advisory services relating to the
Conversion, which fees will be in addition to marketing fees payable to Webb.
See "Pro Forma Data" for further information regarding expenses of the
Conversion.
If the Company and the Bank determine to offer shares of Common Stock
for sale in the Syndicated Public Offering, Webb will organize and manage the
syndicate of selected broker-dealers. Webb is directly responsible for the
payment of selling commissions to other NASD firms and licensed
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brokers participating in the Syndicated Public Offering. Other firms may
participate under a selected dealers arrangement. Webb and the selected dealers
will receive an aggregate fee of up to 5.5% of the aggregate dollar amount of
stock sold in the Syndicated Public Offering, and this fee will be in lieu of
the marketing and consulting and advisory fees to Webb would otherwise be
entitled if the stock were sold through the Offerings. Fees paid to Webb and to
any other broker-dealer may be deemed to be underwriting fees and Webb and such
broker-dealers may be deemed to be underwriters.
Shares to be Purchased by Management Pursuant to Subscription Rights
The following table sets forth certain information as to the
approximate purchases of Common Stock by each director and executive officer of
the Bank and by all directors and officers as a group, including their
"associates." All such shares will be purchased for investment purposes and not
for purposes of resale. For purposes of the following table, it has been assumed
that 820,000 shares (the midpoint of the EVR) of the Common Stock will be sold
at $10.00 per share and that sufficient shares will be available to satisfy
subscriptions in all categories.
<TABLE>
<CAPTION>
Aggregate
Total Price of Percent
Shares Shares of Shares
Name Position Purchased(1) Purchased(1) Purchased(1)
---- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Stephen M. Gagliardi President, Chief 10,000 $100,000 1.3%
Executive Officer
and Director
James R. Murphy Director 15,000 150,000 1.8
John R. Sperlazza Director 15,000 150,000 1.8
William E. Watson Director 15,000 150,000 1.8
George H. Johnson Director 5,000 50,000 0.6
Gary Young Director 2,500 25,000 0.3
Noreen Mechling Director, Senior 5,000 50,000 0.6
Vice President and
Chief Financial
Officer
Steve D. Martino Senior Vice 2,500 25,000 0.3
----- ------ -----
President and Chief
Operating Officer
Total executive officers
and directors (8 persons) 70,000 $700,000 8.5%
====== ======= ====
</TABLE>
- --------------------
(1) Does not include shares to be purchased by the ESOP.
Stock Pricing
Keller, a financial consulting and appraisal firm that is experienced
in the evaluation and appraisal of business entities, including thrift
institutions involved in the conversion process, has been retained by
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<PAGE>
the Bank to prepare an appraisal of the estimated pro forma market value of the
Common Stock to be sold pursuant to the Conversion. For its appraisal, Keller
will receive a fee of $17,000, including out-of-pocket expenses. Keller will
receive a fee of $1,000 for certain appraisal updates. The Bank has agreed to
indemnify Keller under certain circumstances against liabilities and expenses
(including certain legal fees) arising out of or based on any misstatement or
untrue statement of a material fact contained in the information supplied by the
Bank to Keller, except where Keller is determined to have been negligent or
failed to exercise due diligence in the preparation of the appraisal.
The appraisal was prepared by Keller in reliance upon the information
contained herein, including the financial statements. The appraisal contains an
analysis of a number of factors including, but not limited to, the Bank's
financial condition and operating trends, the competitive environment within
which the Bank operates, operating trends of certain thrift institutions and
savings and loan holding companies, relevant economic conditions, both
nationally and in the State of West Virginia which affect the operations of
thrift institutions, and stock market values of certain institutions. In
addition, Keller has advised the Bank that it has considered and will consider
the effect of the additional capital raised by the sale of the Common Stock on
the estimated aggregate pro forma market value of such shares. The appraisal has
been filed as an exhibit to the registration statement of which this prospectus
is a part. See "Additional Information."
On the basis of the above, Keller has determined, in its opinion, that
as of September 6, 1996, the estimated aggregate pro forma market value of the
Common Stock to be issued in the Conversion was $8,200,000. The Company has
determined to offer the shares in the Conversion at a price of $10.00 per share.
By dividing the price per share into the estimated aggregate value, the Company
initially plans to issue 820,000 shares. OTS regulations require, however, that
the appraiser establish a range of value for the stock to allow for fluctuations
in the aggregate value of the stock due to changing market conditions and other
factors. Accordingly, Keller has established a range of value from $6,970,000 to
$9,430,000 for this offering (the Estimated Valuation Range) that will be
updated prior to consummation of the Conversion. If the final value is outside
the Estimated Valuation Range, the total number of shares being offered will be
further adjusted and a new Estimated Valuation Range may be established without
resolicitation of subscriptions and without the approval of the Bank's members,
unless required by the OTS or unless the final valuation is less than $6,970,000
or more than $10,844,500 (15% above the maximum of the Estimated Valuation
Range).
The Board of Directors has reviewed the independent appraisal,
including the stated methodology of the independent appraiser and the
assumptions used in the preparation of the independent appraisal. The Board of
Directors is relying upon the expertise, experience and independence of the
appraiser and is not qualified to determine the appropriateness of the
assumptions or the methodology.
No sale of the shares will take place unless prior thereto Keller
confirms to the OTS that, to the best of Keller's knowledge and judgment,
nothing of a material nature has occurred which would cause it to conclude that
the Purchase Price on an aggregate basis was incompatible with its estimate of
the aggregate pro forma market value of the Common Stock at the time of the sale
thereof. If, however, the facts do not justify such a statement, an amended
Estimated Valuation Range may be set and subscribers may be resolicited.
Subscribers will not be resolicited in the event the final valuation is not less
than the minimum of the Estimated Valuation Range and is not more than 15% above
the Estimated Valuation Range.
The appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the Common
Stock. In preparing the appraisal, Keller has relied upon and assumed the
accuracy and completeness of financial and statistical information provided by
the Bank. Keller did not independently verify the financial statements and other
information provided by the Bank, nor did Keller value independently the assets
and liabilities of
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<PAGE>
the Bank. The appraisal considers the Bank only as a going concern and should
not be considered as an indication of the liquidation value of the Bank.
Moreover, because such appraisal is necessarily based upon estimates and
projections of a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing the Common Stock will
thereafter be able to sell such shares at prices within the estimated range at
the time of the Offerings.
Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the
completion of the Offerings, the Company may significantly increase or decrease
the number of shares to be issued in the Conversion. No resolicitation of
subscribers will be made and subscribers will not be permitted to modify or
cancel their subscriptions unless the change in the number of shares to be
issued in the Conversion results in an offering which is either below the
minimum of the EVR or materially above the maximum of the EVR, provided that up
to a 15% increase in the maximum of the EVR will not be deemed to be material.
Any adjustments to the EVR as a result of market and financial conditions would
be subject to OTS review.
In the event of a material increase in the valuation, the Company may
increase the total number of shares to be issued in the Conversion. An increase
in the total number of shares to be issued in the Conversion would decrease both
a subscriber's ownership interest and the pro forma equity and income on a per
share basis while increasing the pro forma net income and equity and income on
an aggregate basis. If the number of shares to be offered is to be increased,
any person who subscribed in the Subscription Offering for the maximum number of
shares permitted may be given the opportunity to purchase an additional number
of shares sufficient to make the total number of shares of the Common Stock
purchased by such subscriber equal to the same percentage of the increased
number of shares of Common Stock to be issued in the Conversion. Purchase
limitations will be based on the actual number of shares issued in the
Conversion.
In the event of a material reduction in the valuation, the Bank may
decrease the number of shares to reflect fully the reduced valuation. A decrease
in the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the pro forma equity on a per share basis
while decreasing equity on an aggregate basis. A decrease in the total number of
shares to be issued in the Conversion would not affect subscription rights by
reducing the maximum number of shares that may be purchased under various
purchase limitations and would not change the number of shares that a subscriber
may purchase unless the purchase limitation was also changed. However, such a
decrease could reduce the amount of shares allocated in the event of an
oversubscription.
Restrictions on Repurchase of Stock
Generally, within one year following the Conversion, the Company may
not repurchase Common Stock and in the second and third year following the
Conversion, the Company may only repurchase Common Stock as part of an
open-market stock repurchase program in an amount up to 5% of the outstanding
stock during each of those two years, provided the repurchase does not cause the
Bank to become undercapitalized and at least 10 days prior notice of the
repurchase is provided to the OTS. The OTS may disapprove the repurchase program
upon a determination that (1) the repurchase program would adversely affect the
financial condition of the Bank, (2) the information submitted is insufficient
upon which to base a conclusion as to whether the financial condition would be
adversely affected, or (3) a valid business purpose was not demonstrated.
However, the Regional Director of the OTS may permit repurchases after six
months following the Conversion and may permit additional repurchases during the
second and third year. In addition, SEC rules also restrict the method, time,
price, and number of shares of Common Stock that may be repurchased by the
Company and affiliated purchasers. If, in the future,
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<PAGE>
the rules and regulations regarding the repurchase of stock are liberalized, the
Company may utilize the rules and regulations then in effect.
Restrictions on Transferability by Directors and Officers
Shares of the Common Stock purchased by directors and officers of the
Company shall be subject to the restriction that said shares shall not be sold
for a period of one year following completion of the Conversion, except for a
disposition of shares in the event of the death of the stockholder or in any
exchange of the Common Stock in connection with a merger or acquisition of the
Company approved by the regulatory authorities. Accordingly, shares of the
Common Stock issued by the Company to directors and officers shall bear a legend
giving appropriate notice of the foregoing restriction, and, in addition, the
Company will give appropriate instructions to the transfer agent for the Common
Stock with respect to the applicable restriction relating to the transfer of any
restricted stock. Any shares issued to directors and officers as a stock
dividend, stock split, or otherwise with respect to restricted stock shall be
subject to the same restrictions.
For a period of three years following the Conversion, no director or
officer of the Bank, the Company or their associates may, without the prior
approval of the OTS, purchase any shares of Common Stock other than from or
through a broker or dealer registered with the SEC unless the purchase involves
more than 1% of the outstanding shares of Common Stock through an arm's length
transaction.
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the
Board of Directors of the Bank will be final, however, such interpretations
shall have no binding effect on the OTS. The Plan provides that, if deemed
necessary or desirable by the Board of Directors, the Plan may be substantively
amended by the Board of Directors as a result of comments from the OTS or
otherwise, prior to the solicitation of proxies from the members and at any time
thereafter with the concurrence of the OTS, except that in the event that the
regulations under which the Plan was adopted are liberalized subsequent to the
approval of the Plan by the OTS and the members at the Special Meeting, the
Board of Directors may amend the Plan to conform to the regulations without
further approval of the OTS or the members of the Bank to the extent permitted
by law. An amendment to the Plan that would result in a material adverse change
in the terms of the Conversion would require a resolicitation. In the event of a
resolicitation, subscriptions for which a confirmation or modification was not
received would be rescinded.
Conditions and Termination
Completion of the Conversion requires the approval of the Plan and the
affirmative vote of not less than a majority of the total number of votes of the
members of the Bank eligible to be cast at the Special Meeting and the sale of
all shares of Common Stock within 24 months following approval of the Plan by
members. If these conditions are not satisfied, the Plan will be terminated and
the Bank will continue its business in the mutual form of organization. The Plan
may be terminated by the Board of Directors at any time prior to the Special
Meeting and, with the approval of the OTS, by the Board of Directors at any time
thereafter.
Other
All statements made in this prospectus are hereby qualified by the
contents of the Plan, the material terms of which are set forth herein. The Plan
is attached to the Proxy Statement. Copies of the Plan are available from the
Bank and it should be consulted for further information.
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Adoption of the Plan by the Bank's members authorizes the Board of Directors to
amend or terminate the Plan.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
Although the Boards of Directors of the Bank and the Company are not
aware of any effort that might be made to obtain control of the Company after
Conversion, the Boards of Directors, as discussed below, believe it is
appropriate to include certain provisions in the Company's Certificate of
Incorporation to protect the interests of the Company and its stockholders from
takeovers which the Board of Directors of the Company might conclude are not in
the best interests of the Bank, the Company or the Company's stockholders.
The following discussion is a general summary of certain material
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other regulatory provisions, which may be deemed to have an "anti-takeover"
effect. The following description of certain of these provisions is necessarily
general and, with respect to provisions contained in the Company's Certificate
of Incorporation and Bylaws and the Bank's proposed stock charter and bylaws,
reference should be made in each case to the document in question, each of which
is part of the Bank's application to the OTS and the Company's Registration
Statement filed with the SEC. See "Additional Information."
Provisions of the Company's Certificate of Incorporation and Bylaws
Limitations on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. In addition, for a period of five years from
the completion of the Conversion of the Bank, no person may directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of an equity security of the Company. After five years from the
date of the Conversion, a beneficial holder submitting a proxy or proxies
totalling more than 10% of the then outstanding shares of Common Stock will be
able to vote in the following manner: the number of votes which may be cast by
such a beneficial owner shall be a number equal to the total number of votes
that a single record owner of all Common Stock owned by such person would be
entitled to cast, multiplied by a fraction, the numerator of which is the number
of shares of such class or series which are both beneficially owned and owned of
record by such beneficial owner and the denominator of which is the total number
of shares of Common Stock beneficially owned by such beneficial owner. The
impact of these provisions on the submission of a proxy on behalf of a
beneficial holder of more than 10% of the Common Stock is (1) to disregard for
voting purposes and require divestiture of the amount of stock held in excess of
10% (if within five years of the Conversion more than 10% of the Common Stock is
beneficially owned by a person) and (2) limit the vote on Common Stock held by
the beneficial owner to 10% or possibly reduce the amount that may be voted
below the 10% level (if more than 10% of the Common Stock is beneficially owned
by a person more than five years after the Conversion). Unless the grantor of a
revocable proxy is an affiliate or an associate of such a 10% holder or there is
an arrangement, agreement or understanding with such a 10% holder, these
provisions would not restrict the ability of such a 10% holder of revocable
proxies to exercise revocable proxies for which the 10% holder is neither a
beneficial nor record owner. A person is a beneficial owner of a security if he
has the power to vote or direct the voting of all or part of the voting rights
of the security, or has the power to dispose of or direct the disposition of the
security. The Certificate of Incorporation of the Company further provide that
this provision limiting voting rights may only be amended upon the vote of 80%
of the outstanding shares of voting stock.
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Election of Directors. Certain provisions of the Company's Certificate
of Incorporation and Bylaws will impede changes in majority control of the Board
of Directors. The Company's Certificate of Incorporation provides that the Board
of Directors of the Company will be divided into three classes, with directors
in each class elected for three-year staggered terms except for the initial
directors. Thus, it would take two annual elections to replace a majority of the
Company's Board. The Company's Certificate of Incorporation provides that the
size of the Board of Directors may be increased or decreased only if two-thirds
of the directors then in office concur in such action. The Certificate of
Incorporation also provides that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the Certificate of Incorporation
and the bylaws impose certain notice and information requirements in connection
with the nomination by stockholders of candidates for election to the Board of
Directors or the proposal by stockholders of business to be acted upon at an
annual meeting of stockholders.
The Certificate of Incorporation provides that a director may only be
removed for cause by the affirmative vote of at least 80% of the shares of the
Company entitled to vote generally in an election of directors cast at a meeting
of stockholders called for that purpose.
Restrictions on Call of Special Meetings. The Certificate of
Incorporation of the Company provides that a special meeting of stockholders may
be called only pursuant to a resolution adopted by a majority of the Board of
Directors, or a Committee of the Board or other person so empowered by the
Bylaws. The Certificate of Incorporation also provides that any action required
or permitted to be taken by the stockholders of the Company may be taken only at
an annual or special meeting and prohibits stockholder action by written consent
in lieu of a meeting.
Absence of Cumulative Voting. The Company's Certificate of
Incorporation provides that there shall be no cumulative voting rights in the
election of directors.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 2,000,000 shares of Common Stock and 500,000 shares of preferred
stock ("Preferred Stock"). The shares of Common Stock and Preferred Stock were
authorized in an amount greater than that to be issued in the Conversion to
provide the Company's Board of Directors with as much flexibility as possible to
effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its fiduciary
duty to deter future attempts to gain control of the Company. The Board of
Directors also has sole authority to determine the terms of any one or more
series of Preferred Stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post-tender offer merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Company's Board currently has no plans
for the issuance of additional shares, other than the issuance of additional
shares upon exercise of stock options.
Procedures for Certain Business Combinations. The Certificate of
Incorporation requires the affirmative vote of at least 80% of the outstanding
shares of the Company entitled to vote in the election of director in order for
the Company to engage in or enter into certain "Business Combinations," as
defined therein, with any Principal Stockholder (as defined below) or any
affiliates of the Principal Stockholder, unless the proposed transaction has
been approved in advance by the Company's Board of Directors, excluding those
who were not directors prior to the time the Principal Stockholder became the
Principal Stockholder. The term "Principal Stockholder" is defined to include
any person and the affiliates and associates of the person (other than the
Company or its subsidiary) who beneficially owns, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Company. Any
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amendment to this provision requires the affirmative vote of at least 80% of the
shares of the Company entitled to vote generally in an election of directors.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by the Company's Board
of Directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to restrictions on the acquisition and voting of greater
than 10% of the Common Stock; number, classification, election and removal of
directors; amendment of Bylaws; call of special stockholder meetings; director
liability; certain business combinations; power of indemnification; and
amendments to provisions relating to the foregoing in the Certificate of
Incorporation).
The Bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of the holders of at least 80% of the outstanding shares
of the Company entitled to vote in the election of Directors cast at a meeting
called for that purpose.
Purpose and Takeover Defensive Effects of the Company's Certificate of
Incorporation and Bylaws. The Board of Directors of the Bank believes that the
provisions described above are prudent and will reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist the Bank and the Company in the orderly deployment of the
Conversion proceeds into productive assets during the initial period after the
Conversion. The Board of Directors believe these provisions are in the best
interests of the Bank and of the Company and its stockholders. In the judgment
of the Board of Directors, the Company's Board will be in the best position to
determine the true value of the Company and to negotiate more effectively for
what may be in the best interests of its stockholders. Accordingly, the Board of
Directors believes that it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of the Company and that these provisions will encourage such
negotiations and discourage hostile takeover attempts. It is also the view of
the Board of Directors that these provisions should not discourage persons from
proposing a merger or other transaction at prices reflective of the true value
of the Company and which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding
companies have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Company and its
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Company's assets.
Effect of Takeover Defenses on Stockholder Interests. An unsolicited
takeover proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Although a tender offer or other
takeover attempt may be made at a price substantially above the current market
prices, such offers are sometimes made for less than all of the outstanding
shares of a target company. As a result, stockholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise that is under
different management and whose objectives may not be similar to those of the
remaining stockholders.
Potential Negative Impact of Takeover Defenses on Stockholder
Interests. Despite the belief of the Bank and the Company as to the benefits to
stockholders of these provisions of the Company's Certificate of Incorporation
and Bylaws, these provisions may also have the effect of discouraging a
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future takeover attempt which would not be approved by the Company's Board, but
pursuant to which stockholders may receive a substantial premium for their
shares over then-current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have any opportunity to do
so. Such provisions will also render the removal of the Company's Board of
Directors and of management more difficult. The Boards of Directors of the Bank
and the Company, however, have concluded that the potential benefits outweigh
the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Company may adopt additional charter
provisions regarding the acquisition of its equity securities that would be
permitted to a Delaware corporation. The Company and the Bank do not presently
intend to propose the adoption of further restrictions on the acquisition of the
Company's equity securities.
Effect of Employment and Severance Agreements. The Bank intends to
enter into an employment agreement with President Stephen M. Gagliardi that
provides for payments in the event of termination of employment following a
change in control, as defined in the agreement, of 2.99 times the five year
average compensation paid to Mr. Gagliardi. In addition, the Bank intends to
enter into employment agreements with three other officers that provide for
payments in the event of termination of employment following a change in
control, as defined in the agreements. At June 30, 1996, such payments, in the
aggregate, would have totalled approximately $637,000, rendering an acquisition,
followed by termination of their employment, more expensive to a possible
acquiror as a result of these agreements. See "Management of the Bank -
Executive Compensation - Employment Agreements."
Federal Regulation. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, OTS regulations prohibit any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is, or
after consummation of such acquisition would be, the beneficial owner of more
than 10% of such stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to a vote of stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of a savings
association or the power to control in any manner the election of a majority of
the directors of such institution.
Federal law also provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings association unless at least 60 days prior written notice
has been given to the OTS and the OTS has not objected to the proposed
acquisition. Control is defined for this purpose as the power, directly or
indirectly, to direct the management or policies of a savings association or to
vote more than 25% of any class of voting securities of a savings association.
Under federal law (as well as the regulations referred to below) the term
"savings
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association" includes state chartered and federally chartered SAIF-insured
institutions, federally chartered savings and loans and savings banks whose
accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an
insured institution, a person, other than a company, must give 60 days notice to
the OTS and have received no OTS objection to such acquisition of control, and a
company must apply for and receive OTS approval of the acquisition. Control, as
defined under federal law, involves a 25% voting stock test, control in any
manner of the election of a majority of the institution's directors, or a
determination by the OTS that the acquiror has the power to direct, or directly
or indirectly to exercise a controlling influence over, the management or
policies of the institution. Acquisition of more than 10% of an institution's
voting stock, if the acquiror also is subject to any one of either "control
factors," constitutes a rebuttable determination of control under the
regulations. The determination of control may be rebutted by submission to the
OTS, prior to the acquisition of stock or the occurrence of any other
circumstances giving rise to such determination, of a statement setting forth
facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings association's stock after the effective
date of the regulations must file with the OTS a certification that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control, and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 2,000,000 shares of the Common
Stock, $0.10 par value per share, and 500,000 shares of serial preferred stock,
$0.10 par value per share. The Company currently expects to issue up to 943,000
shares of Common Stock in the Conversion. The Company does not intend to issue
any shares of serial preferred stock in the Conversion, nor are there any
present plans to issue such preferred stock following the Conversion. The
aggregate par value of the issued shares will constitute the capital account of
the Company. The balance of the purchase price will be recorded for accounting
purposes as additional paid-in capital. See "Capitalization." The capital stock
of the Company will represent nonwithdrawable capital and will not be insured by
the Company, the Bank, the FDIC, or any other government agency.
Common Stock
Voting Rights. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every other share of
the Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of the
Common Stock will be entitled to only one vote for each share held of record on
all matters submitted to a vote of holders of the Common Stock and will not be
permitted to cumulate their votes in the election of the Company's directors.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company (including all deposits in the Bank and accrued interest thereon); (ii)
any accrued dividend claims; (iii) liquidation preferences of any serial
preferred stock which may be issued in the future; and (iv) any interests in the
liquidation account established upon the Conversion for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders who continue their
deposits at the Bank.
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Restrictions on Acquisition of the Common Stock. See "Certain
Restrictions on Acquisition of the Company" for a discussion of the limitations
on acquisition of shares of the Common Stock.
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. Therefore, the Board of Directors may sell shares of
capital stock of the Company without first offering such shares to existing
stockholders of the Company. The Common Stock is not subject to call for
redemption, and the outstanding shares of Common Stock when issued and upon
receipt by the Company of the full purchase price therefor will be fully paid
and non-assessable.
Transfer Agent and Registrar. _____________________________________ is
expected to act as the transfer agent and registrar for the Common Stock of the
Company.
Issuance of Additional Shares. Except in the Subscription and Public
Offerings and possibly pursuant to the RSP or Option Plan, the Company has no
present plans, proposals, arrangements or understandings to issue additional
authorized shares of the Common Stock. In the future, the authorized but
unissued and unreserved shares of the Common Stock will be available for general
corporate purposes, including, but not limited to, possible issuance as stock
dividends, in connection with mergers or acquisitions, under a cash dividend
reinvestment or stock purchase plan, in a public or private offering, or under
employee benefit plans. See "Risk Factors - Possible Dilutive Effect of RSP and
Stock Options and Effect of Purchases by the RSP and ESOP" and "Pro Forma Data."
Normally no stockholder approval would be required for the issuance of these
shares, except as described herein or as otherwise required to approve a
transaction in which additional authorized shares of the Common Stock are to be
issued.
For additional information, see "Dividends," "Regulation," and
"Taxation" with respect to restrictions on the payment of cash dividends; "-
Restrictions on Transferability by Directors and Officers" relating to certain
restrictions on the transferability of shares purchased by directors and
officers; and "Certain Restrictions on Acquisition of the Company" for
information regarding restrictions on acquiring Common Stock of the Company.
Serial Preferred Stock
None of the 500,000 authorized shares of serial preferred stock of the
Company will be issued in the Conversion. After the Conversion is completed, the
Board of Directors of the Company will be authorized to issue serial preferred
stock and to fix and state voting powers, designations, preferences, or other
special rights of such shares and the qualifications, limitations, and
restrictions thereof, subject to regulatory approval but without stockholder
approval. If and when issued, the serial preferred stock is likely to rank prior
to the Common Stock as to dividend rights, liquidation preferences, or both, and
may have full or limited voting rights. The Board of Directors, without
stockholder approval, can issue serial preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the Common Stock. The Board of Directors has no present intention to issue
any of the serial preferred stock.
LEGAL AND TAX MATTERS
The legality of the Common Stock has been passed upon for the Bank and
the Company by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain
legal matters for Webb will be passed upon by Elias, Matz, Tiernan & Herrick,
LLP, Washington, D.C. The federal income tax consequences of the Conversion have
been passed upon for the Bank and the Company by Malizia, Spidi, Sloane & Fisch,
P.C., Washington, D.C. The West Virginia income tax consequences of the
Conversion have been passed upon for the Bank and the Company by S.R. Snodgrass,
A.C..
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EXPERTS
The consolidated financial statements of the Bank as of June 30, 1996
and for the three years ended June 30, 1996, appearing in this prospectus have
been audited by S.R. Snodgrass, A.C., independent certified public accountants,
as set forth in their report thereon appearing elsewhere herein, and is included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
Keller has consented to the inclusion herein of a summary of its
appraisal report setting forth its opinion as to the estimated pro forma market
value of the Common Stock to be issued in the Conversion and its opinion setting
forth the value of subscription rights and to the use of its name and statements
with respect to it appearing herein.
REGISTRATION REQUIREMENTS
The Common Stock of the Company will be registered pursuant to Section
12(g) of the Exchange Act prior to completion of the Conversion. The Company
will be subject to the information, proxy solicitation, insider trading
restriction, tender offer rules, periodic reporting and other requirements of
the SEC under the Exchange Act. The Company will not deregister the Common Stock
under the Exchange Act for a period of at least three years following the
Conversion.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. As permitted by the rules and regulations of the SEC, this prospectus
does not contain all the information set forth in the registration statement.
Such information can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
The SEC also maintains an internet address ("Web site") that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the SEC. The address for
this Web site is "http://www.sec.gov." The statements contained herein as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
The Bank has filed an Application for Conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this prospectus omits certain information contained in that Application. The
Application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Northeast Regional Office of the OTS, 10
Exchange Place, Jersey City, New Jersey 07302 without charge.
A copy of the Certificate of Incorporation and Bylaws of the Company
are available without charge from the Bank.
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ADVANCE FINANCIAL SAVINGS BANK, f.s.b.
Index to Consolidated Financial Statements
Page(s)
Independent Auditors' Report ...............................................F-1
Consolidated Balance Sheet as of June 30, 1996
and June 30, 1995.........................................................F-2
Consolidated Statement of Income for the Years
Ended June 30, 1996, 1995 and 1994.........................................17
Consolidated Statement of Retained Earnings for the
Years Ended June 30, 1996, 1995, and 1994 ............................... F-3
Consolidated Statement of Cash Flows for the
Years Ended June 30, 1996, 1995, and 1994 ................................F-4
Notes to Consolidated Financial Statements .................................F-6
All schedules (other than financial data schedules) are omitted because the
required information is either not applicable or is included in the consolidated
financial statements or related notes.
Separate financial statements for the Company have not been included because the
Company will not engage in material transactions until after the Conversion. The
Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses, or contingent liabilities.
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[LETTERHEAD OF S.R. SNODGRASS, A.C.]
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors
Advance Financial Savings Bank, f.s.b.
We have audited the accompanying consolidated balance sheet of Advance Financial
Savings Bank, f.s.b. and Subsidiary as of June 30, 1996 and 1995, and the
related consolidated statements of income, retained earnings, and cash flows for
each of the three years in the period ended June 30, 1996. These 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 Advance Financial
Savings Bank, f.s.b. and Subsidiary as of June 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996 in conformity with generally accepted accounting
principles.
As explained in the notes to the financial statements, effective July 1, 1995,
the Bank changed its method of accounting for the impairment of loans and the
related allowance for loan losses, effective July 1, 1994, changed its method of
accounting for investment securities, and also effective July 1, 1993, changed
its method of accounting for income taxes.
/s/ S.R. SNODGRASS, A.C.
Steubenville, Ohio
August 19, 1996, except for the subsequent
events as described in Note 17, which is
as of September 30, 1996
F-1
<PAGE>
ADVANCE FINANCIAL SAVINGS BANK, F.S.B.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1996 1995
----------- -----------
Restated
<S> <C> <C>
ASSETS
Cash and Cash Equivalents
Cash and amounts due from banks $ 948,671 $ 805,791
Interest-bearing deposits with other institutions 3,067,912 2,333,592
----------- -----------
Total cash and cash equivalents 4,016,583 3,139,383
Investment Securities
Securities held to maturity (fair value of $4,761,709
and $3,740,156) 4,799,596 3,736,914
Securities available for sale 68,549 83,787
----------- -----------
Total investment securities 4,868,145 3,820,701
Mortgage-backed securities (fair value of
$561,203 and $945,564) 536,808 907,707
Loans held for sale 1,375,143 -
Loans receivable, (net of allowance for loan
losses of $324,983 and $197,833) 77,565,831 73,057,262
Office properties and equipment, net 2,099,470 1,271,151
Federal Home Loan Bank Stock, at cost 559,500 501,800
Accrued interest receivable 521,187 545,343
Real estate acquired in settlement of loans - 334,121
Other assets 309,726 168,735
----------- -----------
Total assets $91,852,393 $83,746,203
=========== ===========
LIABILITIES AND RETAINED EARNINGS
Deposit accounts $80,770,646 $74,698,144
Advances from Federal Home Loan Bank 4,376,452 2,842,887
Advances from borrowers for taxes and insurance 182,977 168,229
Accrued interest payable and other liabilities 322,439 254,434
----------- -----------
Total liabilities 85,652,514 77,963,694
Retained Earnings - substantially restricted 6,209,329 5,791,963
Net unrealized loss on securities (9,450) (9,454)
----------- -----------
Total retained earnings 6,199,879 5,782,509
----------- -----------
Total liabilities and retained earnings $91,852,393 $83,746,203
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
ADVANCE FINANCIAL SAVINGS BANK, F.S.B
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
<TABLE>
<CAPTION>
Retained Net
Earnings - Unrealized Total
Substantially Loss on Retained
Restricted Securities Earnings
------------- ----------- -----------
<S> <C> <C> <C>
Balance, June 30, 1993 $ 4,221,540 $ - $ 4,221,540
Net income, as restated 855,715 - 855,715
Net unrealized loss on securities - (7,585) (7,585)
----------- --------- -----------
Balance, June 30, 1994, as restated 5,077,255 (7,585) 5,069,670
Net income 714,708 - 714,708
Net unrealized loss on securities - (1,869) (1,869)
----------- --------- -----------
Balance, June 30, 1995, as restated 5,791,963 (9,454) 5,782,509
Net income 417,366 - 417,366
Net unrealized gain on securities - 4 4
----------- --------- -----------
Balance, June 30, 1996 $ 6,209,329 $ (9,450) $ 6,199,879
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
ADVANCE FINANCIAL SAVINGS BANK, F.S.B.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
------------ ------------ ------------
Restated
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 417,366 $ 714,708 $ 855,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion, net 127,177 111,814 106,333
Provision for loan losses 262,942 48,208 56,511
Gain on sale of real estate owned (5,446) (5,945) (290)
Gain on sale of loans (20,364) - -
Origination of loans held for sale (1,485,034) - -
Proceeds from the sale of loans 110,088 - -
Increase in accrued interest receivable
and other assets (113,459) (211,259) (6,812)
Increase (decrease) in accrued interest payable
and other liabilities 65,826 3,094 (5,061)
Decrease in federal income tax payable (3,836) (3,444) (71,740)
Increase in deferred federal income taxes 2,183 26,553 7,504
----------- ----------- -----------
Net cash provided by (used for)
operating activities (642,557) 683,729 942,160
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of held to maturity securities (3,050,000) (1,737,800) (997,734)
Proceeds from maturities of held to maturity
securities 1,987,130 300,000 2,899,648
Proceeds from redemptions of available for sale
securities 14,310 19,345 -
Principle collected on mortgage-backed securities 369,643 219,580 1,075,089
Purchases of Federal Home Loan Bank Stock (57,700) (65,600) (18,100)
Proceeds from the sale of student loans 1,378,046 - -
Net increase in loans (6,259,933) (7,501,134) (11,244,593)
Purchases of office properties and equipment (786,000) (82,949) (69,169)
Proceeds from sales of real estate acquired in
settlement of loans, net 303,446 12,465 -
----------- ----------- -----------
Net cash used for investing activities (6,101,058) (8,836,093) (8,354,859)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
ADVANCE FINANCIAL SAVINGS BANK, F.S.B.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
------------ ------------ ------------
Restated
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits $ 6,072,502 $ 7,467,952 $ 7,937,939
Net increase (decrease) in advances
from Federal Home Loan Bank 1,533,565 (3,350,000) 3,842,887
Net change in advances for taxes and insurance 14,748 56,827 -
----------- ----------- -----------
Net cash provided by financing activities 7,620,815 4,174,779 11,780,826
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 877,200 (3,977,585) 4,368,127
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 3,139,383 7,116,968 2,748,841
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 4,016,583 $ 3,139,383 $ 7,116,968
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ADVANCE FINANCIAL SAVINGS BANK, F.S.B.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying consolidated financial statements follows:
NATURE OF OPERATIONS
--------------------
Advance Financial Savings Bank, f.s.b. (the "Bank"), a federally-chartered
Bank, and its wholly-owned service corporation subsidiary, Advance
Financial Service Corporation of West Virginia, are located in Wellsburg,
WV. The Bank's principal sources of revenue emanate from its portfolio of
residential real estate and consumer loans, as well as, interest earnings
on investment securities, interest-bearing deposits with other financial
institutions, and a variety of deposit services provided to its customers
through two locations. The Bank is subject to regulation and supervision by
the Office of Thrift Supervision and Federal Deposit Insurance Corporation.
BASIS OF PRESENTATION
---------------------
The consolidated financial statements include the accounts of Advance
Financial Savings Bank, f.s.b. and its wholly-owned subsidiary, Advance
Financial Service Corporation of West Virginia. All material intercompany
balances and transactions have been eliminated in consolidation.
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 and
disclosure of contingent assets and liabilities as of the date of the
statement of financial statements and the reported amounts of revenues and
expenses for the reporting period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible the allowance for loan losses and
foreclosed assets may change materially in the near term.
INVESTMENT SECURITIES
---------------------
Debt securities that management has the ability and intent to hold to
maturity are classified as held-to-maturity and carried at cost, adjusted
for amortization of premium and accretion of discounts using a method
approximating a level yield. Other marketable securities are classified as
available-for-sale and are carried at fair value. Unrealized gains and
losses on securities available-for-sale are recognized as direct increases
or decreases in retained earnings. The cost of securities sold is
recognized using the specific identification method.
F-6
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE-BACKED SECURITIES
--------------------------
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal
balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized using a method approximating a level
yield over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Management intends and has the ability to hold
such securities to maturity. Should any be sold, the cost of the securities
sold is determined using the specific identification method.
LOANS HELD FOR SALE
-------------------
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost or market value determined on an aggregate
basis. Net unrealized losses are recognized in a valuation allowance
through charges to income. Gains and losses on the sale of loans held for
sale are determined using the specific identification method. At June 30,
1996, the cost of loans held for sale was equal to market value.
LOANS
-----
Loans are stated at unpaid principal balances, less loans in process, net
deferred loan fees, and the allowance for loan losses.
Loan origination and commitment fees, as well as, certain direct
origination costs are deferred and amortized as a yield adjustment over the
lives of the related loans using the interest method. Amortization of
deferred loan fees is discontinued when a loan is placed on nonaccrual
status.
Loans are generally placed on nonaccrual status when principal or interest
is delinquent for 90 days or more except for those loans which, in
management's judgment, are adequately secured and for which collection is
probable. Any unpaid interest previously accrued on those loans is reversed
from income, and thereafter, interest is recognized only to the extent of
payments received.
ALLOWANCE FOR LOAN LOSSES
-------------------------
Effective July 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures. These Statements prescribe
recognition criteria for loan impairment, generally related to commercial
loans, and measurement methods for certain impaired loans and all loans
whose terms are modified in trouble debt restructurings subsequent to the
adoption of these Statements. A loan is considered impaired when it is
probable that the borrower will not repay the loan according to the
original contractual terms of the loan agreement.
Management has determined that first mortgage loans on one-to-four family
properties and all consumer loans are large groups of smaller-balance
homogenous loans are to be collectively evaluated. Accordingly, such loans
are outside the scope of Statement Nos. 114 and 118.
Management considers an insignificant delay, which is defined as 90 days by
the Bank, will not cause a loan to be classified as impaired. A loan is not
impaired during a period of delay in payment if the Bank expects to collect
all amounts due including interest accrued at the contractual interest rate
for the period of delay. All loans identified as impaired are evaluated
independently by management.
F-7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (Continued)
-------------------------
Under this Standard, the Bank estimates credit losses on impaired loans
based on the present value of expected cash flows or the fair value of the
underlying collateral if the loan repayment is expected to come from the
sale or operation of such collateral. Statement No. 118 amends Statement
No. 114 to permit a creditor to use existing methods for recognizing
interest income on impaired loans eliminating the income recognition
provisions of Statement No. 114. Prior to 1995, the credit losses related
to these loans were estimated based on undiscounted cash flows or the fair
value of the underlying collateral. The adoption of the statements did not
have a material effect on the Bank's financial position or results of
operations.
Impaired loans, or portions thereof, are charged-off when it is determined
that a realized loss has occurred. Until such time, an allowance for loan
losses is maintained for estimated losses.
Cash receipts on impaired loans are applied first to accrued interest
receivable, unless otherwise required by the loan terms, except when an
impaired loan is also a nonaccrual loan, in which case the portion of the
receipts related to interest is recognized as income.
The allowance for loan losses represents the amount which management
estimates is adequate to provide for potential losses in its loan
portfolio. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance and all
recoveries are credited to it. The allowance for loan losses is established
through a provision for loan losses charged to operations. The provision
for loan losses is based on management's periodic evaluation of individual
loans, economic factors, past loan loss experience, changes in the
composition and volume of the portfolio, and other relevant factors. The
estimates used in determining the adequacy of the allowance for loan
losses, including the amounts and timing of future cash flows expected on
impaired loans, are particularly susceptible to change in the near term.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
-------------------------------------------
Real estate acquired in settlement of loans is classified separately on the
balance sheet at the lower of the recorded investment in the property or
its fair value minus estimated costs of sale. Prior to foreclosure, the
value of the underlying collateral is written down by a charge to the
allowance for possible loan losses, if necessary. Any subsequent write-
downs are charged against operating expenses. Operating expenses of such
properties, net of related income and losses on their disposition are
included in other expenses.
OFFICE PROPERTIES AND EQUIPMENT
-------------------------------
Land is carried at cost; buildings and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed
primarily by the straight-line method based upon the estimated useful lives
of the assets which range from five to forty years. Expenditures for
maintenance and repairs are charged against income as incurred. Costs of
major additions and improvements are capitalized.
INCOME TAXES
------------
Effective July 1, 1993, the Bank adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Under this accounting
standard, deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. Deferred income tax
expenses or benefits are based on the changes in the deferred tax asset or
liability from period to period.
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RETIREMENT PLAN
---------------
The Bank maintains a profit sharing plan for all employees meeting special
service requirements.
RECLASSIFICATION
----------------
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation. These
reclassification had no effect on net income.
PRIOR PERIOD ADJUSTMENT
-----------------------
Net income for the year ended June 30, 1994 decreased by $189,692 to
correct an error in the initial calculation of the cumulative effect
adjustment in connection with the adoption of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. The error had no
effect of net income for the years ended June 30, 1996 and 1995.
CASH FLOW INFORMATION
---------------------
The Bank has defined cash and cash equivalents as cash on hand, amounts due
from depository institutions, and overnight deposits with the Federal Home
Loan Bank.
Cash payments for interest for the fiscal years ended June 30, 1996, 1995,
and 1994 were $3,801,247, $3,146,659, and $2,463,460. Cash payments for
federal income taxes for the fiscal years ended June 30, 1996, 1995, and
1994 were $241,884, $300,840, and $479,807.
Non cash investing activity included mortgages originated and office
properties created from sales and transfers of real estate owned totaling
$172,110, $10,835, and $88,900, and real estate acquired in settlement of
loans of $130,543, $298,000, and $39,031 for the fiscal years ended June
30, 1996, 1995, and 1994 respectively.
During the period ended June 30, 1994, securities with an amortized cost of
$114,012 were transferred to investment securities available-for-sale. The
securities had an unrealized loss of $7,585. There were no securities
transferred between classifications during the period ended June 30, 1995
and 1996.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
During the second quarter of 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which becomes effective for the Bank in fiscal
year 1997. This Statement requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present. Impairment would be considered when the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. Management does not anticipate that implementation of this
Statement will have a material, if any, effect on its consolidated
financial condition or results of operations.
Statement of Financial Accounting Standards Statement No. 122, Accounting
for Mortgage Servicing Rights, was issued in May, 1995 and becomes
effective for fiscal year 1997. This statement allows enterprises engaged
in mortgage banking activities to recognize as separate assets the rights
to service mortgage loans originated for sale. Additionally, the Bank must
periodically assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights. Presently, the Bank
does not anticipate that implementation will have a material, if any,
effect on its consolidated financial condition or results of operations.
F-9
<PAGE>
2. INVESTMENT SECURITIES
Securities held-to-maturity are as follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Government and
Agency Obligations $4,799,596 $ 6,020 $(43,907) $4,761,709
========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government and
Agency Obligations $3,736,914 $26,417 $(23,175) $3,740,156
========== ======= ======== ==========
</TABLE>
Securities available-for-sale are as follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Money Fund Securities $ 77,999 $ - $(9,450) $ 68,549
========== ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Money Fund Securities $ 93,241 $ - $(9,454) $ 83,787
========== ======= ======= =========
</TABLE>
The amortized cost and fair value of investment securities at June 30, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or repayment penalties.
F-10
<PAGE>
2. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Securities Securities
Held-to-Maturity Available-for-Sale
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
One year or less $1,000,061 $1,002,136 $ - $ -
After one through five years 2,499,535 2,483,569 51,830 45,549
After five through ten years 300,000 297,094 26,169 23,000
After ten years 1,000,000 978,910 - -
---------- ---------- -------- --------
Total $4,799,596 $4,761,709 $ 77,999 $ 68,549
========== ========== ======== ========
</TABLE>
There were no securities sold during the three year period ended June 30,
1996.
3. MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed and related securities
are as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
GNMA Certificates $ 258,991 $ 11,347 $ - $ 270,338
Federal Home Loan Mortgage
Corporation Certificates 277,817 13,048 - 290,865
---------- -------- ------- ----------
Total $ 536,808 $ 24,395 $ - $ 561,203
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
Gros Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
GNMA Certificates $ 342,850 $ 18,459 $ - $ 361,309
Federal Home Loan Mortgage
Corporation Certificates 529,790 19,749 - 549,539
Collateralized Mortgage
Obligations 35,067 - (351) 34,716
---------- -------- ------- ----------
Total $ 907,707 $ 38,208 $ (351) $ 945,564
========== ======== ======= ==========
</TABLE>
Mortgage-backed securities provide for periodic, generally monthly payments of
principal and interest and have contractual maturities ranging from one to
twenty-five years. However, due to expected repayment terms being significantly
less than the underlying mortgage loan pool contractual maturities, the
estimated lives of these securities could be significantly shorter.
F-11
<PAGE>
4. LOANS RECEIVABLE
Loans receivable are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Mortgage loans:
1 - 4 family $ 54,599,854 $ 52,710,826
Multi-family 1,697,235 1,736,893
Non-residential 8,327,445 6,231,815
Construction 1,900,718 2,402,458
------------ ------------
66,525,252 63,081,992
------------ ------------
Consumer loans:
Home improvement 1,118,956 1,312,846
Automobile 6,178,615 4,598,045
Share loans 1,124,674 1,025,532
Education 128,045 1,571,745
Other 1,511,864 1,229,717
------------ ------------
10,062,154 9,737,885
------------ ------------
Commercial loans 3,099,876 2,058,129
------------ ------------
Less:
Loans in process 1,548,953 1,326,727
Net deferred loan fees 247,515 296,184
Allowance for loan losses 324,983 197,833
------------ ------------
2,121,451 1,820,744
------------ ------------
Total $ 77,565,831 $ 73,057,262
============ ============
</TABLE>
In the normal course of business, loans are extended to directors and executive
officers and their associates. In management's opinion, all of these loans are
on substantially the same terms and conditions as loans to other individuals and
businesses of comparable creditworthiness. A summary of loan activity for those
directors, executive officers, and their associates with loan balances in excess
of $60,000 for the year ended June 30, 1996 is as follows:
<TABLE>
<CAPTION>
Balance Amounts Balance
1995 Additions Collected 1996
--------- --------- --------- ---------
<S> <C> <C> <C>
$ 366,491 $ 348,848 $ 101,794 $ 613,545
</TABLE>
The Bank's loan portfolio is predominantly made up of one to four family unit
first mortgage loans in the Brook and Hancock counties of West Virginia and
Jefferson County, Ohio. These loans are typically secured by first lien
positions on the respective real estate properties and are subject to the Bank's
loan underwriting policies. In general, the Bank's loan portfolio performance is
dependent upon the local economic conditions.
F-12
<PAGE>
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended June 30,
1996, 1995, and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of period $ 197,833 $ 174,090 $ 119,451
Add:
Provisions charged to operations 262,942 48,208 56,511
Loan recoveries 8,896 14,227 7,006
--------- --------- ---------
469,671 236,525 182,968
Less loans charged off 144,688 38,692 8,878
--------- --------- ---------
Balance, end of period $ 324,983 $ 197,833 $ 174,090
========= ========= =========
</TABLE>
6. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment are summarized by major classification as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land $ 311,877 $ 303,857
Office buildings and improvements 1,749,040 1,153,258
Furniture, fixtures, and equipment 1,117,455 847,341
----------- -----------
Sub-total 3,178,372 2,304,456
Less: accumulated depreciation 1,078,902 1,033,305
----------- -----------
Total $ 2,099,470 $ 1,271,151
=========== ===========
</TABLE>
Depreciation charged to operations amounted to $124,805, $109,010, and
$102,147 for the years ended June 30, 1996, 1995, and 1994 respectively.
7. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System. As a member, the
Bank maintains an investment in the capital stock of the Federal Home Loan
Bank of Pittsburgh, at cost, in an amount not less than the greater of 1%
of its mortgage related assets or 0.3% of its total assets as calculated at
December 31 of each year.
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Investment securities $ 65,540 $ 81,698
Mortgage-backed and related securities 7,769 11,868
Loans receivable 447,878 451,777
--------- ---------
Total $ 521,187 $ 545,343
========= =========
</TABLE>
F-13
<PAGE>
9. DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Non-interest-bearing $ 1,607,362 2.0 % $ 878,220 1.2 %
Savings accounts 17,378,294 21.4 16,255,305 21.7
NOW accounts 8,036,844 10.0 6,872,206 9.2
Money market accounts 2,893,026 3.6 2,164,697 2.9
------------ ----- ------------ -----
29,915,526 37.0 26,170,428 35.0
------------ ----- ------------ -----
Savings certificates:
2.00 - 4.00% 3,053,637 3.8 6,214,926 8.3
4.01 - 6.00% 37,258,267 46.1 30,979,224 41.5
6.01 - 8.00% 10,513,216 13.0 10,826,025 14.5
8.01 - 10.00% 30,000 .1 507,541 0.7
------------ ----- ------------ -----
50,855,120 63.0 48,527,716 65.0
------------ ----- ------------ -----
Total $ 80,770,646 100.0 % $ 74,698,144 100.0 %
============ ====== ============ =====
</TABLE>
The scheduled maturities of time certificates of deposit are as follows at
June 30, 1996:
<TABLE>
<CAPTION>
Amount
------------
<S> <C>
Within one year $ 37,124,543
Beyond one year but within two years 6,428,126
Beyond two years but within three years 2,794,384
Beyond three years 4,508,067
------------
Total $ 50,855,120
============
</TABLE>
The Bank had certificates of deposit with a minimum denomination of
$100,000 in the amount of approximately $7,760,079 and $6,819,693 at June
30, 1996 and 1995 respectively.
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Passbooks $ 543,002 $ 557,657 $ 631,461
NOW and Money Market Deposit accounts 297,880 278,749 300,105
Time certificates of deposit 2,786,900 2,142,292 1,316,571
----------- ----------- -----------
$ 3,627,782 $ 2,978,698 $ 2,248,137
=========== =========== ===========
</TABLE>
F-14
<PAGE>
10. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consists of the following:
<TABLE>
<CAPTION>
Principal Interest Interest
Due Due Rate 1996 1995
---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Flexline Advance 6-20-1997 Monthly Variable $1,000,000 $1,000,000
Advance 7-31-1995 Monthly 4.21% - 247,700
Advance 10-29-1996 Monthly 4.23% 595,187 595,187
Advance 11-29-1996 Monthly 5.67% 1,000,000 -
Advance 5-21-1998 Monthly 5.43% 1,000,000 1,000,000
Advance 11-13-2002 Monthly 6.51% 781,265 -
---------- ----------
$4,376,452 $2,842,887
========== ==========
</TABLE>
These borrowings are subject to the terms and conditions of the Advances,
Collateral Pledge and Security Agreement between the Federal Home Loan Bank
of Pittsburgh and the Bank.
The variable interest rate on the Flexline Advance at June 30, 1996 was
5.91%.
The advance due 11-13-2002 has a monthly scheduled payment of principal and
interest of $6,973 with a balloon payment due at maturity of $524,863.
As of June 30, 1996 the Bank had a Flexline line of credit with the Federal
Home Loan Bank as follows:
<TABLE>
<CAPTION>
<S> <C>
Total Flexline $ 4,757,000
Flexline outstanding 1,000,000
-----------
Available Flexline $ 3,757,000
===========
</TABLE>
Interest paid on borrowings for the year ending June 30, 1996, 1995, and
1994 amounted to $173,624, $165,233, and $211,302 respectively.
11. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Currently payable:
Federal $ 238,049 $ 297,395 $ 408,067
State 35,744 38,953 61,326
--------- --------- ---------
273,793 336,348 469,393
Deferred 2,183 26,553 (48,972)
--------- --------- ---------
Total $ 275,976 $ 362,901 $ 420,421
========= ========= =========
</TABLE>
F-15
<PAGE>
The following temporary differences gave rise to deferred tax asset and
liabilities at June 30:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Deferred tax assets
Allowance for loan losses $ 110,494 $ 67,263 $ 59,191
Loan origination fees, net 57,466 73,868 102,045
Other, net 8,050 8,792 8,191
--------- --------- ----------
Deferred tax assets 176,010 149,923 169,427
--------- --------- ----------
Deferred tax liabilities
Premise and equipment 181,629 147,001 94,846
Tax reserve for loan losses 117,879 124,237 169,343
--------- --------- ----------
Deferred tax liabilities 299,508 271,238 264,189
--------- --------- ----------
Net deferred tax liabilities $ 123,498 $ 121,315 $ 94,762
========= ========= =========
</TABLE>
The reconciliation between the actual provision for income taxes and the
amount of income taxes which would have been provided at statutory rates
for the years ended June 30 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate $ 235,736 34.0 % $ 366,387 34.0 % $ 453,088 34.0 %
State income tax expense, net
of federal tax benefit 23,591 3.4 25,709 2.4 40,475 3.0
Tax exempt interest (9,349) (1.3 ) (7,072) (.7 ) (8,342) (.6 )
Other, net 25,998 3.7 (22,123) (2.0 ) (64,800) (4.9 )
--------- ----- --------- ----- --------- ----
Total $ 275,976 39.8 % $ 362,901 33.7 % $ 420,421 31.5 %
========= ===== ========= ===== ========= =====
</TABLE>
Savings institutions that meet certain definitional tests and other
conditions prescribed by the Internal Revenue Code of 1986, as amended, are
permitted to deduct, within limitations, a bad debt deduction computed as a
percentage of taxable income before such deduction. The maximum deduction
allowable was 8% of income subject to tax before such deduction.
12. RETAINED EARNINGS - SUBSTANTIALLY RESTRICTED
The Bank is subject to the risk-based capital rules. These guidelines
include a common framework for defining elements of capital and a system
for relating capital to risk. The minimum total risk-based capital
requirement is 8% which at least half must be Tier I capital. The Tier I
and total risk-based capital positions of the Bank as of June 30, 1996, as
calculated by management, amounted to 11.13% and 11.72% respectively.
Additionally, the general regulatory guidelines establish a minimum ratio
of leverage capital to adjusted total assets of 3.00% for top rated
financial institutions with less highly rated institutions or those with
higher levels of risk required to maintain ratios of 100 to 200 basis
points above the minimum level. The Bank's ratios under these guidelines,
as calculated by management, as of June 30, 1996 is 6.75%.
As a result of the special treatment accorded the Bank under income tax
regulations, approximately $1,352,000 of retained earnings at June 30,
1996, represents allocations of income to bad debt deductions for tax
purposes only. Should amounts previously claimed as a bad debt deduction be
used for any other purpose than to absorb bad debts (which is not
anticipated), tax liabilities will be incurred at the rate then in effect.
F-16
<PAGE>
13. RETIREMENT PLAN
The Bank has a profit-sharing plan with a 401(k) feature. The 401(k) allows
employees to make contributions to the plan up to 12% of their annual
compensation. The Bank will match 50% of the employees voluntary
contributions of up to 3% of the employees' compensation. Additional
employer contributions are made at the discretion of the Board of
Directors. The plan covers substantially all employees with more than one
year's service. The Bank's contributions for the benefit of covered
employees amounted to $56,190, $52,060, and $48,101 for the years ended
June 30, 1996, 1995, and 1994 respectively.
14. COMMITMENTS AND CONTINGENT LIABILITIES
LOAN COMMITMENTS
----------------
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the statement of financial condition. The
contract amounts of these instruments reflect the extent of involvement the
bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments. No losses are anticipated by
management as a result of these commitments.
The following represents financial instruments whose contract amounts
represent credit risk at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Commitments to originate loans $1,469,700 $ 1,574,360
Loans in process $1,548,953 $ 1,326,727
Unused equity lines of credit $2,046,746 $ 1,224,585
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counter party.
Collateral held consists primarily of single-family residences and income-
producing commercial properties.
F-17
<PAGE>
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
LEASE COMMITMENTS
-----------------
The future lease commitments as of June 30, 1996 for all noncancellable
equipment and land leases follows:
<TABLE>
<CAPTION>
Fiscal Year
Ending June 30, Amount
------------------ ---------------
<S> <C>
1997 $ 53,638
1998 54,015
1999 53,956
2000 36,000
2001 37,800
2002 and thereafter 1,858,500
-----------
$ 2,093,909
===========
</TABLE>
The Bank entered into a forty year land lease with two five year option
periods for their Follansbee branch. The terms of this lease commenced as
of than January 1, 1996.
The Bank also signed a new five year contract with the Savings and Loan
Data Corporation, Inc., commencing May 1, 1995 which requires the Bank to
pay monthly processing fees for services provided by the service center.
The amount of the monthly payment varies each month based upon the type and
amount of service provided. Processing fees charged to operations amounted
to $144,390, $129,975, and $113,606 for the years ended June 30, 1996,
1995, and 1994 respectively.
LITIGATION
----------
Also, the Bank is involved in litigation arising in the normal course of
business. Management believes that liabilities, if any, arising from these
proceedings will not have a material adverse effect on the consolidated
financial position, operating results, or liquidity.
15. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statements No. 107, Disclosure About
Fair Value of Financial Instruments, requires disclosure of the estimated
fair value of the financial instruments. Financial instruments are defined
as cash, evidence of ownership interest in an entity, or a contract which
creates an obligation or right to receive or deliver cash or another
financial instrument from/to a second entity on potentially favorable or
unfavorable terms.
F-18
<PAGE>
15. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties other than in
a forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based
upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for
financial instruments should be based upon management's judgment regarding
current economic conditions, interest rate risk, expected cash flows,
future estimated losses, and other factors as determined through various
option pricing formulas or simulation modeling. As many of these
assumptions result from judgments made by management based upon estimates
which are inherently uncertain, the resulting estimated fair values may not
be indicative of the amount realizable in the sale of a particular
financial instrument. In addition, changes in assumptions on which the
estimated fair values are based may have a significant impact on the
resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment
are not considered financial instruments, the estimated fair value of
financial instruments would not represent the full value of the Bank.
The Bank employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumptions:
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH OTHER INSTITUTIONS,
---------------------------------------------------------------------------
ACCRUED INTEREST RECEIVABLE, AND ACCRUED INTEREST PAYABLE
---------------------------------------------------------
The fair value is equal to the current carrying value.
INVESTMENT SECURITIES, MORTGAGE-BACKED SECURITIES, AND LOANS HELD FOR SALE
--------------------------------------------------------------------------
The fair value of securities held to maturity and loans held for sale is
equal to the available quoted market price. If no quoted market price is
available, fair value is estimated using the quoted market price for
similar securities.
The fair value of securities available for sale is equal to the current
carrying value.
LOANS, DEPOSITS. AND ADVANCES FROM FEDERAL HOME LOAN BANK
---------------------------------------------------------
The fair value of loans, certificates of deposit, and advances from Federal
Home Loan Bank is estimated by discounting the future cash flows using a
simulation model which estimates future cash flows and constructs discount
rates that consider reinvestment opportunities, operating expenses, non-
interest income, credit quality, and prepayment risk. Demand, savings, and
money-market deposit accounts are valued at the amount payable on demand as
of the year end.
F-19
<PAGE>
15. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)
COMMITMENTS TO EXTEND CREDIT
----------------------------
These financial instruments are generally not subject to sale and estimated
fair values are not readily available. The contractual amounts of unfunded
commitments and letters of credit are presented previously in this report.
The estimated fair value of the Bank's financial instruments at June 30,
1996 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,016,583 $ 4,016,583
Securities available-for-sale 68,549 68,549
Securities held to maturity 4,799,596 4,761,709
Mortgage-backed securities 536,808 561,203
Loans held-for sale 1,375,143 1,375,143
Loans receivable 77,565,831 77,828,000
Accrued interest receivable 521,187 521,187
------------ ------------
$ 88,883,697 $ 89,132,374
============ ============
Financial liabilities:
Deposits $ 80,770,646 $ 80,741,000
Advances from Federal Home Loan Bank 4,376,452 4,314,000
Accrued interest payable 25,887 25,887
Advances from borrowers for taxes and insurance 182,977 182,977
------------ ------------
$ 85,355,962 $ 85,263,864
============ ============
</TABLE>
16. CONSOLIDATED SUBSIDIARY
The following condensed statements summarize the financial position of the
Bank's wholly-owned subsidiary.
ADVANCE FINANCIAL SERVICE CORPORATION OF WEST VIRGINIA
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30,
1996 1995
-------- ---------
<S> <C> <C>
ASSETS
Investment in Savings and Loan Data Corporation $ 15,000 $ 15,000
-------- --------
Total assets $ 15,000 $ 15,000
-------- --------
STOCKHOLDERS' EQUITY
Capital stock $ 15,000 $ 15,000
======== ========
Total stockholders' equity $ 15,000 $ 15,000
======== ========
</TABLE>
Advance Financial Service Corporation had no operating activity during the
years ended June 30, 1996, 1995, and 1994.
F-20
<PAGE>
17. SUBSEQUENT EVENTS
CONVERSION AND REORGANIZATION
-----------------------------
On September 3, 1996, the Board of Directors of the Bank, subject to
regulatory approval, adopted the Plan of Conversion pursuant to which the
Bank proposed to convert from a federally-chartered mutual savings bank to
a federally-chartered stock savings bank and concurrently form a Bank
Holding Company. The conversion is expected to be accomplished through
amendment of the Bank's federal charter and the sale of the holding
company's common stock in an amount equal to the pro forma market value of
the Bank after giving effect of the conversion. A subscription offering of
the sale of the Bank's common stock will be offered initially to the Bank's
depositors, then to other members and directors, officers, and employees of
the Bank. Any shares of the Bank's common stock not sold in the
subscription offering will be offered for sale to the general public in the
Bank's market area.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. At June 30, 1996, the Bank had not incurred
any conversion costs. In the event that the conversion is not completed,
any deferred conversion costs will be charged to operations.
In accordance with regulations, at the time that the Bank converts from a
mutual savings bank to a stock savings bank, a portion of retained earnings
will be restricted by establishing a liquidation account. The liquidation
account will be maintained for the benefit of eligible account holders who
continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible
account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank,
each account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The Bank may not pay dividends
if those dividends would reduce equity capital below the required
liquidation account amount.
Savings Association Insurance Fund Recapitalization
---------------------------------------------------
On September 30, 1996, the President signed into law legislation which
included, among other things, recapitalization of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC") by a one time charge to SAIF-insured institutions of 65.7 basis
points per one hundred dollars of insurable deposits. The gross effect to
the Bank amounted to $469,908, which will be reflected in the financial
results of the Bank, for the quarter ended September 30, 1996.
F-21
<PAGE>
<TABLE>
<CAPTION>
================================================================================ ===============================================
<S> <C>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this prospectus in connection
with the offering made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by the Bank or
the Company. This prospectus does not constitute an offer to sell, or the Up to 943,000 Shares
solicitation of an offer to buy, any of the securities offered hereby to any (Anticipated Maximum)
person in any jurisdiction in which such offer or solicitation would be Common Stock
unlawful. Neither the delivery of this prospectus by the Bank or the Company nor
any sale made hereunder shall in any circumstances create an implication that
there has been no change in the affairs of the Bank or the Company since any of
the dates as of which information is furnished herein or since the date hereof.
-----------------
TABLE OF CONTENTS
Page
----
Summary........................................ (i)
Selected Financial and Other Data
Recent Selected Financial and Other Data
Recent Developments ...........................
Management's Discussion and Analysis of
Recent Developments.......................... ADVANCE FINANCIAL BANCORP
Risk Factors................................... 1 (Proposed Holding Company for
Advance Financial Bancorp...................... Advance Financial Savings Bank)
Advance Financial Savings Bank, f.s.b..........
Use of Proceeds................................
Dividends......................................
Market for the Common Stock....................
Capitalization.................................
Pro Forma Data.................................
Historical and Pro Forma Capital Compliance ----------
Statements of Income...........................
Management's Discussion and Analysis of Financial PROSPECTUS
Condition and Results of Operations
Business of the Company........................ ----------
Business of the Bank...........................
Regulation.....................................
Taxation.......................................
Management of the Company......................
Management of the Bank......................... CHARLES WEBB & COMPANY
The Conversion................................. A Division of Keefe,
Certain Restrictions on Acquisition of Bruyette & Woods, Inc.
the Company..................................
Description of Capital Stock...................
Legal and Tax Matters..........................
Experts........................................
Registration Requirements...................... Dated __________, 1996
Additional Information.........................
Index to Financial Statements..................
Until the later of ____________, 1996, or 25 days after commencement of the
offering of Common Stock, all dealers effecting transactions in the registered THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
securities, whether or not participating in this distribution, may be required AND ARE NOT FEDERALLY INSURED OR GUARANTEED
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.
================================================================================ ===============================================
</TABLE>
<PAGE>
PROSPECTUS SUPPLEMENT
Supplement to the Advance Financial Bancorp
Prospectus dated November ____, 1996
ADVANCE FINANCIAL BANCORP
COMMON STOCK, $0.10 PAR VALUE
ADVANCE FINANCIAL SAVINGS BANK
EMPLOYEES' PROFIT SHARING PLAN & TRUST
(57,274 SHARES OF COMMON STOCK AND PARTICIPATION INTERESTS THEREIN)
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") under the Advance Financial Savings Bank Employees' Profit
Sharing Plan & Trust, as amended (the "Plan") of participation interests offered
under the Plan and of a maximum of 57,274 shares of common stock of Advance
Financial Bancorp (the "Company"), par value $0.10 per share (the "Common
Stock"), as set forth herein.
In connection with the proposed mutual-to-stock conversion of Advance
Financial Savings Bank, F.S.B. (the "Bank" or "Employer") from a mutual savings
bank to a stock savings bank (the "Conversion"), the Plan has been amended
effective November 1, 1996, to permit the investment of Plan assets in Common
Stock as one of several participant directed investment alternatives. The Plan
will permit Participants to direct the trustee of the Plan (the "Trustee") to
purchase Common Stock with Plan assets which are attributable to such
Participants. This Prospectus Supplement relates to the one time election of a
Participant to direct the purchase of Common Stock under the Plan in connection
with the Conversion and to the purchase of the Common Stock under the Plan
thereafter in the open-market.
The Prospectus dated November ____, 1996, of the Company (the
"Prospectus") which is attached to this Prospectus Supplement includes detailed
information with respect to the Conversion, the Common Stock and the financial
condition, results of operation, and business of the Bank. This Prospectus
Supplement, which provides detailed information with respect to the Plan, should
be read only in conjunction with the Prospectus. Terms not otherwise defined in
this Prospectus Supplement are defined in the Plan or the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "Risk Factors" in the Prospectus.
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 SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK AND THE PARTICIPATION INTERESTS UNDER THE PLAN
OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
The date of this Prospectus Supplement is November ____, 1996.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company, the Bank, or the Plan.
This Prospectus Supplement does not constitute an offer to sell or a
solicitation of an offer to buy any securities in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation in such jurisdiction.
Neither the delivery of this Prospectus Supplement and the Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
there has been no change in the affairs of the Bank or the Plan since the date
hereof, or that the information herein contained or incorporated by reference is
correct as of any time subsequent to the date hereof. This Prospectus Supplement
should be read only in conjunction with the Prospectus that is attached hereto
and should be retained for future reference.
<PAGE>
TABLE OF CONTENTS
The Offering.................................................................1
Securities Offered.....................................................1
Election to Purchase Common Stock in Connection
with the Conversion...............................................1
Value of Participation Interests.......................................1
Method of Directing Investments........................................1
Time for Directing Investment..........................................2
Irrevocability of Investment Direction.................................2
Direction to Purchase Common Stock After the Conversion................2
Purchase Price of Common Stock.........................................2
Nature of Participant's Interest in the
Common Stock......................................................3
Voting and Tender Rights of Common Stock...............................3
Minimum Investment.....................................................3
Description of the Plan......................................................3
General................................................................3
Eligibility and Participation..........................................4
Contributions and Benefits Under the Plan..............................4
Limitations on Contributions...........................................5
Investment of Plan Assets..............................................7
Investment of Contributions...........................................10
Benefits Under the Plan...............................................12
Withdrawals and Distributions From the Plan...........................12
Administration of the Plan............................................14
Plan Administrator....................................................15
Reports to Plan Participants..........................................15
Amendment and Termination.............................................15
Merger, Consolidation or Transfer.....................................15
Federal Income Tax Consequences.......................................15
ERISA and Other Qualifications........................................18
Restrictions on Resale................................................18
SEC Reporting and Short-Swing Liability...............................19
Additional Information................................................20
Legal Opinions..............................................................20
Investment Election Form............................................Appendix A
<PAGE>
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan and
up to 57,274 shares (assuming the actual purchase price is $10.00 per share) of
Common Stock which may be acquired by the Plan for the accounts of Participants.
The Company is the issuer of the Common Stock. Only employees of the Bank who
meet the eligibility requirements under the Plan may participate in the Plan.
Information with regard to the Plan is contained in this Prospectus Supplement
and information with regard to the Conversion and the financial condition,
results of operation and business of the Bank is contained in the attached
Prospectus. The address of the principal executive office of the Company and the
Bank is 1015 Commerce Street, Wellsburg, West Virginia 26070-1532. The Company's
and the Bank's telephone number is (304) 737-3531.
Election to Purchase Common Stock in Connection with the Conversion
In connection with the Conversion, the Plan has been amended to permit
each Participant the opportunity to direct that all or part of the funds which
represent his or her beneficial interest in the assets of the Plan may be
transferred to an investment fund for the purpose of purchasing Common Stock
issued in connection with the Conversion (the "Employer Stock Fund").
Participants will also be permitted to direct ongoing purchases of Common Stock
under the Plan after the Conversion. See "Direction to Purchase Common Stock
After Conversion." The Trustee will follow the Participants' investment
directions. Funds not transferred to the Employer Stock Fund will remain
invested in the other investment funds of the Plan as directed by the
Participant (see "Investment of Contributions" herein).
Value of Participation Interests
The assets of the Plan were valued as of ________________ ____, 1996, and
each Participant was informed of the value of his or her beneficial interest in
the Plan. This value represented the market value as of _________________ ____,
1996, of past contributions to the Plan by the Bank and by the Participants and
earnings thereon, less previous withdrawals, if any. The assets of the Plan
shall also be valued prior to accepting a Participant's directed investment to
ascertain that such directed investment does not exceed the Participant's
account assets.
Method of Directing Investments
Appendix A of this Prospectus Supplement includes a form to direct a
transfer to the Employer Stock Fund (the "Investment Form") of all or a portion
of a Participant's account under the Plan ("Account"). If a Participant wishes
to transfer all or part of his or her beneficial interest in the assets of the
Plan to the purchase of Common Stock issued in connection with the Conversion
under the Employer Stock Fund, he or she should indicate that investment
decision on the Investment Form. The Investment Form must be properly completed
and signed by the Participant in order for such Investment Form to be honored by
the Trustee. Additionally, subsequent to the Conversion, a Participant may
indicate the directed investment of future contributions under the Plan for
investment in the Employer Stock Fund as one of various investment alternatives
under the Plan. If a Participant does not wish to make an investment election to
purchase Common Stock under the Plan in the Conversion, or thereafter, he or she
does not need to take any action.
1
<PAGE>
Time for Directing Investment
The deadline for submitting the Investment Form directing the transfer of
amounts to the Employer Stock Fund in order to purchase Common Stock issued in
connection with the Conversion is ________________ ____, 1996. The Investment
Form should be returned to the Bank's Personnel Department by 12:00 noon on such
date.
Subsequent to the Conversion, Participants will continue to be able to
direct the investment of their Account under the Plan in the Employer Stock Fund
and in the other investment alternatives, as detailed below.
Irrevocability of Investment Direction
A Participant's direction to transfer amounts credited to such
Participant's Account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable as of 12:00 noon on ________________ ____, 1996.
Direction to Purchase Common Stock After the Conversion
Following completion of the Conversion, a Participant shall be permitted
to direct that a certain percentage of such Participant's interests in his or
her Account may be transferred to the Employer Stock Fund and invested in Common
Stock, or to the other investment funds available under the Plan. Alternatively,
a Participant may direct that a certain percentage of such Participant's
interest in the Employer Stock Fund be transferred to his or her Account to be
invested in the other investment funds available in accordance with the terms of
the Plan. Participants will be permitted to direct that future contributions
made to the Plan by them or on their behalf will be invested in the Employer
Stock Fund. Following the initial election, the allocation of a Participant's
interest in the Employer Stock Fund may be changed quarterly by filing a written
notice with the Plan's administrator (the "Plan Administrator"). Special
restrictions apply to transfers directed by those Participants who are officers,
directors and principal shareholders of the Company who are subject to the
provisions of Section 16(b) of the Securities Exchange Act of 1934 (the "1934
Act"). See "Restrictions on Resale" and "SEC Reporting and Short- Swing
Liability" herein.
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund prior to the Conversion
will be used by the Trustee to purchase shares of Common Stock in the
Conversion. The initial price paid for such shares of Common Stock will be the
same price that is paid by all other persons who purchase shares of Common Stock
in the Conversion (i.e., $10.00 per share of Common Stock).
Account assets directed for investment in the Employer Stock Fund after
the Conversion shall be invested by the Trustee to purchase shares of Common
Stock in open market transactions. The price paid by the Trustee for shares of
Common Stock in the Conversion, or otherwise, will not exceed "adequate
consideration" as defined in Section 3(18) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
2
<PAGE>
Nature of Participant's Interest in the Common Stock
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant has an allocable interest in the investment funds of
the Plan but not in any particular assets of the Plan. Accordingly, no specific
shares of Common Stock will be directly attributable to the Account of any
Participant. Dividend rights associated with the Common Stock held by the
Employer Stock Fund shall be allocated to the Employer Stock Fund. Any increase
(or decrease) in the value of such fund attributed to dividend rights shall be
reflected in a Participant's allocable interest in the Employer Stock Fund.
Voting and Tender Rights of Common Stock
The Trustee generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with interests
in the Employer Stock Fund. With respect to each matter as to which holders of
Common Stock have a right to vote or tender, each Participant will be allocated
a number of voting or tender instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The number of shares of
Common Stock held in the Employer Stock Fund that are voted or tendered in the
affirmative and negative on each matter shall be determined by the number of
voting instruction rights or tender instruction rights exercised in the
affirmative and negative, respectively, from the Participants. With respect to
shares for which no timely voting instruction rights or tender instruction
rights are received by the Trustee, the Trustee shall vote or tender such shares
within its discretion as a fiduciary under the Plan or as directed by the Plan's
administrative committee ("Committee").
Minimum Investment
The minimum investment of assets directed by a Participant for the
purchase of Common Stock in the Conversion through investment under the Employer
Stock Fund shall be $_____ and may only be specified in increments of $10.00.
Funds may be directed for the purchase of such Common Stock attributable to a
Participant's Account whether or not such account assets are 100% vested at the
time of such investment election. With respect to investment in the Employer
Stock Fund after the Conversion, there is no minimum level of investment
specific to this investment fund.
DESCRIPTION OF THE PLAN
General
The Plan was initially established on December 28, 1978. The Plan is a
deferred compensation arrangement established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Plan has been submitted to the
Internal Revenue Service (the "IRS") for a determination that the Plan is
qualified under Section 401(a) of the Code, and that its related trust is
qualified under Section 501(a) of the Code. The Bank intends that the Plan, in
operation, will comply with the requirements under Section 401(a) and Section
401(k) of the Code. The Bank intends to adopt any amendments to the Plan that
may be necessary to ensure the continued qualified status of the Plan under the
Code and applicable Treasury Regulations.
3
<PAGE>
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase plan). The Plan
is not subject to Title IV (Plan Termination Insurance) of ERISA. Neither the
funding requirements contained in Part 3 of Title I of ERISA nor the plan
termination insurance provisions contained in Title IV of ERISA will be extended
to Participants (as defined below) or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
OR HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF
EMPLOYMENT WITH THE BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED
ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2,
REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH
THE BANK OR AFTER TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The statements contained in this
Prospectus Supplement are summaries of certain provisions of the Plan. They are
not complete and are qualified in their entirety by the full text of the Plan
which is an exhibit to the registration statement filed with the Securities and
Exchange Commission. Copies of the Plan are available to all Participants for
inspection by filing a request with the Plan Administrator. Each employee is
urged to carefully read the full text of the Plan before taking any action with
respect to the Plan.
Eligibility and Participation
All employees of the Employer are eligible to participate in the Plan on
the earlier of the first day of the Plan Year or the first day of the seventh
month coinciding with or next following the date the employee reaches the age of
20-1/2 and works at least 1,000 hours during a 12-month period with the Bank. As
of June 30, 1996, there were approximately _____ employees eligible to
participate in the Plan and _____ employees had elected to participate in the
Plan.
Contributions and Benefits Under the Plan
401(k) Plan Contributions. Each Participant is permitted to elect to
reduce his or her compensation (as defined below) pursuant to a "Compensation
Reduction Agreement" up to the maximum percentage allowable not to exceed the
limits of Code Sections 401(k), 404, and 415, and have that amount ("Elective
Deferral") contributed to the Plan on such Participant's behalf. A Participant
may elect to commence salary reductions as of January 1, April 1, July 1, or
October 1 of a Plan Year. Changes in the level of such Elective Deferrals may be
made to be effective as of the first day of January 1, April 1, July 1, and
October 1 of each Plan Year. Participants may suspend such Elective Deferrals by
completing a form to suspend future Elective Deferrals. Only once in any
calendar quarter may an election be made which would prospectively increase,
decrease, suspend or resume Elective Deferrals made on behalf of a Participant.
"Compensation" under the Plan generally means a Participant's wages, salary,
fees and other amounts received for personal services actually rendered in the
course of employment with the Bank for the calendar year, prior to any reduction
pursuant to a Compensation
4
<PAGE>
Reduction Agreement. For Plan Years commencing after December 31, 1993, the
annual compensation of each Participant taken into account under the Plan is
limited to $150,000, subject to adjustments in accordance with the Code. A
Participant may elect to modify the amount contributed to the Plan under such
Participant's Compensation Reduction Agreement quarterly by providing notice to
the Plan Administrator in accordance with procedures established by the Plan
Administrator from time to time. Elective Deferrals are transferred by the
Employer to the Trustee.
Matching Contributions. The Bank will contribute a Matching Contribution
in addition to each Participant's Elective Deferral of 50% of the Participant's
Elective Deferral, up to a maximum of 6% of the Participant's compensation.
Matching Contributions shall be 100% vested at all times.
Employer's Non-Elective Contributions. In addition to any other
contributions, the Bank may, in its discretion, make Non-Elective Contributions
for a Plan Year, to the Account of any employee of the Bank who is eligible to
participate in the Plan ("Eligible Employee"). Such Non-Elective Contributions
may be limited to the amount necessary to insure that the Plan complies with the
requirements of Code Section 401(k). No Matching Contributions shall be made
with respect to any NonElective Contributions.
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions and forfeitures
allocated to each Participant's Account during any Plan Year may not exceed the
lesser of 25% of the Participant's ss. 415 Compensation for the Plan Year or
$30,000 (adjusted for increases in the cost of living as permitted by the Code).
A Participant's ss. 415 Compensation is a Participant's Compensation, excluding
any employer contribution to the Plan or to any other plan or deferred
compensation or any distributions from a plan or deferred compensation. In
addition, annual additions are limited to the extent necessary to prevent the
limitations for the combined qualified plans of the Bank from being exceeded. To
the extent that these limitations would be exceeded by reason of excess annual
additions with respect to a Participant, the Administrator shall (1) distribute
any Elective Deferrals (within the meaning of Code Section 402(g)(3)) or return
any voluntary employee contributions credited for the "limitation year" to the
extent that the return would reduce the "excess amount" in the Participant's
accounts (2) hold any "excess amount" remaining after the return of any elective
deferrals or voluntary employee contributions in a "Section 415 suspense
account" (3) use the "Section 415 suspense account" in the next "limitation
year" (and succeeding "limitation years" if necessary) to reduce employee
contributions for that Participant if that Participant is covered by the Plan as
of the end of the "limitation year," or if the Participant is not so covered,
allocate and reallocate the "Section 415 suspense account" in the next
"limitation year" (and succeeding "limitation years" if necessary) to all
Participants in the Plan before any employer or employee contributions which
would constitute "annual additions" are made to the Plan for such "limitation
year" (4) reduce employer contributions to the Plan for such "limitation year"
by the amount of the "Section 415 suspense account" allocated and reallocated
during such "limitation year."
Limitation on 401(k) Plan Contributions. The amount of a Participant's
Elective Deferrals (when aggregated with any elective deferrals of the
Participant under a simplified employee pension plan or a tax-deferred annuity),
on an annual basis, may not exceed $7,000 adjusted for increases in the cost of
living as permitted by the Code (the limitation for 1996 is $9,500).
Contributions in excess of this limitation ("excess deferrals") will be included
in the Participant's gross income for federal income tax purposes in the year
they are made. In addition, any such excess deferral will again be subject to
federal
5
<PAGE>
income tax when distributed by the Plan to the Participant, unless the excess
deferral (together with any income allocable thereto) is distributed to the
Participant not later than the first April 15th following the close of the
taxable year in which the excess deferral is made. Any income on the excess
deferral that is distributed not later than such date shall be treated, for
federal income tax purposes, as earned and received by the Participant in the
taxable year in which the excess deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees. Section
401(k) of the Code limits the amount of Elective Deferrals that may be made to
the Plan in any Plan Year on behalf of Highly Compensated Employees (defined
below) in relation to the amount of Elective Deferrals made by or on behalf of
all other employees eligible to participate in the Plan. Specifically, the
actual deferral percentage (i.e., the average of the ratios, calculated
separately for each eligible employee in each group, by dividing the amount of
Elective Deferrals credited to the Account of such eligible employee by such
eligible employee's compensation for the Plan Year) of the Highly Compensated
Employees may not exceed the greater of (i) 125% of the actual deferral
percentage of all other eligible employees, or (ii) the lesser of (a) 200% of
the actual deferral percentage of all other eligible employees, or (b) the
actual deferral percentage of all other eligible employees plus two percentage
points.
In general, a Highly Compensated Employee includes any employee who,
during the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner
(i.e., owns directly or indirectly more than 5% of the stock of an employer, or
stock possessing more than 5% of the total combined voting power of all stock of
an employer), (2) received compensation from an employer in excess of $100,000,
(3) received compensation from an employer in excess of $66,000 and was in the
group consisting of the top 20% of employees when ranked on the basis of
compensation paid during the Plan Year, or (4) was at any time an officer of the
Bank and received compensation in excess of $60,000 (a "Highly Compensated
Employee"). The dollar amounts in the foregoing sentence adjust annually to
reflect increases in the cost of living.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Bank will be subject
to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to the
combination of annual additions to the Plan and projected annual benefits under
any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance of
the Accounts of Participants who are Key Employees exceeds 60% of the aggregate
balance of the Accounts of all Participants. Key Employees generally include any
employee who, at any time during the Plan Year or any of the four preceding Plan
Years, is (1) an officer of the Bank having annual compensation in excess of
$60,000 who is in an administrative or policy-making capacity, (2) one of the
ten employees having annual compensation in excess of $30,000 and owning,
directly or indirectly, the largest interests in the Company, (3) a 5%
6
<PAGE>
owner of the Company, (i.e., owns directly or indirectly more than 5% of the
stock of the Company, or stock possessing more than 5% of the total combined
voting power of all stock of the Company) or (4) a 1% owner of the Company
having annual compensation in excess of $150,000.
Investment of Plan Assets
All amounts credited to Participants' Accounts under the Plan are held in
the Plan Trust (the "Trust") which is administered by the Trustee appointed by
the Bank's Board of Directors. Prior to the Conversion, all Plan assets are
invested in the funds listed below, except for the Employer Stock Fund. Upon the
Conversion, the Accounts of a Participant held in trust under the Plan will be
invested by the Trustee, at the direction of the Participant, in the following
funds, including the Employer Stock Fund:
a. Money Market
b. Intermediate Government Securities
c. Quality Bond
d. High Yield
e. Growth & Income
f. Equity Index
g. Common Stock
h. Global
i. International
j. Aggressive Stock
k. Conservative Investors
l. Balanced
m. Growth Investors
n. Employer Stock Fund
Participants will have the right to transfer the net value of their Accounts (or
portion thereof) in any of the above listed funds to any one or more of the
above listed funds, not more than once per calendar quarter. A brief summary of
such funds is as follows:
a. Money Market.
-------------
The fund seeks to achieve a high level of current income while preserving
assets and maintaining liquidity. The fund invests in primarily high quality
short-term money market instruments.
b. Intermediate Government Securities.
-----------------------------------
The fund seeks to achieve a high current income consistent with relative
stability of principal. The fund invests primarily in debt securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. Each
investment will have a final maturity of not more than 10 years or a duration
not exceeding that of a 10-year Treasury note.
c. Quality Bond.
-------------
The fund seeks to achieve a high current income consistent with
preservation of capital. The fund invests in investment grade fixed income
securities.
7
<PAGE>
d. High Yield.
-----------
The fund seeks to achieve a high return by maximizing current income and,
to the extent consistent with that objective, capital appreciation. The fund
primarily invests in a diversified mix of high yield, fixed income securities
involving greater volatility of price and risk of principal and income than high
quality fixed income securities. The medium and lower quality debt securities in
which this fund may invest are known as "junk bonds."
e. Growth & Income.
----------------
The fund seeks to achieve a high return through a combination of current
income and capital appreciation. This fund primarily invests in common stocks
and securities convertible into common stocks.
f. Equity Index.
-------------
The fund seeks to achieve a total return, before expenses, that
approximates the investment performance of the Standard & Poor's 500 Index ("S&P
500 Index"), including reinvestment of dividends, at a risk level consistent
with that of the Index. The fund invests in selected securities in the S&P 500
Index which the adviser believes will, in the aggregate, approximate the
performance results of the S&P 500 Index.
g. Common Stock (Equitable).
-------------------------
The fund seeks to achieve a long-term growth of capital and to increase
income. The fund invests primarily in common stocks and other equity-type
instruments.
h. Global.
-------
The fund seeks to achieve long-term growth of capital. The fund primarily
invests in equity securities of non-United States as well as United States
companies.
i. International.
--------------
The fund seeks to achieve long-term growth of capital. The fund primarily
invests in equity securities selected principally to permit participation in
non-United States companies with prospects for growth.
j. Aggressive Stock.
-----------------
The fund seeks to achieve long-term growth of capital. The fund primarily
invests in common stocks and other equity-type securities issued by medium and
other smaller-sized companies with strong growth potential.
8
<PAGE>
k. Conservative Investors.
-----------------------
The fund seeks to achieve high total return without, in the fund adviser's
opinion, undue risk to principal. The fund invests in a diversified mix of
publicly traded fixed income and equity securities; asset mix and security
selection are primarily based upon factors expected to reduce risk.
l. Balanced.
---------
The fund seeks to achieve high return through a combination of current
income and capital appreciation. The fund primarily invests in common stocks,
publicly traded debt securities and high quality money market instruments.
m. Growth Investors.
-----------------
The fund seeks to achieve high total return consistent with the adviser's
determination of reasonable risk. The fund invests in a diversified mix of
publicly traded fixed income and equity securities; asset mix and security
selection are based upon factors expected to increase the possibility of high
long-term return.
n. Employer Stock Fund.
--------------------
The Employer Stock Fund will consist of investments in Common Stock made
on the effective date of the Conversion. Cash dividends paid on Common Stock
held in the Employer Stock Fund will be credited to a cash dividend subaccount
for each Participant investing in the Employer Stock Fund. The Trustee will, to
the extent practicable, use all amounts held by it in the Employer Stock Fund
(except the amounts credited to cash dividend subaccounts) to purchase shares of
Common Stock of the Company as of the effective date of the Conversion.
Following the Conversion, the Employer Stock Fund may purchase additional shares
of Common Stock in the open-market or from Accounts directing the sale of Common
Stock. Prior to investment in Common Stock, assets held in the Employer Stock
Fund will be placed in bank deposits or other short-term investments.
When Common Stock is purchased in the Conversion no sales commissions will
be paid. The Bank expects to pay any transfer fees and other expenses incurred
in the purchase of Common Stock for the Employer Stock Fund in the Conversion.
Accounts will be adjusted to reflect changes in the value of shares of Common
Stock resulting from stock dividends, stock splits and similar changes.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund.
In connection with the Conversion, Participants may, prior to the
expiration of the Subscription Offering conducted by the Company in connection
with the Conversion, elect to liquidate all or part of their investments in the
other investment funds under the Plan and transfer the liquidation proceeds to
the Employer Stock Fund. See "Time for Directing Investment." Investment
elections will be evidenced by a properly signed and timely delivered Investment
Form. The Trustee will then subscribe to purchase in the Conversion the maximum
number of shares of Common Stock of the Company that may be purchased by
Participants with the amounts allocated to the Employer Stock Fund as of the end
of the subscription period. In all instances, purchases by Participants shall be
subject to the individual purchase
9
<PAGE>
limitations set forth in the Bank's Plan of Conversion. In the event that, in
connection with the Conversion, an insufficient amount of Common Stock is
available for purchase by the Plan to satisfy all requests to direct the
investment of account balances within the Plan to the purchase of Common Stock,
then the available shares of Common Stock shall be allocated among Participants
in the Plan. Such shares shall be allocated, to the extent possible, in a manner
which shall permit each Participant to purchase an interest in the Employer
Stock Fund equivalent to a number of shares which will make the total
acquisition for his or her account equal to the lesser of the number of shares
subscribed for or 100 shares. Any shares remaining which may be acquired by the
Plan, after each Participant has been allocated such minimum interest in the
Employer Stock Fund, shall be allocated among Participants in the Plan in the
proportion which the aggregate account balances of such Participants bears to
the total aggregate account balances of all Participants who desire to purchase
shares of Common Stock under the Employer Stock Fund.
The Bank or the Trustee may adopt investment guidelines, which may limit
or restrict a Participant's investment in the Employer Stock Fund. In no event
may any Participant (or a Participant together with any associate or group of
persons acting in concert) purchase in the aggregate shares of Common Stock
through the Employer Stock Fund, or otherwise, in an amount in excess of 15,000
shares of Common Stock being offered by the Company in the Conversion. (See the
discussion under "The Conversion -- Limitations on Purchases of Shares" in the
accompanying Prospectus for clarification of purchases aggregated for purposes
of this purchase limitation.)
Each Participant who makes an election to direct investment of assets
under the Employer Stock Fund may liquidate such investment at a future date, in
whole, or in part, by filing a notice with the Trustee in accordance with
established procedures to dispose of such Plan investment and reinvest the net
proceeds in an alternative investment under the Plan, by submitting such request
to the Plan Administrator prior to any calendar month. The Trustee shall
complete such sale as soon as administratively feasible. The process of such
sale, net of expenses, shall be allocated to the Participant's Account and
reinvested in accordance with the Plan.
Please refer to the section "Restrictions on Resale" contained herein for
additional information related to the sale of Common Stock held under the
Employer Stock Fund as an investment in a Participant's Account.
Investments in the Employer Stock Fund may involve certain special risks
related to investment in Common Stock of the Company. For a discussion of these
risk factors, see "Risk Factors" in the Prospectus. Please note that investment
in the Employer Stock Fund is not an investment in a savings account or
certificate of deposit, and such investment in the Common Stock through the
Employer Stock Fund is not insured by the FDIC or any other regulatory agency.
Further, no assurances can be given with respect to the price at which such
Common Stock may be sold in the future.
Investment of Contributions
The Trust assets are invested by the Trustee pursuant to Participants'
directions, as described below. The assets of any Account shall consist of the
units credited to such Account. The units shall be valued from time to time by
the Trustee, but not less than annually. On the basis of such valuations, each
Account shall be adjusted to reflect the effect of income collected and accrued,
realized and unrealized profits and losses, expenses and all other transactions
during the period ending on the applicable valuation date.
Each Participant directs that the contributions made shall be invested to
purchase units for his or her credit in one or more of the above listed funds.
You may elect a new investment mix for future
10
<PAGE>
contributions to the Plan only once per calendar quarter. Participants are
entitled to designate what percentage of employee contributions and employer
contributions made on their behalf will be invested in the various investment
funds offered by the Bank. Reallocation and reinvestment of previously invested
contributions may be made quarterly. To the extent that a Participant fails to
make an investment direction, his or her accounts are invested in the investment
fund which provides for short-term investments.
Investment Accounts.
As of the date of this Prospectus Supplement, no shares of Common Stock
have been issued or are outstanding and there is no established market for the
Common Stock. Accordingly, there is no record of the historical performance of
the Common Stock.
The following table provides performance data with respect to the various
investment funds available to Participants, based on information provided to the
Company by the Equitable Life Assurance Society of the United States
("Equitable").
The information set forth below with respect to the various investment
funds available to Participants has been reproduced from materials supplied by
Equitable. The Bank and the Company take no responsibility for the accuracy of
such information. Additional information regarding the available investment
funds may be available from Equitable or the Bank. Participants should review
any available additional information regarding these available investment funds
before making an investment decision under the Plan.
<TABLE>
<CAPTION>
Annualized
-------------------------------------------
Year to
FUND Date (1) 1 Year 3 Years 5 Years 10 Years
- ---- ----------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Money Market 1.83% 3.94% 3.19% 2.94% 4.52%
Intermediate Gov't Securities (0.77) 3.26 2.45 5.53 --
Quality Bond (1.57) 3.76 -- -- --
High Yield 11.05 19.37 10.85 13.35 --
Growth & Income 6.36 17.30 -- -- --
Equity Index 9.10 23.55 -- -- --
Common Stock (Equitable) 7.92 19.75 15.23 14.24 11.75
Global 7.42 18.23 13.16 13.33 --
International 7.96 17.61 -- -- --
Aggressive Stock 16.43 33.36 17.15 16.69 14.94
Conservative Investors (1.74) 4.91 4.07 7.45 --
Balanced 3.50 11.94 5.98 8.63 7.18
Growth Investors 4.08 14.50 9.11 13.18 --
</TABLE>
_____________
(1) As of June 30, 1996.
The yields shown above are derived from the actual change in the
accumulation unit value, which is then adjusted to omit capital changes in such
fund during the period. The net change is then reduced to reflect the effect of
the annual administrative charge.
Each Participant should note that past performance is not necessarily an
indicator of future results.
11
<PAGE>
Benefits Under the Plan
Vesting. A Participant, at all times, has a fully vested, nonforfeitable
interest in his or her Account with respect to Elective Contributions and
Matching Contributions, and the earnings thereon under the Plan. A Participant
will become vested and have a nonforfeitable interest in his or her NonElective
Contributions based on the number of years of service and the vesting schedule
set forth below.
Number of Full Years of Service Nonforfeitable % of Account
------------------------------- ---------------------------
Less than 2 years 0%
2 years but less than 3 years 20%
3 years but less than 4 years 40%
4 years but less than 5 years 60%
5 years but less than 6 years 80%
6 or more years 100%
Withdrawals and Distributions From the Plan
Distributions Upon Retirement. Every Participant may terminate his or her
employment with the Bank and retire on his or her Normal Retirement Date.
However, a Participant may postpone the termination of his or her employment
with the Bank to a later date in which event the participation of such
Participant in the Plan, including the right to receive certain allocations,
shall continue until his or her Late Retirement Date. Upon a Participant's
Retirement Date or attainment of his Normal Retirement Date without termination
of employment with the Bank, or as soon thereafter as is practicable, the
Trustee shall distribute all amounts credited to such Participant's Combined
Account.
Distributions Upon Death. Upon the death of a Participant before his or
her Retirement Date or other termination of employment, all amounts credited to
such Participant's Combined Account shall become fully Vested. The Administrator
shall direct the Trustee to distribute the value of the deceased Participant's
accounts to the Participant's Beneficiary.
Upon the death of a Former Participant, the Administrator shall direct the
Trustee to distribute any remaining vested amounts credited to the accounts of a
deceased Former Participant to such Former Participant's Beneficiary. Any
security interest held by the Plan by reason of an outstanding loan to the
Participant or Former Participant shall be taken into account in determining the
amount of the Pre- Retirement Survivor Annuity.
Distributions Upon Disability. In the event of a Participant's Total and
Permanent Disability prior to his or her Retirement Date or other termination of
employment, all amounts credited to such Participant's Combined Account shall
become fully vested. In the event of a Participant's Total and Permanent
Disability, the Trustee shall distribute to such Participant all amounts
credited to such Participant's Combined Account as though he or she had retired.
Distributions Upon Termination of Employment. On or before the Anniversary
Date coinciding with or subsequent to the termination of a Participant's
employment for any reason other than death, Total and Permanent Disability or
retirement, the Administrator may direct the Trustee to segregate the amount of
the vested portion of such Terminated Participant's Combined Account and invest
the aggregate amount thereof in a separate, federally insured savings account,
certificate of deposit, common or collective trust fund of a bank or a deferred
annuity. In the event the vested portion of a Participant's Combined Account is
not segregated, the amount shall remain in a separate account for the
12
<PAGE>
Terminated Participant and share in allocations pursuant to the Plan until such
time as a distribution is made to the Terminated Participant.
Distribution of the funds due to a Terminated participant shall be made on
the occurrence of any event which would result in the distribution had the
Terminated Participant remained in the employ of the Employer (upon the
Participant's death, Total and Permanent Disability or Normal Retirement).
However, at the election of the Participant, the Administrator shall direct the
Trustee to cause the entire vested portion of the Terminated Participant's
Combined Account to be payable to such Terminated Participant on or after the
Anniversary Date coinciding with or next following termination of employment.
Any distribution under this paragraph shall be made in a manner which is
consistent with and satisfies the provisions of the Plan, including, but not
limited to, all notice and consent requirements of Code Sections 417 and
411(a)(11) and the Treasury Regulations thereunder.
If the value of a Terminated Participant's Vested benefit does not exceed
$3,500 and has never exceeded $3,500 at the time of any prior distribution, the
Administrator shall direct the Trustee to cause the entire Vested benefit to be
paid to such Participant in a single lump sum.
Pre-Retirement Distributions. At such time as a Participant shall have
attained the age of 59-1/2 years, the Administrator, at the election of the
Participant, shall direct the Trustee to distribute all or a portion of the
amount then credited to the accounts maintained on behalf of the Participant.
However, no distribution from the Participant's Account shall occur prior to
100% vesting. In the event that the Administrator makes such a distribution, the
Participant shall continue to be eligible to participate in the Plan on the same
basis as any other employee.
Notwithstanding the above, pre-retirement distributions from a
Participant's Elective Account shall not be permitted prior to the Participant
attaining age 59 1/2 except as otherwise permitted under the terms of the Plan.
Hardship Distributions. The Administrator, at the election of the
Participant, shall direct the Trustee to distribute to any Participant in any
one Plan Year up to the lesser of 100% of his Participant's Elective Account and
his Participant's Account valued as of the last Anniversary Date or other
valuation date or the amount necessary to satisfy the immediate and heavy
financial need of the Participant. Any hardship distribution made shall be
deemed to be made as of the first day of the Plan Year or, if later, the
valuation date immediately preceding the date of distribution, and the
Participant's Elective Account and his Participant's Account shall be reduced
accordingly. Hardship withdrawals under the Plan shall be authorized only if the
hardship criteria set forth in the Plan are met. No such hardship distribution
shall be made from the Participant's Account until such Account has become fully
Vested.
Notwithstanding the above, for Plan Years beginning after December 31,
1988, distributions from the Participant's Elective Account pursuant to hardship
distributions shall be limited, as of the date of distribution, to the
Participant's Elective Account as of the end of the last Plan Year ending before
July 1, 1989, plus the total Participant's Deferred Compensation after such
date, reduced by the amount of any previous distributions.
Qualified Domestic Relations Order Distributions. All rights and benefits,
including elections, provided to a Participant in this Plan shall be subject to
the rights afforded to any "alternative payee" under a "qualified domestic
relations order." Furthermore, a distribution to an "alternate payee" shall be
permitted if such distribution is authorized by a "qualified domestic relations
order," even if the affected Participant has not separated from service and has
not reached the "earliest retirement age" under the Plan. "Alternate payee,"
"qualified domestic relation order" and "earliest retirement age" shall have the
meaning set forth under Code Section 414(p).
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Direct Rollover Distributions. Notwithstanding any provision of the Plan
to the contrary that would otherwise limit a Participant's election, a
Participant may elect, at the time and in the manner prescribed by the
Administrator, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the Participant in a direct
rollover.
An eligible rollover distribution is any distribution of all or any
portion of the balance to the credit of the distributee, except that an eligible
rollover distribution does not include: any distribution that is one of a series
of substantially equal periodic payments (not less frequently than annually)
made for the life (or life expectancy) of the distributee or the joint lives (or
joint life expectancies) of the distributee and the distributee's designated
beneficiary, or for a specified period of ten years or more; any distribution to
the extent such distribution is required under Code Section 401(a)(9); and the
portion of any distribution that is not includible in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
employer securities).
An eligible retirement plan is an individual retirement account described
in Code Section 408(a), an individual retirement annuity described in Code
Section 408(b), an annuity plan described in Code Section 403(a), or a qualified
trust described in Code Section 401(a), that accepts the distributee's eligible
rollover distribution. However, in the case of an eligible rollover distribution
to the surviving spouse, an eligible retirement plan is an individual retirement
account or individual retirement annuity.
A distributee includes an employee or former employee. In addition, the
Employee's or former Employee's surviving spouse and the Employee's or former
Employee's spouse or former spouse who is the alternate payee under a qualified
domestic relations order, as defined in Code Section 414(p), are distributees
with regard to the interest of the spouse or former spouse. A direct rollover is
a payment by the plan to the eligible retirement plan specified by the
distributee.
Distributions of Benefits. Unless otherwise elected, a Participant who is
married on the "annuity starting date" (as defined in the Plan) and who does not
die before the "annuity starting date" shall receive the value of all of his
benefits in the form of a joint and survivor annuity. The joint and survivor
annuity is an annuity that commences immediately and shall be equal in value to
a single life annuity. Such joint and survivor benefits following the
Participant's death shall continue to the spouse during the spouse's lifetime at
a rate equal to 50% of the rate at which such benefits were payable to the
Participant. This joint and 50% survivor annuity shall be considered the
designated qualified joint and survivor annuity and automatic form of payment
for the purposes of this Plan. However, the Participant may elect to receive a
smaller annuity benefit with continuation of payments to the spouse at a rate of
seventy-five percent (75%), or one hundred percent (100%) of the rate payable to
a Participant during his lifetime, which alternative joint and survivor annuity
shall be equal in value to the automatic joint and 50% survivor annuity. An
unmarried Participant shall receive the value of his benefit in the form of a
life annuity. Such unmarried Participant, however, may elect in writing to waive
the life annuity. The election must comply with the provisions of this Section
as if it were an election to waive the joint and survivor annuity by a married
Participant, but without the spousal consent requirement. The Participant may
elect to have any annuity provided for in this Section distributed upon the
attainment of the "earliest retirement age" under the Plan. The "earliest
retirement age" is the earliest date on which, under the Plan, the Participant
could elect to receive retirement benefits.
In the event a married Participant duly elects not to receive his benefit
in the form of a joint and survivor annuity, or if such Participant is not
married, in the form of a life annuity, the Administrator, pursuant to the
election of the Participant, shall direct the Trustee to distribute to a
Participant or his Beneficiary any amount to which he is entitled under the Plan
in one or more of the following methods: (1) One lump-sum payment in cash or in
property; (2) Payments over a period certain in monthly, quarterly, semiannual,
or annual cash installments. In order to provide such installment payments, the
Administrator may (A) segregate the aggregate amount thereof in a separate,
federally insured savings
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account, certificate of deposit in a bank or savings and loan association, money
market certificate or other liquid short-term security or (B) purchase a
nontransferable annuity contract for a term certain (with no life contingencies)
providing for such payment. The period over which such payment is to be made
shall not extend beyond the Participant's life expectancy (or the life
expectancy of the Participant and his designated Beneficiary); (3) Purchase of
or providing an annuity. However, such annuity may not be in any form that will
provide for payments over a period extending beyond either the life of the
Participant (or the lives of the Participant and his designated Beneficiary) or
the life expectancy of the Participant (or the life expectancy of the
Participant and his designated Beneficiary).
Distributions of Common Stock. Participants receiving a distribution from
the Plan where assets under the Plan have been directed by the Participant to be
invested in the Employer Stock Fund may have such assets distributed in kind in
the form of Common Stock.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Loans to Participants. The Trustee may, in the Trustee's discretion, make
loans to Participants and Beneficiaries under the following circumstances: (1)
loans shall be made available to all Participants and Beneficiaries on a
reasonably equivalent basis; (2) loans shall not be made available to Highly
Compensated employees in an amount greater than the amount made available to
other Participants and Beneficiaries; (3) loans shall bear a reasonable rate of
interest; (4) loans shall be adequately secured; and (5) shall provide for
repayment over a reasonable period of time.
Participant loans (when added to the outstanding balance of all other
loans made by the Plan to the Participant) shall be limited to the lesser of:
(1) $50,000 reduced by the excess (if any) of the highest outstanding balance of
loans from the Plan to the Participant during the one year period ending on the
day before the date on which such loan is made, over the outstanding balance of
loans from the Plan to the Participant on the date on which such loan was made,
or (2) one-half (1/2) of the present value of the non-forfeitable accrued
benefit of the Participant under the Plan.
Administration of the Plan
The Bank administers the Plan. The Bank has delegated general plan
administrative responsibility to Mr. Stephen M. Gagliardi, the President of the
Bank. The address of the Plan Administrator is: 1015 Commerce Street, Wellsburg,
West Virginia 26070-1532.
The following individuals serve as trustees with respect to the Plan:
Stephen M. Gagliardi, Noreen Mechling, and Steven D. Martino (collectively
referred to herein as "Trustee"). The Trustee receives and holds the
contributions to the Plan in trust and distributes them to Participants and
beneficiaries in accordance with the terms of the Plan and the directions of the
Plan Administrator. The Trustee is responsible for investment of the assets of
the Trust. The current address of the Trustee is: 1015 Commerce Street,
Wellsburg, West Virginia 26070-1532.
Plan Administrator
Pursuant to the terms of the Plan, the Plan is administered by a Committee
consisting of one or more persons who are appointed by and who serve at the
pleasure of the Bank (the "Committee"). Presently, the Committee consists of Mr.
Gagliardi. The address and telephone number of the Committee
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<PAGE>
is the same as that of the Bank. The Committee is responsible for the
administration of the Plan, interpretation of the provisions of the Plan,
prescribing procedure for filing applications for benefits, preparation and
distribution of information explaining the Plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the Plan, and preparation and filing of all returns and reports relating to the
Plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to Participants, beneficiaries
and others under Sections 104 and 105 of ERISA.
Reports to Plan Participants
The Plan Administrator will furnish to each Participant a quarterly
statement annually showing (i) the balance in the Participant's Account as of
the end of that period, (ii) the amount of contributions allocated to the
Participant's Account for that period, and (iii) the adjustments to such
Participant's Account to reflect earnings or losses (if any). Participants
investing in the Employer Stock Fund shall also receive a copy of the Company's
Annual Report to Stockholders and a proxy statement related to the Company's
stockholder meetings.
Amendment and Termination
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank within its sole discretion may terminate the Plan at any
time. The Bank reserves the right to make, from time to time, any amendment or
amendments to the Plan that do not cause any part of the Trust to be used for,
or diverted to, any purpose other than the exclusive benefit of Participants or
their beneficiaries; provided, however, that the Bank may make any amendment it
determines necessary or desirable, with or without retroactive effect, to comply
with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that each
Participant would (if either the Plan or the other plan then terminated) receive
a benefit immediately after the merger, consolidation or transfer that is equal
to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
Federal Income Tax Consequences
The following discussion is only a brief summary of certain federal income
tax aspects of the Plan which are of general application under the Code and is
not intended to be a complete or definitive description of the federal income
tax consequences of participating in or receiving distributions from the Plan.
The summary is necessarily general in nature and does not purport to be
complete. Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. Participants are urged to
consult their tax advisors with respect to any distribution from the Plan and
transactions involving the Plan.
The Plan has been submitted to the IRS for a determination that it is
qualified under Section 401(a) and 401(k) of the Code, and that the related
Trust is exempt from tax under Section 501(a) of the Code. A plan that is
"qualified" under these sections of the Code is afforded special tax treatment
which include the following: (1) The sponsoring employer is allowed an immediate
tax deduction for the amount contributed to the Plan each year; (2) Participants
pay no current income tax on amounts contributed by the sponsoring employer on
their behalf; and (3) earnings of the plan are tax-exempt thereby permitting the
tax-free accumulation of income and gains on investments. The Plan will be
administered to comply
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in operation with the requirements of the Code as of the applicable effective
date of any change in the law. The Bank expects to timely adopt any amendments
to the Plan that may be necessary to maintain the qualified status of the Plan
under the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Participant's Account and the
investment earnings on this Account are not includable in a Participant's
federal taxable income until such contributions or earnings are actually
distributed or withdrawn from the Plan. Special tax treatment may apply to
the taxable portion of any distribution that includes Common Stock or
qualifies as a Lump Sum Distribution (as described below).
(b) Income earned on assets held by the Trust will not be taxable
to the Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a Lump Sum Distribution if it
is made: (i) within one taxable year of the Participant or beneficiary; (ii) on
account of the Participant's death, disability or separation from service, or
after the Participant attains age 59-1/2; and (iii) consists of the balance to
the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum Distribution
that is required to be included in the Participant's or beneficiary's taxable
income for federal income tax purposes (the "total taxable amount") consists of
the entire amount of such Lump Sum Distribution less the amount of after-tax
contributions, if any, made by the Participant to any other profit sharing plans
maintained by the Bank which is included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation in this Plan or in any other
profit-sharing plan maintained by the Bank (the "ordinary income portion") will
be taxable generally as ordinary income for federal income tax purposes.
However, a Participant who has completed at least five years of participation in
this Plan before the taxable year in which the distribution is made, or a
beneficiary who receives a Lump Sum Distribution on account of the Participant's
death (regardless of the period of the Participant's participation in this Plan
or any other profit-sharing plan maintained by an employer), may elect to have
the ordinary income portion of such Lump Sum Distribution taxed according to a
special averaging rule ("five-year averaging"). The election of the special
averaging rules may apply only to one Lump Sum Distribution received by the
Participant or beneficiary, provided such amount is received on or after the
Participant turns 59-1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule or under the prior law ten-year averaging
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the participant's pre-1974 participation in the
Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock
(i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost to the Plan). The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution will be
considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in
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excess of the amount of net unrealized appreciation at the time of distribution
will be considered either short-term capital gain or long-term capital gain
depending upon the length of the holding period of the Common Stock. The
recipient of a distribution may elect to include the amount of any net
unrealized appreciation in the total taxable amount of such distribution to the
extent allowed by the Treasury Regulations.
Contribution to Another Qualified Plan or to an IRA. A Participant may
defer federal income taxation of all or any portion of the total taxable amount
of a Lump Sum Distribution (including the proceeds from the sale of any Common
Stock included in the Lump Sum Distribution) to the extent that such amount, or
a portion thereof, is contributed, within sixty days after the date of its
receipt by the Participant, to another qualified plan or to an individual
retirement account ("IRA"). If less than the total taxable amount of a Lump Sum
Distribution is contributed to another qualified plan or to an IRA within the
applicable 60 day period, the amount not so contributed must be included in the
Participant's income for federal income tax purposes and will not be eligible
for the special averaging rules or for capital gains treatment. Additionally, a
Participant may defer the federal income taxation of any portion of an amount
distributed from the Plan on account of the Participant's death, disability or
separation from service, generally, if the amount is distributed within one
taxable year of the Participant, is equal to at least 50% of the balance of the
Participant's Account and such amount is contributed, within 60 days after the
date of its receipt by the Participant, to an IRA. Following the partial
distribution of a Participant's Account, any remaining balance under the Plan
(and the balance to the credit of the Participant under any other profit sharing
plan sponsored by the Bank) will not be eligible for the special averaging rules
or for capital gains treatment. The beneficiary of a Participant who is the
Participant's surviving spouse may also defer federal income taxation of all or
any portion of a distribution from the Plan to the extent that such amount, or a
portion thereof, is contributed, within 60 days after the date of its receipt by
the surviving spouse, to an IRA. If all or any portion of the total taxable
amount of a Lump Sum Distribution is contributed by the surviving spouse of a
Participant to an IRA within the applicable 60-day period, any subsequent
distribution from the IRA will not be eligible the special averaging rules or
for capital gains treatment. Any amount received by the Participant's surviving
spouse that is not contributed to another qualified plan or to an IRA within the
applicable 60 day period, and any amount received by a non-spouse beneficiary
will be included in such beneficiary's income for federal tax purposes in the
year in which it is received.
A payment from the Plan that is eligible for "rollover" can be taken in
two ways. You can have all or any portion of your payment either 1) PAID IN A
"DIRECT ROLLOVER" or 2) PAID TO YOU. A rollover is a payment of your Plan
benefits to your IRA or to another employer plan. This choice will affect the
federal tax you owe.
If you choose a DIRECT ROLLOVER
* Your payment will not be taxed in the current year and no income tax
will be withheld.
* Your payment will be made directly to your IRA or, if you choose, to
another employer plan that accepts your rollover.
* Your payment will be taxed later when you take it out of the IRA or
the employer plan.
If you choose to have your Plan benefit PAID TO YOU
* You will receive only 80% of the payment, because the plan
administrator is required to withhold 20% of the payment and send it
to the IRS as income tax withholding to be credited against your
taxes.
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* Your payment will be taxed in the current year unless you roll it
over. You may be able to use special tax rules that could reduce the
tax you owe. However, if you receive the payment before age 59-1/2,
you also may have to pay an additional 10% tax.
* You can rollover the payment by paying it to your IRA or to another
employer plan that accepts your rollover within 60 days of receiving
the payment. The amount rolled over will not be taxed until you take
it out of the IRA or employer plan.
* If you want to roll over 100% of the payment to an IRA or an
employer plan, you must find other money to replace the 20% that was
withheld. If you roll over only the 80% that you received, you will
be taxed on the 20% that was withheld and that is not rolled over.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59-1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of the Participant)
on or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his beneficiary, (iv)
made to the Participant after separation from service on account of early
retirement under the Plan after attainment of age 55, (v) made to pay medical
expenses to the extent deductible for federal income tax purposes, (vi) pursuant
to a qualified domestic relations order, or (vii) made to effect the
distribution of excess contributions or excess deferrals.
The foregoing is only a brief summary of certain federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Participant is urged to consult a tax advisor concerning the
federal, state, and local tax consequences of participating in and receiving
distributions from the Plan.
ERISA and Other Qualifications
As noted above, the Plan is subject to certain provisions of ERISA and
will be submitted to the IRS for a determination that it is qualified under
Section 401(a) of the Code.
Restrictions on Resale
Any person receiving shares of Common Stock under the Plan who is an
"affiliate" of the Bank or the Company as the term "affiliate" is used in Rules
144 and 405 under the Securities Act of 1933 ("1933 Act") (e.g., directors,
officers and substantial shareholders of the Company) may reoffer or resell such
shares only pursuant to a registration statement filed under the 1933 Act or,
assuming the availability thereof, pursuant to Rule 144 or some other exemption
of the registration requirements of the 1933 Act. Any person who may be an
"affiliate" of the Bank or the Company may wish to consult with counsel before
transferring any Common Stock owned by him. Participants who serve as directors,
officers or 10% stockholders of the Company are advised to consult with counsel
as to the applicability of Section 16 of the 1934 Act which may restrict the
sale of Common Stock where acquired under the Plan, or other sales of Common
Stock. In addition, directors and officers of the Bank may be restricted from
transferring shares purchased in the Conversion for a period of one year in
accordance with regulations of the Office of Thrift Supervision.
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Persons who are not deemed to be "affiliates" of the Bank or the Company at
the time of resale will be free to resell any shares of Common Stock received by
them under the Plan, either publicly or privately, without regard to the
registration and Prospectus delivery requirements of the 1993 Act or compliance
with the restrictions and conditions contained in the exemptive rules
thereunder. An "affiliate" is someone who directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control,
with the Bank or the Company. Normally, a director, principal officer or major
shareholder of a corporation may be deemed to be an "affiliate" of that
corporation. A person who may be deemed an "affiliate" at the time of a proposed
resale will be permitted to make public resales of the Common Stock only
pursuant to a "reoffer" prospectus or in accordance with the restrictions and
conditions contained in Rule 144 in any three-month period may not exceed the
greater of one percent of the Common Stock then outstanding or the average
weekly trading volume reported on the Nasdaq System during the four calendar
weeks prior to the sale. Such sales may be made only though brokers without
solicitation and only at a time when the Company is current in filing the
reports required of it under the 1934 Act.
SEC Reporting and Short-Swing Liability
Section 16 of the 1934 Act imposes reporting and liability requirements on
officers, directors, and persons beneficially owning more than ten percent of
the stock of public companies, such as the Company. Section 16(a) of the 1934
Act requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a Form
3 reporting initial beneficial ownership must be filed with the SEC. Certain
changes in beneficial ownership, such as purchases, sales, gifts and
participation in savings and retirement plans must be reported periodically,
either on a Form 4 within ten days after the end of the month in which a change
occurs, or annually on a Form 5 within 45 days after the close of the Company's
fiscal year. Participation in the Employer Stock Fund of the Plan by officers,
directors and persons beneficially owning more than ten percent of the Common
Stock of the Company must be reported to the SEC annually on a Form 5 by such
individuals.
In addition to the reporting requirements described above, Section 16(b)
of the 1934 Act provides for the recovery by the Company of profits realized by
any officer, director or any person beneficially owning more than ten percent of
the Common Stock ("Section 16(b) Persons") resulting from the purchase and sale
or sale and purchase of the Common Stock within any six-month period. The SEC
has adopted rules that provide exemption from the profit recovery provisions of
Section 16(b) for participant- directed employer security transactions within an
employee benefit plan, such as the Plan, provided certain requirements are met.
These requirements generally involve restrictions upon the timing of elections
to acquire or dispose of employer securities for the accounts of Section 16(b)
Persons. Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, under the Plan, Section 16(b) Persons are required to hold shares of
Common Stock distributed for six months after receiving such a distribution.
Additional Information
This Prospectus Supplement dated November ____, 1996, is part of the
Prospectus of the Company dated November ____, 1996. This Prospectus Supplement
shall be delivered to Plan Participants in conjunction with the Prospectus and
is not complete unless it is accompanied by the Prospectus dated November ____,
1996.
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LEGAL OPINIONS
The legality of the Common Stock will be passed upon by Malizia, Spidi,
Sloane & Fisch, P.C., Washington, D.C., which acted as special counsel for the
Company and the Bank in connection with the Conversion. See the Prospectus
"Legal and Tax Matters."
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PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
(a) List of Exhibits:
1.1 Agency Agreement with Charles Webb & Company*
2 Plan of Conversion of Advance Financial Savings Bank, f.s.b.*
3(i) Certificate of Incorporation of Advance Financial Bancorp
3(ii)Bylaws of Advance Financial Bancorp
4 Specimen Stock Certificate of Advance Financial Bancorp
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding
legality of securities registered
5.2 Opinion of Keller & Company, Inc. as to the value of
subscription rights
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 State Tax Opinion of S.R. Snodgrass, A.C.*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in
its opinions filed as Exhibits 5.1 and 8.1)
23.2 Consent of S.R. Snodgrass, A.C.*
23.3 Consent of Keller & Company, Inc.
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule
99.1 Stock Order Form*
99.2 Appraisal Report of Keller & Company, Inc.*
99.3 Marketing Materials
(b) Financial Statements Schedules**
* Filed with this amendment
** All schedules are omitted because they are not required or applicable or
the required information is shown in the financial statements or the notes
thereto.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Wellsburg, West Virginia, as of
October 31, 1996.
ADVANCE FINANCIAL BANCORP
By: /s/ Stephen M. Gagliardi
-----------------------------------------
Stephen M. Gagliardi
President
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated as of October 31, 1996.
<TABLE>
<CAPTION>
<S> <C>
/s/ Stephen M. Gagliardi /s/ Noreen Mechling
- --------------------------------------- ----------------------------------
Stephen M. Gagliardi Noreen Mechling
President, Chief Executive Officer, and Chief Financial Officer, Principal Accounting
Chairman of the Board Officer, and Director
</TABLE>
ADVANCE FINANCIAL BANCORP
Up to 1,084,450 Shares
COMMON STOCK
($0.10 Par Value)
Subscription Price $10.00 Per Share
AGENCY AGREEMENT
----------------
November __, 1996
Charles Webb & Company
211 Bradenton Drive
Dublin, Ohio 43017-5034
Ladies and Gentlemen:
Advance Financial Bancorp, a Delaware corporation (the "Company") and
Advance Financial Savings Bank, F.S.B., a federally chartered mutual savings
bank (references to the "Bank" include the Bank in the mutual or stock form, as
indicated by the context), with its deposit accounts insured by the Savings
Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation ("FDIC"), hereby confirm their agreement with Charles Webb
& Company, a division of Keefe, Bruyette & Woods, Inc. ("Webb") as follows:
Section 1. The Offering. The Bank, in accordance with its plan of
conversion adopted by its Board of Directors (the "Plan"), intends to convert
from a federally chartered mutual savings bank to a federally chartered stock
savings bank, and to issue all of its issued and outstanding capital stock to
the Company. In addition, pursuant to the Plan, the Company will offer and sell
up to 1,084,450 shares of its common stock, par value $0.10 per share (the
"Shares" or "Common Stock"), in a subscription offering (the "Subscription
Offering") to (1) depositors of the Bank with savings accounts as of August 31,
1995 ("Eligible Account Holders"), (2) the Bank's Employee Stock Ownership Plan
("ESOP"), (3) depositors of the Bank with savings accounts as of September 30,
1996 ("Supplemental Eligible Account Holders") and (4) depositors of the Bank
(other than Eligible Account Holders and Supplemental Eligible Account Holders)
and certain borrowers of the Bank as of _______, 1996 ("Other Members"). Subject
to the prior subscription rights of the above-listed parties, the Company is
offering for sale in a community offering (the "Community Offering" and, when
referred to together with the Subscription Offering, the "Subscription and
Community
<PAGE>
Offering") conducted concurrently with the Subscription Offering, the Shares not
so subscribed for or ordered in the Subscription Offering to certain members of
the general public to whom a copy of the Prospectus (as hereinafter defined) is
delivered, with a preference given to natural persons who reside in the West
Virginia and Ohio counties in which the Bank has an office (the "Local
Community") and then to natural persons residing in the State of West Virginia
("Other Subscribers") (all such offerees being referred to in the aggregate as
"Eligible Offerees"). It is anticipated that shares not subscribed for in the
Subscription and Community Offering will be offered to members of the general
public on a best efforts basis through a selected dealers arrangement (the
"Syndicated Community Offering") (the Subscription Offering, Community Offering
and Syndicated Community Offering are collectively referred to as the
"Offering"). It is acknowledged that the purchase of Shares in the Offering is
subject to the maximum and minimum purchase limitations as described in the Plan
and that the Company and the Bank may reject, in whole or in part, any orders
received in the Community Offering or Syndicated Community Offering.
Collectively, these transactions are referred to herein as the "Conversion."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 33-_______) (the
"Registration Statement") containing a prospectus relating to the Offering for
the registration of the Shares under the Securities Act of 1933 (the "1933
Act"), and has filed such amendments thereof, if any, and such amended
prospectuses as may have been required to the date hereof. The prospectus, as
amended, on file with the Commission at the time the Registration Statement
initially became effective is hereinafter called the "Prospectus," except that
if any prospectus is filed by the Company pursuant to Rule 424(b) or (c) of the
rules and regulations of the Commission under the 1933 Act (the "1933 Act
Regulations") differing from the prospectus on file at the time the Registration
Statement initially becomes effective, the term "Prospectus" shall refer to the
prospectus filed pursuant to Rule 424(b) or (c) from and after the time said
prospectus is filed with the Commission.
In accordance with 12 C.F.R. Part 563b (the "Conversion Regulations"),
the Bank has filed with the Office of Thrift Supervision (the "OTS") an
Application for Conversion (the "Conversion Application"), including the
prospectus, and has filed such amendments thereto, if any, as may have been
required by the OTS. The Conversion Application has been [approved] by the OTS
and the related Prospectus has been authorized for use by the OTS. In addition,
the Company has filed with the OTS an Application H-(e)1-S (the "Holding Company
Application") to become a registered savings and loan holding company under
Section 10 of the Home Owners' Loan Act, as amended ("SLHCA"), which has been
[approved].
Section 2. Retention of Webb; Compensation; Sale and Delivery of the
Shares. Subject to the terms and conditions herein set forth, the Company and
the Bank hereby appoint Webb (i) as their exclusive financial advisory and
marketing agent to utilize its best efforts to solicit subscriptions for Shares
of the Common Stock and to advise and assist the Company and the Bank with
respect to the Company's sale of the Shares in the Offering and
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<PAGE>
(ii) to participate in the Offering in the areas of market making, research
coverage and syndicate formation (if necessary).
On the basis of the representations, warranties, and agreements herein
contained, but subject to the terms and conditions herein set forth, Webb
accepts such appointment and agree to consult with and advise the Company and
the Bank as to the matters set forth in the letter agreement ("Letter
Agreement"), dated August 19, 1996, between the Bank and Webb (a copy of which
is attached hereto as Exhibit A). It is acknowledged by the Company and the Bank
that Webb shall not be required to purchase any Shares and shall not be
obligated to take any action which is inconsistent with all applicable laws,
regulations, decisions or orders. In the event of a Syndicated Community
Offering, Webb will assemble and manage a selling group of broker-dealers which
are members of the National Association of Securities Dealers, Inc. (the "NASD")
to participate in the solicitation of purchase orders for shares under a
selected dealers' agreement ("Selected Dealers' Agreement"), the form of which
is set forth as Exhibit B to this Agreement.
The obligations of Webb pursuant to this Agreement shall terminate upon
the completion or termination or abandonment of the Plan by the Company or upon
termination of the Offering, but in no event later than 60 days after the
completion of the Subscription Offering (the "End Date"). All fees or expenses
due to Webb but unpaid will be payable to Webb in next day funds at the earlier
of the Closing Date (as hereinafter defined) or the End Date. In the even the
Offering is extended beyond the End Date, the Company, the Bank and Webb may
agree to renew this Agreement under mutually acceptable terms.
In the event the Company is unable to sell a minimum of 697,000 Shares
within the period herein provided, this Agreement shall terminate and the
Company shall refund to any persons who have subscribed for any of the Shares,
the full amount which it may have received from them plus accrued interest as
set forth in the Prospectus; and none of the parties to this Agreement shall
have any obligation to the other parties hereunder, except as otherwise set
forth in this Section 2 and in Sections 6, 8 and 9 hereof.
In the event the Offering is terminated for any reason not attributable
to the action or inaction of Webb, Webb shall be paid the fees and expenses due
to the date of such termination pursuant to subparagraphs (a) and (d) below.
If all conditions precedent to the consummation of the Conversion,
including, without limitation, the sale of all Shares required by the Plan to be
sold, are satisfied, the Company agrees to issue, or have issued, the Shares
sold in the Offering and to release for delivery certificates for such Shares on
the Closing Date (as hereinafter defined) against payment to the Company by any
means authorized by the Plan, provided however, that no funds shall be released
to the Company until the conditions specified in Section 7 hereof shall have
been complied with to the reasonable satisfaction of Webb and their counsel. The
release of Shares against payment therefor shall be made at 10:00 a.m., Eastern
Time, on a date
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<PAGE>
and at a place acceptable to the Company, the Bank and Webb (it being understood
that such date shall not be more than ten business days after termination of the
Offering) or such other time or place as shall be agreed upon by the Company,
the Bank and Webb. Certificates for shares shall be delivered directly to the
purchasers in accordance with their directions. The date upon which the Company
shall release or deliver the Shares sold in the Offering, in accordance with the
terms herein, is called the "Closing Date."
Webb shall receive the following compensation for their services
hereunder:
(a) A management fee to Webb in the amount of $25,000, of which
$______ has been paid as of the date of this Agreement. Such fees
shall be deemed to be earned when due. Should the Conversion be
terminated for any reason not attributable to the action or
inaction of Webb, Webb shall have earned and be entitled to be
paid fees accruing through the stage at which point the
termination occurred.
(b) A success fee of 1.5% of the dollar amount of Common Stock sold
in the Subscription and Community Offering, excluding Common
Stock purchased by directors, officers and employees (and members
of their immediate families) of Advance Financial and by the ESOP
and any tax-qualified or stock-based compensation plan (excluding
individual retirement plans ("IRAs")) and any similar plan
created by the Bank for some or all of its directors or employees
payable on the Closing Date.
(c) If any shares of the Company's stock remain available after the
Subscription and Community Offering, at the request of the Bank,
Webb will seek to form a syndicate of registered broker-dealers
to assist in the sale of such common stock on a best efforts
basis, subject to the terms and conditions set forth in the
selected dealers agreement. Webb will endeavor to distribute the
common stock among dealers in a fashion which best meets the
distribution objectives of the Bank and the Plan of Conversion.
Webb will be paid a fee not to exceed 5.5% of the aggregate
Purchase Price of the shares of common stock sold pursuant to the
selected dealers agreement and then will pass onto selected
broker-dealers who assist in the syndicated community an amount
competitive with gross underwriting discounts charged at such
time for comparable amounts of stock sold at a comparable price
per share in a similar market environment. Fees with respect to
purchases affected with the assistance of a broker/dealer shall
be transmitted by Webb to such broker/dealer. The decision to
utilize selected broker-dealers will be made by the Bank upon
consultation with Webb. In the event, with respect to any stock
purchases, fees are paid pursuant to this subparagraph 2(c), such
fees shall be in lieu of, and not in addition to, payment
pursuant to subparagraphs 2(a) and 2(b).
-4-
<PAGE>
(d) The Bank and the Company hereby agree to reimburse Webb, from
time to time upon Webb's request, for its reasonable
out-of-pocket expenses, not to exceed $5,000. In addition, Webb
shall be reimbursed for the reasonable fees and expenses of their
counsel which shall not exceed $30,000 excluding "Blue Sky"
related fees of counsel. The Bank will bear the expenses of the
Offering customarily borne by issuers including, without
limitation, OTS, SEC, "Blue Sky," and NASD filing and
registration fees; the fees of the Bank's accountants, conversion
agent, attorneys, appraiser, transfer agent and registrar,
printing, mailing and marketing expenses associated with the
Conversion; and the fees set forth under this Section 2.
Full payment of Webb's actual and accountable expenses, advisory fees
and compensation shall be made in next day funds on the earlier of the Closing
Date or a determination by the Bank to terminate or abandon the Plan.
Webb will provide financial advisory assistance for a period of one year
following completion of the Conversion as set forth in the Letter Agreement.
Following this initial one-year term, if Webb and the Company wish to continue
the relationship, a fee will be negotiated and an agreement entered into at that
time.
In the event of an oversubscription or other event which causes the
Offering to continue beyond the original expiration date, or a resolicitation of
subscribers, the parties agree to renegotiate the expense cap applicable to
Webb.
Section 3. Prospectus; Offering. The Shares are to be initially offered
in the Offering at the Purchase Price as defined and set forth on the cover page
of the Prospectus.
Section 4. Representations and Warranties. The Company and the Bank
jointly and severally represent and warrant to Webb on the date hereof as
follows:
(a) The Registration Statement was declared effective by the Commission
on _________ __, 1996. At the time the Registration Statement, including the
Prospectus contained therein (including any amendment or supplement thereto),
became effective, the Registration Statement complied in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and the
Registration Statement, including the Prospectus contained therein (including
any amendment or supplement thereto), and any information regarding the Company
or the Bank contained in Sales Information (as such term is defined in Section 8
hereof) authorized by the Company or the Bank for use in connection with the
Offering, did not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and at the time any Rule 424(b) or (c) Prospectus was filed with
the Commission; provided, however, that the representations and warranties in
this Section 4(a) shall not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the Company
-5-
<PAGE>
or the Bank by Webb expressly regarding Webb for use in the Prospectus under the
caption "The Conversion-Marketing Arrangements" or statements in or omissions
from any Sales Information or information filed pursuant to state securities or
blue sky laws or regulations regarding Webb.
(b) The Conversion Application was approved by the OTS on _______ __,
1996 and the related Prospectus has been authorized for use by the OTS on
_______ __, 1996. At the time of the approval of the Conversion Application,
including the Prospectus (including any amendment or supplement thereto), by the
OTS and at all times subsequent thereto until the Closing Date, the Conversion
Application, including the Prospectus (including any amendment or supplement
thereto), will comply in all material respects with the Conversion Regulations
except to the extent waived by the OTS. The Conversion Application, including
the Prospectus (including any amendment or supplement thereto), does not include
any untrue statement of a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the
representations and warranties in this Section 4(b) shall not apply to
statements or omissions made in reliance upon and in conformity with written
information furnished to the Company or the Bank by Webb expressly regarding
Webb for use in the Prospectus contained in the Conversion Application under the
caption ["The Conversion-Subscription and Community Marketing" and "- Syndicated
Community Offering"] or statements in or omissions from any sales information or
information filed pursuant to state securities or blue sky laws or regulations
regarding Webb.
(c) The Company filed with the OTS the Holding Company Application which
was approved on ______ __, 1996.
(d) No order has been issued by the OTS or the Commission preventing or
suspending the use of the Prospectus and no action by or before any such
government entity to revoke any approval, authorization or order of
effectiveness related to the Conversion is, to the best knowledge of the Company
or the Bank, pending or threatened.
(e) To the best knowledge of the Company, no person has sought to obtain
review of the final action of the OTS in approving or taking no objection to the
Plan or in approving or taking no objection to the Conversion or the Holding
Company Application pursuant to the Conversion Regulations, the SLHCA, or any
other statute or regulation.
(f) The Bank has been organized and is a validly existing federally
chartered savings bank in mutual form of organization and upon the Conversion
will become a duly organized and validly existing federally chartered savings
bank in capital stock form of organization, in both instances duly authorized to
conduct its business and own its property as described in the Registration
Statement and the Prospectus; the Bank has obtained all material licenses,
permits and other governmental authorizations currently required for the conduct
of its business; all such licenses, permits and governmental authorizations are
in full force and effect, and the Bank is in all material respects complying
with all laws, rules, regulations
-6-
<PAGE>
and orders applicable to the operation of its business; the Bank is existing
under federal laws and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which its ownership of
property or leasing of property or the conduct of its business requires such
qualification, unless the failure to be so qualified in one or more of such
jurisdictions would not have a material adverse effect on the condition,
financial or otherwise, or the business, operations or income of the Bank. The
Bank does not own equity securities or any equity interest in any other business
enterprise except as described in the Prospectus or as would not be material to
the operations of the Bank.
(g) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware with
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and the Company is qualified to do business as a foreign corporation
in each jurisdiction in which the conduct of its business requires such
qualification, except where the failure to so qualify would not have a material
adverse effect on the condition, financial or otherwise, or the business,
operations or income of the Company. The Company has obtained all material
licenses, permits and other governmental authorizations currently required for
the conduct of its business; all such licenses, permits and governmental
authorizations are in full force and effect, and the Company is in all material
respects complying with all laws, rules, regulations and orders applicable to
the operation of its business.
(h) The Bank's wholly owned subsidiary, Advance Financial Service
Corporation of West Virginia ("Advance Service"), is duly incorporated and
validly existing as a corporation in good standing under the laws of the State
of [West Virginia], and is duly licensed and possessed of full corporate power
and authority to own its properties and conduct its business as described in the
Prospectus.
(i) The Bank is a member of the Federal Home Loan Bank of Pittsburgh
("FHLB- Pittsburgh"). The deposit accounts of the Bank are insured by the FDIC
up to the applicable limits; and no proceedings for the termination or
revocation of such insurance are pending or, to the best knowledge of the
Company or the Bank, threatened. Upon consummation of the Conversion, the
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders will be duly established in accordance with the
requirements of the Conversion Regulations.
(j) The Company and the Bank have good and marketable title to all real
property and other assets material to the business of the Company and the Bank
and to those properties and assets described in the Registration Statement and
Prospectus as owned by them, free and clear of all liens, charges, encumbrances
or restrictions, except such as are described in the Registration Statement and
Prospectus or are not material to the business of the Company and the Bank taken
as a whole; and all of the leases and subleases material to the business of the
Company and the Bank under which the Company or the Bank hold
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<PAGE>
properties, including those described in the Registration Statement and
Prospectus, are in full force and effect.
(k) The Company and the Bank have received an opinion from
[______________________] with respect to the West Virginia state income tax
consequences of the proposed transaction; all material aspects of the opinion of
[___________________________] are accurately summarized in the Prospectus; and
the facts and representations upon which such opinion are based are truthful,
accurate and complete.
(l) The Company and the Bank have all such power, authority,
authorizations, approvals and orders as may be required to enter into this
Agreement, to carry out the provisions and conditions hereof and to issue and
sell (i) the capital stock of the Bank to the Company and (ii) the Shares to be
sold by the Company as provided herein and as described in the Prospectus.
(m) The Company and the Bank are not in violation of any directive
received from the OTS or any other agency to make any material change in the
method of conducting their businesses so as to comply in all material respects
with all applicable statutes and regulations (including, without limitation,
regulations, decisions, directives and orders of the OTS, and, except as set
forth in the Registration Statement and the Prospectus, there is no suit or
proceeding or charge or action before or by any court, regulatory authority or
governmental agency or body, pending or, to the knowledge of the Company and the
Bank, threatened, which would materially and adversely affect the Conversion,
the performance of this Agreement or the consummation of the transactions
contemplated in the Plan and as described in the Registration Statement and the
Prospectus or which would result in any material adverse change in the condition
(financial or otherwise), earnings, capital or properties of the Company, or the
Bank.
(n) The financial statements which are included in the Prospectus fairly
present the financial condition, results of operations, retained earnings and
cash flows of the Bank at the respective dates thereof and for the respective
periods covered thereby and comply as to form in all material respects with the
applicable accounting requirements of the Regulations of the Commission, Title
12 of the Code of Federal Regulations and generally accepted accounting
principles (including those requiring the recording of certain assets at their
current market value). Such financial statements have been prepared in
accordance with generally accepted accounting principles consistently applied
through the periods involved, present fairly in all material respects the
information required to be stated therein and are consistent with the most
recent financial statements and other reports filed by the Bank with the OTS,
except that accounting principles employed in such regulatory filings conform to
the requirements of such authorities and not necessarily to generally accepted
accounting principles. The other financial, statistical and pro forma
information and related notes included in the Prospectus present fairly the
information shown therein on a basis consistent with the audited and unaudited
financial statements of the Bank included
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<PAGE>
in the Prospectus, and as to the pro forma adjustments, the adjustments made
therein have been properly applied on the basis described therein.
(o) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus: (i) there has not been any material
adverse change, financial or otherwise, in the condition of the Company, the
Bank or Advance Service considered as one enterprise, or in the earnings,
capital or properties of the Company or the Bank, whether or not arising in the
ordinary course of business; (ii) there has not been any material increase in
the long term debt of the Bank or in loans past due 90 days or more or real
estate acquired by foreclosure, by deed-in-lieu of foreclosure or deemed
in-substance foreclosure or any material decrease in surplus and reserves or
total assets of the Bank nor has the Company or the Bank issued any securities
or incurred any liability or obligation for borrowing other than in the ordinary
course of business and (iii) there have not been any material transactions
entered into by the Company or the Bank, except with respect to those
transactions entered into in the ordinary course of business.
(p) The capitalization, liabilities, assets, properties and business of
the Company and the Bank conform in all material respects to the descriptions
thereof contained in the Prospectus.
(q) Neither the Company nor the Bank has any material contingent
liabilities, except as set forth in the Prospectus.
(r) As of the date hereof, neither the Company, the Bank nor Advance
Service is in violation of its articles of incorporation or bylaws or charter or
bylaws, as applicable (and the Bank will not be in violation of its charter or
bylaws in capital stock form at the time of consummation of the Conversion), or
in default in the performance or observance of any material obligation,
agreement, covenant, or condition contained in any material contract, lease,
loan agreement, indenture or other instrument to which it is a party or by which
it or any other instrument to which it is a party or by which it or any of its
property may be bound; the consummation of the Conversion, the execution,
delivery and performance of this Agreement and the consummation of the
transactions herein contemplated have been duly and validly authorized by all
necessary corporate action on the part of the Company and the Bank and this
Agreement has been validly executed and delivered by the Company and the Bank
and is the valid, legal and binding Agreement of the Company and the Bank
enforceable in accordance with its terms, except as the enforceability thereof
may be limited by (i) bankruptcy, insolvency, reorganization, moratorium,
conservatorship, receivership or other similar laws now or hereafter in effect
relating to or affecting the enforcement of creditors' rights generally or the
rights of creditors of Federal savings associations and their holding companies,
(ii) general equitable principles, (iii) laws relating to the safety and
soundness of insured depository institutions, and (iv) applicable law or public
policy with respect to the indemnification and/or contribution provisions
contained herein, and except that no representation or warranty need be made as
to the effect or availability of equitable remedies or injunctive relief
(regardless of whether such enforceability is considered in a
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<PAGE>
proceeding in equity or at law). The consummation of the transaction herein
contemplated will not: (i) conflict with or constitute a breach of, or default
under, the articles of incorporation and bylaws of the Company or the charter
and bylaws of the Bank (in either mutual or capital stock form), or any material
contract, lease or other instrument to which the Company or the Bank is a party,
or any applicable law, rule, regulation or order; (ii) violate any
authorization, approval, judgement, decree, order, statute, rule or regulation
applicable to the Company or the Bank, except for such violation which would not
have a material adverse effect on the financial condition and results of
operations of the Company and the Bank on a consolidated basis; or (iii) with
the exception of the liquidation account established in the Conversion, result
in the creation of any material lien, charge or encumbrance upon any property of
the Company or the Bank.
(s) No default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default on the part of the Company,
the Bank or Advance Service, in the due performance and observance of any term,
covenant or condition of any indenture, mortgage, deed of trust, note, bank loan
or credit agreement or any other instrument of agreement to which the Company,
the Bank or Advance Service is a party or by which any of them or any of their
property is bound or affected except such defaults which would not have a
material adverse effect on the financial condition or results of operations of
the Company, the Bank and Advance Service on a consolidated basis; such
agreements are in full force and effect; and no other party to any such
agreements has instituted or, to the best knowledge of the Company, the Bank and
Advance Service, threatened any action or proceeding wherein the Company, the
Bank or Advance Service would be alleged to be in default thereunder under
circumstances where such action or proceeding, if determined adversely to the
Company, the Bank or Advance Service, would have a material adverse effect on
the Company, the Bank and Advance Service, taken as a whole.
(t) Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Company will be within the range set forth in
the Prospectus under the caption "Capitalization," and no shares of Common Stock
have been or will be issued and outstanding prior to the Closing Date referred
to in Section 2; the Shares will have been duly and validly authorized for
issuance and, when issued and delivered by the Company pursuant to the Plan
against payment of the consideration calculated as set forth in the Plan and in
the Prospectus, will be duly and validly issued, fully paid and non-assessable;
no preemptive rights exist with respect to the Shares; and the terms and
provisions of the Shares will conform in all material respects to the
description thereof contained in the Registration Statement and the Prospectus.
To the best knowledge of the Company and the Bank, upon the issuance of the
Shares, good title to the Shares will be transferred from the Company to the
purchasers thereof against payment therefor, subject to such claims as may be
asserted against the purchasers thereof by third-party claimants.
(u) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance
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<PAGE>
of the Shares, except for the approval of the Commission, the OTS and any
necessary qualification, notification, registration or exemption under the
securities or blue sky laws of the various states in which the Shares are to be
offered, and except as may be required under the rules and regulations of the
NASD and/or the Nasdaq SmallCap Market.
(v) S.R. Snodgrass A.C., which has certified the financial statements of
the Bank included in the Prospectus as of June 30, 1996 and 1995 and for each of
the years in the three-year period ended June 30, 1996, has advised the Company
and the Bank in writing that they are, with respect to the Company and the Bank,
independent public accountants within the meaning of the Code of Professional
Ethics of the American Institute of Certified Public Accountants and Title 12 of
the Code of Federal Regulations and Section 571.2(c)(3).
(v) Keller & Company, Inc. which has prepared the Bank's Conversion
Valuation Appraisal Report as of September 6, 1996 (as amended or supplemented,
if so amended or supplemented) (the "Appraisal"), has advised the Company in
writing that it is independent of the Company and the Bank within the meaning of
the Conversion Regulations.
(w) The Company and the Bank have timely filed all required federal,
state and local tax returns; the Company and the Bank have paid all taxes that
have become due and payable in respect of such returns, except where permitted
to be extended; to the best knowledge of the Bank adequate reserves have been
made for similar future tax liabilities and no deficiency has been asserted with
respect thereto by any taxing authority.
(x) The Company and the Bank are in compliance in all material respects
with the applicable financial record-keeping and reporting requirements of the
Currency and Foreign Transactions Reporting Act of 1970, as amended, and the
regulations and rules thereunder.
(y) To the knowledge of the Company and the Bank, neither the Company,
the Bank nor employees of the Company or the Bank have made any payment of funds
of the Company or the Bank as a loan for the purchase of the Shares.
(z) Prior to the Conversion, the Bank was not authorized to issue shares
of capital stock and neither the Company nor the Bank has: (i) issued any
securities within the last 18 months (except for notes to evidence other bank
loans and reverse repurchase agreements or other liabilities in the ordinary
course of business or as described in the Prospectus); (ii) had any material
dealings within the 12 months prior to the date hereof with any member of the
NASD, or any person related to or associated with such member, other than
discussions and meetings relating to the proposed Offering (and the offering
related to a proposed mutual holding company reorganization which was terminated
prior to consummation) and routine purchases and sales of United States
government and agency securities; (iii) entered into a financial or management
consulting agreement except as contemplated hereunder and except for the Letter
Agreement set forth in Exhibit A; and (iv) engaged any intermediary between Webb
and the Company and the Bank in connection
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<PAGE>
with the offering of the Shares, and no person is being compensated in any
manner for such service.
(aa) Except in connection with "Blue Sky" matters, the Company and the
Bank have not relied upon Webb or Webb's counsel for any legal, tax or
accounting advice in connection with the Conversion.
(bb) The Company is not required to be registered under the Investment
Company Act of 1940, as amended.
Any certificates signed by an officer of the Company or the Bank
pursuant to the conditions of this Agreement and delivered to Webb or its
counsel that refers to this Agreement shall be deemed to be a representation and
warranty by the Company or the Bank to Webb as to the matters covered thereby
with the same effect as if such representation and warranty were set forth
herein.
Section 5. Representations and Warranties of Webb.
(a) Webb represents and warrants to the Company and the Bank that:
(i) Webb is a corporation and is validly existing in good
standing under the laws of the State of Ohio with full power and authority to
provide the services to be furnished to the Bank and the Company hereunder.
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of Webb, and this Agreement has
been duly and validly executed and delivered by Webb and is the legal, valid and
binding agreement of Webb, enforceable in accordance with its terms.
(iii) Each of Webb and its employees, agents and representatives
who shall perform any of the services hereunder shall be duly authorized and
empowered, and shall have all licenses, approvals and permits necessary to
perform such services.
(iv) The execution and delivery of this Agreement by Webb, the
consummation of the transactions contemplated hereby and compliance with the
terms and provisions hereof will not conflict with, or result in a breach of,
any of the terms, provisions or conditions of, or constitute a default (or event
which with notice or lapse of time or both would constitute a default) under,
the articles of incorporation of Webb or any agreement, indenture or other
instrument to which Webb is a party or by which it or its property is bound.
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<PAGE>
(v) No approval of any regulatory or supervisory or other public
authority is required in connection with Webb's execution and delivery of this
Agreement, except as may have been received.
(vi) There is no suit or proceeding or charge or action before or
by any court, regulatory authority or government agency or body or, to the
knowledge of Webb, pending or threatened, which might materially adversely
affect Webb's performance under this Agreement.
Section 5.1 Covenants of the Company and the Bank. The Company and the
Bank hereby jointly and severally covenant with Webb as follows:
(a) The Company has filed the Registration Statement with the
Commission. The Company will not, at any time after the date the Registration
Statement is declared effective, file any amendment or supplement to the
Registration Statement without providing Webb and its counsel an opportunity to
review such amendment or supplement or file any amendment or supplement to which
amendment or supplement Webb or its counsel shall reasonably object.
(b) The Bank has filed the Conversion Application with the OTS. The Bank
will not, at any time after the Conversion Application is approved by the OTS,
file any amendment or supplement to such Conversion Application without
providing Webb and its counsel an opportunity to review such amendment or
supplement or file any amendment or supplement to which amendment or supplement
Webb or its counsel shall reasonably object.
(c) The Company will not, at any time before the Holding Company
Application is approved by the OTS, file any amendment or supplement to such
Holding Company Application without providing Webb and its counsel an
opportunity to review the nonconfidential portions of such amendment or
supplement or file any amendment or supplement to which amendment or supplement
Webb or its counsel shall reasonably object.
(d) The Company and the Bank will use their best efforts to cause any
post-effective amendment to the Registration Statement to be declared effective
by the Commission and any post-effective amendment to the Conversion Application
to be approved by the OTS and will immediately upon receipt of any information
concerning the events listed below notify Webb: (i) when the Registration
Statement, as amended, has become effective; (ii) when the Conversion
Application, as amended, has been approved by the OTS; (iii) when the Holding
Company Application, as amended, has been approved by he OTS; (iv) of any
comments from the Commission, the OTS or any other governmental entity with
respect to the Conversion or the transactions contemplated by this Agreement;
(v) of the request by the Commission, the OTS or any other governmental entity
for any amendment or supplement to the Registration Statement, the Conversion
Application or the Holding Company Application or for additional information;
(vi) of the issuance by the commission, the OTS or any other governmental entity
of any order or other action suspending the
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<PAGE>
Offering or the use of the Registration Statement or the Prospectus or any other
filing of the Company or the Bank under the Conversion Regulations, or other
applicable law, or the threat of any such action; (vii) the issuance by the
Commission, the OTS or any state authority of any stop order suspending the
effectiveness of the Registration Statement or the approval of the Conversion
Application or Holding Company Application, or of the initiation or threat of
initiation or threat of any proceedings for any such purpose; or (viii) of the
occurrence of any event mentioned in paragraph (h) below. The Company and the
Bank will make every reasonable effort (i) to prevent the issuance by the
Commission, the OTS or any state authority of any such order and, if any such
order shall at any time be issued, (ii) to obtain the lifting thereof at the
earliest possible time.
(e) The Company and the Bank will deliver to Webb and to its counsel two
conformed copies of the Registration Statement, the Conversion Application and
the Holding Company Application, as originally filed and of each amendment or
supplement thereto, including all exhibits. Further, the Company and the Bank
will deliver such additional copies of the foregoing documents to counsel to
Webb as may be required for any NASD and blue sky filings.
(d) The Company and the Bank will furnish to Webb, from time to time
during the period when the Prospectus (or any later prospectus related to this
offering) is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934, (the "1934 Act"), such number of copies of such Prospectus
(as amended or supplemented) as Webb may reasonably request for the purposes
contemplated by the 1933 Act, the 1933 Act Regulations, the 1934 Act or the
rules and regulations promulgated under the 1934 Act (the "1934 Act
Regulations"). The Company authorizes Webb to use the Prospectus (as amended or
supplemented, if amended or supplemented) in any lawful manner contemplated by
the Plan in connection with the sale of the Shares by Webb.
(g) The Company and the Bank will comply with any and all material
terms, conditions, requirements and provisions with respect to the Conversion
and the transactions contemplated thereby imposed by the Commission, the OTS,
the Conversion Regulations or the SLHCA, and by the 1933 Act, the 1933 Act
Regulations, the 1934 Act and the 1934 Act Regulations to be complied with prior
to or subsequent to the Closing Date and when the Prospectus is required to be
delivered, the Company and the Bank will comply, at their own expense, with all
material requirements imposed upon them by the Commission, the OTS, the
Conversion Regulations or the SLHCA, and by the 1993 Act, the 1933 Act
Regulations, the 1934 Act and the 1934 Act Regulations, including, without
limitation, Rule 10b-5 under the 1934 Act, in each case as from time to time in
force, so far as necessary to permit the continuance of sales or dealing in
shares of Common Stock during such period in accordance with the provisions
hereof and the Prospectus.
(h) If, at any time during the period when the Prospectus relating to
the Shares is required to be delivered, any event relating to or affecting the
Company, the Bank or Advance Service shall occur, as a result of which it is
necessary or appropriate, in the
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<PAGE>
opinion of counsel for the Company and the Bank to amend or supplement the
Registration Statement or Prospectus in order to make the Registration Statement
or Prospectus not misleading in light of the circumstances existing at the time
the Prospectus is delivered to a purchaser, the Company and the Bank will, at
their expense, prepare and file with the Commission and the OTS and furnish to
Webb a reasonable number of copies of an amendment or amendments of, or a
supplement or supplements to, the Registration Statement and Prospectus (in form
and substance satisfactory to Webb and its counsel after a reasonable time for
review) which will amend or supplement the Registration Statement and Prospectus
so that as amended or supplemented it will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading. For the purpose of this
Agreement, the Company and the Bank each will timely furnish to Webb such
information with respect to itself as Webb may from time to time reasonably
request.
(i) At the Closing Date referred to in Section 2, the Plan will have
been adopted by the Boards of Directors of both the Company and the Bank and the
offer and sale of the Shares will have been conducted in all material respects
in accordance with the Plan, the Conversion Regulations, and all other
applicable laws, regulations, decisions and orders, including all terms,
conditions, requirements and provisions precedent to the Conversion imposed upon
the Company or the Bank by the OTS, the Commission or any other regulatory
authority and in the manner described in the Prospectus.
(j) Upon completion of the sale by the Company of the Shares
contemplated by the Prospectus, (i) the Bank will be converted pursuant to the
Plan to a federally chartered stock savings bank, (ii) all of the authorized and
outstanding capital stock of the Bank will be owned by the Company, and (iii)
the Company will have no direct subsidiaries other than the Bank. The Conversion
will have been effected in all material respects in accordance with all
applicable statutes, regulations, decisions and orders; and, except with respect
to the filing of certain post-sale, post-Conversion reports, and documents in
compliance with the 1933 Act Regulations or the OTS's letters of approval, all
terms, conditions, requirements and provisions with respect to the Conversion
(except those that are conditions subsequent) imposed by the Commission and the
OTS, if any, will have been complied with by the Company and the Bank in all
material respects or appropriate waivers will have been obtained and all
material notice and waiting periods will have been satisfied, waived or elapsed.
(k) The Company and the Bank will take all necessary actions, in
cooperation with Webb, and furnish to whomever Webb may direct, such information
as may be required to qualify or register the Shares for offering and sale by
the Company or to exempt such Shares from registration, or to exempt the Company
as a broker-dealer and its officers, directors and employees as broker-dealers
or agents under the applicable securities or blue sky laws of such jurisdictions
in which the Shares are to be offered and sold as Webb and the Company and the
Bank may reasonably agree upon; provided, however, that the Company
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<PAGE>
shall not be obligated to file any general consent to service of process or to
qualify to do business in any jurisdiction in which it is not so qualified. In
each jurisdiction where any of the Shares shall have been qualified or
registered as above provided, the Company will make and file such statements and
reports in each fiscal period as are or may be required by the laws of such
jurisdiction.
(l) The liquidation account for the benefit of Eligible Account Holders
and Supplemental Eligible Account Holders will be duly established and
maintained in accordance with the requirements of the OTS, and such Eligible
Account Holders and Supplemental Eligible Account Holders who continue to
maintain their savings accounts in the Bank will have an inchoate interest in
their pro rata portion of the liquidation account which shall have a priority
superior to that of the holders of shares of Common Stock in the event of a
complete liquidation of the Bank.
(m) The Company and the Bank will not sell or issue, contract to sell or
otherwise dispose of, for a period of 90 days after the Closing Date, without
Webb's prior written consent, any shares of Common Stock other than the Shares
or other than in connection with any plan or arrangement described in the
Prospectus.
(n) The Company shall register its Common Stock under Section 12(g) of
the 1934 Act concurrent with the Offering pursuant to the Plan and shall request
that such registration be effective upon completion of the Conversion. The
Company shall maintain the effectiveness of such registration for not less than
three (3) years or such shorter period as may be required by the OTS.
(o) During the period during which the Company's Common Stock is
registered under the 1934 Act or for three years from the date hereof, whichever
period is greater, the Company will furnish to its stockholders as soon as
practicable after the end of each fiscal year an annual report of the Company
(including a consolidated balance sheet and statements of consolidated income,
stockholders' equity and cash flows of the Company and its subsidiaries as at
the end of and for such year, certified by independent public accountants in
accordance with Regulation S-X under the 1933 Act and the 1934 Act).
(p) During the period of three years from the date hereof, the Company
will furnish to Webb: (i) as soon as practicable after such information is
publicly available, a copy of each report of the Company furnished to or filed
with the Commission under the 1934 Act or any national securities exchange or
system on which any class of securities of the Company is listed or quoted
(including, but not limited to, reports on Forms 10-K, 10-Q and 8-K and all
proxy statements and annual reports to stockholders), (ii) a copy of each other
non-confidential report of the Company mailed to its stockholders or filed with
the Commission, the OTS or any other supervisory or regulatory authority or any
national securities exchange or system on which any class of securities of the
Company is listed or quoted, each press release and material news items and
additional documents and information with respect to the Company or the Bank as
Webb may reasonably request; and
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<PAGE>
(iii) from time to time, such other nonconfidential information concerning the
Company or the Bank as Webb may reasonably request.
(q) The Company and the Bank will use the net proceeds from the sale of
the Shares in the manner set forth in the Prospectus under the caption "Use of
Proceeds."
(r) Other than as permitted by the Conversion Regulations, the SLHCA,
the 1933 Act, the 1933 Act Regulations, and the laws of any state in which the
Shares are registered or qualified for sale or exempt from registration, neither
the Company nor the Bank will distribute any prospectus, offering circular or
other offering material in connection with the offer and sale of the Shares.
(s) The Company will use its best efforts to (i) encourage and assist
two market makers to establish and maintain a market for the Shares and (ii)
list the Shares on a national or regional securities exchange or on the Nasdaq
SmallCap Market effective on or prior to the Closing Date.
(t) The Bank will maintain appropriate arrangements for depositing all
funds received from persons mailing subscriptions for or orders to purchase
Shares in the Offering on an interest bearing basis at the rate described in the
Prospectus until the Closing Date and satisfaction of all conditions precedent
to the release of the Bank's obligation to refund payments received from persons
subscribing for or ordering Shares in the Offering in accordance with the Plan
and as described in the Prospectus or until refunds of such funds have been made
to the persons entitled thereto or withdrawal authorizations cancelled in
accordance with the Plan and as described in the Prospectus. The Bank will
maintain such records of all funds received to permit the funds of each
subscriber to be separately insured by the FDIC (to the maximum extent
allowable) and to enable the Bank to make the appropriate refunds of such funds
in the event that such refunds are required to be made in accordance with the
Plan and as described in the Prospectus.
(u) The Company will promptly take all necessary action to register as a
savings and loan holding company under the SLHCA within 90 days of the Closing
Date.
(v) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by Webb in order for Webb to ensure
compliance with the NASD's "Interpretation Relating to Free Riding and
Withholding."
(w) The Bank will not amend the Plan of Conversion without notifying
Webb prior thereto.
(x) The Company shall assist Webb, if necessary, in connection with the
allocation of the Shares in the event of an oversubscription and shall provide
Webb with any information necessary in allocating the Shares in such event and
such information shall be accurate and reliable.
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<PAGE>
(y) Prior to the Closing Date, the Company and the Bank will inform Webb
of any event or circumstances of which it is aware as a result of which the
Registration Statement, the Conversion Application and/or Prospectus, as then
amended or supplemented, would contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein
not misleading.
Section 5.2 Covenants of Webb. Webb hereby covenants with the Company
and the Bank as follows:
(a) During the period when the Prospectus is used, Webb will comply, in
all material respects and at its own expense, with all requirements imposed upon
it by the OTS and the NASD and, to the extent applicable, by the 1933 Act and
the 1934 Act and the rules and regulations promulgated thereunder.
(b) Webb shall return unused copies of the Prospectus, if any, to the
Company promptly upon the completion of the Conversion.
(c) Webb will distribute copies of the Prospectus and Sales Information
in connection with the sales of the common stock only in accordance with NASD
and OTS regulations, the 1933 Act and the rules and regulations promulgated
thereunder.
(d) Webb shall assist the Bank in maintaining arrangements for the
deposit of funds and the making of refunds, as appropriate (as described in
Section 5.1(r)), and shall perform the allocation of shares in the event of an
oversubscription, in conformance with the Plan and applicable regulations and
based upon information furnished to Webb by the Bank (as described in Section
5.1(x)).
Section 6. Payment of Expenses. Whether or not the Conversion is
completed or the sale of the Shares by the Company is consummated, the Company
and the Bank jointly and severally agree to pay or reimburse Webb for: (a) all
filing fees in connection with all filings with the NASD; (b) any stock issue or
transfer taxes which may be payable with respect to the sale of the Shares; (c)
all reasonable expenses of the Conversion, including but not limited to, the
Company's and the Bank's attorneys' fees, transfer agent, registrar and other
agent charges, fees relating to auditing and accounting or other advisors and
costs of printing all documents necessary in connection with the Conversion; and
(d) all reasonable out-of-pocket expenses incurred by Webb not to exceed $5,000.
Such out-of-pocket expenses include, but are not limited to, travel,
communications and postage. However, such out-of-pocket expenses do not include
expenses incurred with respect to the matters set forth in (a) and (b) above. In
the event the Company is unable to sell a minimum of 697,000 Shares or the
Conversion is terminated or otherwise abandoned, the Company and the Bank shall
reimburse Webb in accordance with Section 2 hereof.
Section 7. Conditions to Webb's Obligations. Webb's obligations
hereunder, as to the Shares to be issued at the Closing Date, are subject, to
the extent not waived by Webb,
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<PAGE>
to the condition that all representations and warranties of the Company and the
Bank herein are, at and as of the commencement of the Offering and at and as of
the Closing Date, true and correct in all material respects, the condition that
the Company and the Bank shall have performed all of their obligations hereunder
to be performed on or before such dates, and to the following further
conditions:
(a) At the Closing Date, the Company and the Bank shall have conducted
the Conversion in all material respects in accordance with the Plan, the
Conversion Regulations, and all other applicable laws, regulations, decisions
and orders, including all terms, conditions, requirements and provisions
precedent to the Conversion imposed upon them by the OTS.
(b) The Registration Statement shall have been declared effective by the
Commission, the Conversion Application approved by the OTS, and the Holding
Company Application approved by the OTS not later than 5:30 p.m. on the date of
this Agreement, or with Webb's consent at a later time and date; and at the
Closing Date, no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefore
initiated or threatened by the Commission, or any state authority and no order
or other action suspending the authorization of the Prospectus or the
consummation of the Conversion shall have been issued or proceedings therefore
initiated or, to the Company's or the Bank's knowledge threatened by the
Commission, the OTS or any state authority.
(c) At the Closing Date, Webb shall have received:
(1) The favorable opinion, dated as of the Closing Date and
addressed to Webb and for its benefit, of Malizia, Spidi, Sloane & Fisch, P.C.,
special counsel for the Company and the Bank, in form and substance to the
effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware and has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus.
(ii) The Bank is organized and is validly existing as a
federally chartered savings bank in mutual form of organization and upon the
Conversion will become a duly organized and validly existing federally chartered
savings bank in capital stock form of organization, in both instances duly
authorized to conduct its business and own its property as described in the
Registration Statement and Prospectus. All of the outstanding capital stock of
the Bank will be duly authorized and, upon payment therefor, will be validly
issued, fully paid and non-assessable and will be owned by the Company, free and
clear of any liens, encumbrances, claims or other restrictions.
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(iii) The Bank is a member of the FHLB-Pittsburgh. The
Bank is an insured depository institution under the provisions of Section 4(a)
of the Federal Deposit Insurance Act, as amended, and no proceedings for the
termination or revocation of such insurance are pending or, to such counsel's
Actual Knowledge, threatened; the description of the liquidation account as set
forth in the Prospectus under the caption "The Conversion- Liquidation Rights"
to the extent that such information constitutes matters of law and legal
conclusions has been reviewed by such counsel and is accurate in all material
respects.
(iv) Upon consummation of the Conversion, the authorized,
issued and outstanding capital stock of the Company will be within the range set
forth in the Prospectus under the caption "Capitalization," and except for
shares issued upon incorporation of the Company, no shares of Common Stock have
been issued prior to the Closing Date; at the time of the Conversion, the Shares
subscribed for pursuant to the Offering will have been duly and validly
authorized for issuance, and when issued and delivered by the Company pursuant
to the Plan against payment of the consideration calculated as set forth in the
Plan and the Prospectus, will be duly and validly issued and fully paid and
non-assessable; except for subscription rights granted pursuant to the Plan the
issuance of the Shares is not subject to preemptive rights and the terms and
provisions of the Shares conform in all material respects to the description
thereof contained in the Prospectus. To such counsel's Actual Knowledge, upon
the issuance of the Shares, good title to the Shares will be transferred from
the Company to the purchasers thereof against payment therefor, subject to such
claims as may be asserted against the purchasers thereof by third-party
claimants.
(v) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of the Company and the Bank; and
this Agreement is a valid and binding obligation of the Company and the Bank,
enforceable in accordance with its terms, except as the enforceability thereof
may be limited by (i) bankruptcy, insolvency, moratorium, reorganization,
conservatorship, receivership or other similar laws now or hereafter in effect
relating to or affecting the enforcement of creditors' rights generally or the
rights of creditors of savings associations and their holding companies, (ii)
general equitable principles, (iii) laws relating to the safety and soundness of
insured depository institutions, and (iv) applicable law or public policy with
respect to the indemnification and/or contribution provisions contained herein,
and except that no opinion need to be expressed as to the effect or availability
of equitable remedies or injunctive relief (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(vi) The Conversion Application has been approved by the
OTS and the Prospectus has been authorized for use by the OTS. The OTS has
approved the Holding Company Application and issued its letter of approval under
the SLHCA, and the purchase by the Company of all of the issued and outstanding
capital stock of the Bank has been authorized by the OTS and no action has been
taken, and to such counsel's Actual Knowledge, none is pending or threatened, to
revoke any such authorization or approval.
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(vii) The Plan has been duly adopted by the required vote
of the directors of the Company and the Bank and, based upon the certificate of
the inspector of election, by the members of the Bank.
(viii) Subject to the satisfaction of the conditions to
the OTS approval of the Conversion, no further approval, registration,
authorization, consent or other order of or notice to any federal agency is
required in connection with the execution and delivery of this Agreement, the
issuance of the Shares and the consummation of the Conversion, except as may be
required under the securities or blue sky laws of various jurisdictions (as to
which no opinion need be rendered) and except as may be required under the rules
and regulations of the NASD and/or the Nasdaq SmallCap Market (as to which no
opinion need be rendered).
(ix) The Registration Statement is effective under the
1933 Act and no stop order suspending the effectiveness has been issued under
the 1933 Act or proceedings therefor initiated or, to such counsel's Actual
Knowledge, threatened by the Commission.
(x) At the time the Conversion Application, including the
Prospectus contained therein, was approved by the OTS, the Conversion
Application, including the Prospectus contained therein, complied as to form in
all material respects with the requirements of the Home Owners' Loan Act, as
amended ("HOLA") and all applicable rules and regulations promulgated
thereunder, including the Conversion Regulations (other than the financial
statements, the notes thereto, and other tabular, financial, statistical and
appraisal data included therein, as to which no opinion need be rendered).
(xi) At the time that the Registration Statement became
effective, (i) the Registration Statement (as amended or supplemented, if so
amended or supplemented) (other than the financial statements, the notes thereto
and other tabular, financial, statistical and appraisal data included therein,
as to which no opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act Regulations, and
(ii) the Prospectus (other than the financial statements, the notes thereto and
other tabular, financial, statistical and appraisal data included therein, as to
which no opinion need be rendered) complied as to form in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations.
(xii) The terms and provisions of the Shares of the
Company conform, in all material respects, to the description thereof contained
in the Registration Statement and Prospectus, and the form of certificate used
to evidence the Shares is in due and proper form.
(xiii) There are no legal or governmental proceedings
pending or to such counsel's Actual Knowledge, threatened which are required to
be disclosed in the Registration Statement and Prospectus, other than those
disclosed therein, and to such counsel's Actual Knowledge, all pending legal and
governmental proceedings to which the
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Company, the Bank or Advance Service is a party or of which any of their
property is the subject, which are not described in the Registration Statement
and the Prospectus, including ordinary routine litigation incidental to the
Company's, the Bank's or Advance Service's business, are, considered in the
aggregate, not material.
(xiv) To such counsel's Actual Knowledge, there are no
material contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Conversion
Application, the Registration Statement or the Prospectus or required to be
filed as exhibits thereto other than those described or referred to therein or
filed as exhibits thereto. The description in the Conversion Application, the
Registration Statement and the Prospectus of such documents and exhibits is
accurate in all material respects and fairly presents the information required
to be shown.
(xv) To such counsel's Actual Knowledge, the Company and
the Bank have conducted the Conversion, in all material respects, in accordance
with all applicable requirements of the Plan the Conversion Regulations and the
HOLA and the Plan complies in all material respects with, the Conversion
Regulations and the HOLA, and all decisions and orders issued thereunder (except
where a written waiver has been received); no order has been issued by the OTS,
the Commission or any state authority to suspend the Offering or the use of the
Prospectus, and no action for such purposes has been instituted or, to such
counsel's Actual Knowledge, threatened by the OTS or the Commission or any state
authority and, to such counsel's Actual Knowledge, no person has sought to
obtain regulatory or judicial review of the final action of the OTS approving
the Plan, the Conversion Application, the Holding Company Application or the
Prospectus.
(xvi) To such counsel's Actual Knowledge, the Company,
the Bank and Advance Service have obtained all material federal licenses,
permits and other governmental authorizations currently required under the HOLA
and the Federal Deposit Insurance Act and all applicable rules and regulations
promulgated thereunder for the conduct of their businesses and to such counsel's
Actual Knowledge all such licenses, permits and other governmental
authorizations are in full force and effect, and the Company, the Bank and
Advance Service are in all material respects complying therewith, except whether
the failure to have such licenses, permits and other governmental authorizations
or the failure to be in compliance therewith would not have a material adverse
affect on the business or operations of the Bank, the Company and Advance
Service, taken as a whole.
(xvii) To such counsel's Actual Knowledge, neither the
Company, nor the Bank is in violation of its articles of incorporation, bylaws,
or charter, as applicable, or, to such counsel's Actual Knowledge, in default or
violation of any obligation, agreement, covenant or condition contained in any
material contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which it is a party or by which it or its property may be bound
except for such defaults or violations which would not have a material adverse
impact on the financial condition or results of operations of the Company, the
Bank and Advance Service on a consolidated basis; to such counsel's Actual
Knowledge,
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the execution and delivery of this Agreement, the occurrence of the obligations
herein set forth and the consummation of the transactions contemplated herein
will not conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or the Bank pursuant to any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument to which
the Company or the Bank is a party or by which any of them may be bound, or to
which any of the property or assets of the Company or the Bank is subject (other
than the establishment of a liquidation account), and such action will not
result in any violation of the provisions of the articles of incorporation,
bylaws or charter, as applicable, of the Company or the Bank or any applicable
federal law, act, regulation (except that no opinion need be rendered with
respect to the securities or blue sky laws of various jurisdictions or the rules
and regulations of the NASD and/or the Nasdaq National Market) or order or court
order, writ, injunction or decree naming the Company or the Bank.
(xviii) The Company' articles of incorporation and bylaws
comply in all material respects with the General Corporation Law of the State of
Delaware ("Delaware Law"). The Bank's charter and bylaws in mutual form and,
upon the completion of the Conversion, in stock form, comply in all material
respects with the Home Owners' Loan Act and the rules and regulations of the
OTS.
(xix) To such counsel's Actual Knowledge, neither the
Company nor the Bank is in violation of any directive from the OTS to make any
material change in the method of conducting its respective business.
(xx) The information in the Prospectus under the captions
"Regulation," "The Conversion," "Certain Restrictions on Acquisition of the
Company" and "Description of Capital Stock," to the extent that such information
constitutes matters of law, summaries of legal matters, documents or
proceedings, or legal conclusions, has been reviewed by such counsel and is
correct in all material respects. The description of the Conversion process
under the caption "The Conversion" in the Prospectus has been reviewed by such
counsel and is in all material respects correct. The discussion of statutes or
regulations described or referred to in the Prospectus are accurate summaries
and fairly present the information required to be shown. The information
regarding the federal tax opinion under the caption "The Conversion-Tax Effects"
has been reviewed by such counsel and constitutes a correct summary of the
opinion rendered by such counsel to the Company and the Bank with respect to
such matters.
In giving such opinion, such counsel may rely as to
all matters of fact on certificates of officers or directors of the Company and
the Bank and certificates of public officials. Such counsel's opinion shall be
limited to matters governed by federal laws and by Delaware Law. With respect to
matters involving the application of West Virginia law, such counsel may rely,
to the extent it deems proper and as specified in its opinion, upon the opinion
of local counsel (providing that such counsel states that it believes Webb
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are justified in relying upon such specified opinion or opinions. The opinion of
Malizia, Spidi, Sloan & Fisch, P.C. shall be governed by and subject to the
qualifications contained in the Legal Opinion Accord ("Accord") of the American
Bar Association Section of Business Law (1991). The term "Actual Knowledge" as
used herein shall have the meaning set forth in the Accord. For purposes of such
opinion, no proceedings shall be deemed to be pending, no order or stop order
shall be deemed to be issued, and no action shall be deemed to be instituted
unless, in each case, a director or executive officer of the Company or the Bank
shall have received a copy of such proceedings, order, stop order or action. In
addition, such opinion may be limited to present statutes, regulations and
judicial interpretations and to facts as they presently exist; in rendering such
opinion, such counsel need assume no obligation to revise or supplement it
should the present laws be changed by legislative or regulatory action, judicial
decision or otherwise; and such counsel need express no view, opinion or belief
with respect to whether any proposed or pending legislation, if enacted, or any
proposed or pending regulations or policy statements issued by any regulatory
agency, whether or not promulgated pursuant to any such legislation, would
affect the validity of the Conversion or any aspect thereof. Such counsel may
assume that any agreement is the valid and binding obligation of any parties to
such agreement other than the Company, the Bank or Advance Service.
In addition, such counsel shall provide a letter stating that during the
preparation of the Conversion Application, the Registration Statement and the
Prospectus, they participated in conferences with certain officers of, the
independent public and internal accountants for, and other representatives of
the Company and the Bank, at which conferences the contents of the Conversion
Application, the Registration Statement and the Prospectus and related matters
were discussed and, while such counsel has not confirmed the accuracy or
completeness of or otherwise verified the information contained in the
Conversion Application, the Registration Statement or the Prospectus, and does
not assume any responsibility for such information, based upon such conferences
and a review of documents deemed relevant for the purpose of rendering their
opinion (relying as to materiality as to factual matters on certificates of
officers and other factual representations by the Company and the Bank), nothing
has come to their attention that would lead them to believe that the Conversion
Application, the Registration Statement, the Prospectus, or any amendment or
supplement thereto (other than the financial statements, the notes thereto, and
other tabular, financial, statistical and appraisal data included therein as to
which no statement need be made) contained, as of the date of approval or
effectiveness, as the case may be, and as of the Closing Date, an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(2) The favorable opinion, dated as of the Closing Date and
addressed to Webb and for their benefit, of [West Virginia counsel], the Bank's
local counsel, in form and substance to the effect that, to the best of such
counsel's knowledge, (i) the Company and the Bank have good and marketable title
to all properties and assets which are material
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to the business of the Company and the Bank and to those properties and assets
described in the Registration Statement and Prospectus, as owned by them, free
and clear of all liens, charges, encumbrances or restrictions, except such as
are described in the Registration Statement and Prospectus, or are not material
in relation to the business of the Company and the Bank considered as one
enterprise; (ii) all of the leases and subleases material to the business of the
Company and the Bank under which the Company and the Bank hold properties, as
described in the Registration Statement and Prospectus, ar in full force and
effect; (iii) the Bank is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which its ownership of
property or leasing of property or the conduct of its business requires such
qualification, unless the failure to be so qualified in one or more of such
jurisdictions would not have a material adverse effect on the condition,
financial or otherwise, or the business, operations or income of the Bank; (iv)
Advance Service's articles of incorporation and bylaws comply in all material
respects with [West Virginia Law]; (v) the information regarding the Oregon tax
opinion under the caption "The Conversion - Tax Effects" has been reviewed by
such counsel and constitutes a correct summary of the opinion rendered by
_____________________ to the Company and the Bank with respect to such matters;
(vi) Advance Service has been duly incorporated and is validly existing as a
corporation under the laws of the State of West Virginia and has corporate power
and authority to own, lease and operate its properties and conduct its business
as described in the Registration Statement and the Prospectus; (vii) subject to
the satisfaction of the conditions to the OTS approval of the Conversion, no
further approval, registration, authorization, consent or other order of or
notice to any West Virginia regulatory agency is required in connection with the
execution and delivery of this Agreement, the issuance of the Shares and the
consummation of the Conversion, except as may be required under the securities
or blue sky laws of various jurisdictions (as to which no opinion need be
rendered) and except as may be required under the rules and regulations of the
NASD and/or the Nasdaq SmallCap Market (as to which no opinion need be
rendered); (viii) to such counsel's Actual Knowledge, the Company, the Bank and
Advance Service have obtained all material West Virginia licenses, permits and
other governmental authorizations currently required for the conduct of their
businesses and to such counsel's Actual Knowledge all such licenses, permits and
other governmental authorizations are in full force and effect, and the Company,
the Bank and Advance Service are in all material respects complying therewith,
except whether the failure to have such licenses, permits and other governmental
authorizations or the failure to be in compliance therewith would not have a
material adverse affect on the business or operations of the Bank, the Company
and Advance Service, taken as a whole; and (ix) to such counsel's Actual
Knowledge, Advance Service is not in violation of its articles of incorporation
or bylaws, or, to such counsel's Actual Knowledge, in default or violation of
any obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
to which it is a party or by which it or its property may be bound except for
such defaults or violations which would not have a material adverse impact on
the financial condition or results of operations of the Company, the Bank and
Advance Service on a consolidated basis.
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<PAGE>
(3) The favorable opinion, dated as of the Closing Date, of
Elias, Matz, Tiernan & Herrick L.L.P. Webb' counsel, with respect to such
matters as Webb may reasonably require. Such opinion may rely upon the opinions
of counsel to the Company and the Bank, and as to matters of fact, upon
certificates of officers and directors of the Company and the Bank delivered
pursuant hereto or as such counsel shall reasonably request.
(d) At the Closing Date, Webb shall receive a certificate of the Chief
Executive Officer and the Chief Financial Officer of the Company and a
certificate of the Chief Executive Officer and the Chief Financial Officer of
the Bank, both dated as of such Closing Date, to the effect that: (i) they have
reviewed the Prospectus and, in their opinion, at the time the Prospectus became
authorized for final use, the Prospectus did not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; (ii) since the date the Prospectus became authorized for final
use, no material adverse change in the condition, financial or otherwise, or in
the earnings, capital, properties or business of the Company, the Bank and
Advance Service has occurred and, to their knowledge, no other event has
occurred, which should have been set forth in an amendment or supplement to the
Prospectus which has not been so set forth, and the conditions set forth in this
Section 7 have been satisfied; (iii) since the respective dates as of which
information is given in the Registration Statement and Prospectus, there has
been no material adverse change in the condition, financial or otherwise, or in
the earnings, capital or properties of the Company, the Bank or Advance Service,
independently, or of the Company, the Bank and Advance Service considered as one
enterprise, whether or not arising in the ordinary course of business; (iv) the
representations and warranties in Section 4 are true and correct with the same
force and effect a though expressly made at and as of the Closing Date; (v) the
Company and the Bank have complied in all material respects with all agreements
and satisfied all conditions on their part to be performed or satisfied at or
prior to the Closing Date and will comply in all material respects with all
obligations to be satisfied by them after Conversion; (vi) no stop order
suspending the effectiveness of the Registration Statement has been initiated
or, to the best knowledge of the Company or the Bank, threatened by the
Commission or any state authority; (vii) no order suspending the Offering, the
Conversion, the acquisition of all of the shares of the Bank by the Company or
the effectiveness of the Prospectus has been issued and no proceedings for that
purpose are pending or, to the best knowledge of the Company or the Bank,
threatened by the OTS, the Commission or any state authority; and (viii) to the
best knowledge of the Company or the Bank, no person has sought to obtain review
of the final action of the OTS approving the Plan.
(e) Prior to and at the Closing Date: (i) in the reasonable
opinion of Webb, there shall have been no material adverse change in the
condition, financial or otherwise, or in the earnings or business of the Bank
independently, or of the Company, the Bank and Advance Service considered as one
enterprise, from that as of the latest dates as of which such condition is set
forth in the Prospectus other than transactions referred to or
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contemplated therein; (iii) the Company or the Bank shall not have received from
the OTS any direction (oral or written) to make any material change in the
method of conducting their business with which it has not complied (which
direction, if any, shall have been disclosed to Webb) or which materially and
adversely would affect the business, operations or financial condition or income
of the Company and the Bank considered as one enterprise; (iv) the Company, the
Bank and Advance Service shall not have been in material default (nor shall an
event have occurred which, with notice or lapse of time or both, would
constitute a default) under any material provision of any agreement or
instrument relating to any outstanding indebtedness; (v) no action, suit or
proceedings, at law or in equity or before or by any federal or state
commission, board or other administrative agency, shall be pending or, to the
knowledge of the Company, the Bank or Advance Service, threatened against the
Company, the Bank or Advance Service or affecting any of their properties
wherein an unfavorable decision, ruling or finding would materially and
adversely affect the business operations, financially condition or income of the
Company, the Bank and Advance Service considered as one enterprise; and (vi) the
Shares have been qualified or registered for offering and sale or exempted
therefore under the securities or blue sky laws of the jurisdictions as Webb
shall have requested and as agreed to by the Company and the Bank.
(f) Concurrently with the execution of this Agreement, Webb shall
receive a letter from S.R. Snodgrass, A.C. dated as of the date of the
Prospectus and addressed to Webb: (i) confirming that S.R. Snodgrass, A.C. is a
firm of independent public accountants within the meaning of Rule 101 of the
Code of Professional Ethics of the American Institute of Certified Public
Accountants and applicable regulations of the OTS and stating in effect that in
S.R. Snodgrass, A.C.'s opinion the financial statements of the Bank as of June
30, 1995 and 1996 and for each of the three years in the period ended June 30,
1996, as are included in the Prospectus and covered by its opinion included
therein, comply as to form in all material respects with the applicable
accounting requirements and related published rules and regulations of the OTS
and the 1933 Act; (ii) a statement from S.R. Snodgrass, A.C. in effect that, on
the basis of certain agreed upon procedures (but not an audit in accordance with
generally accepted auditing standards) consisting of a reading of the latest
available unaudited interim consolidated financial statements of the Bank
prepared by the Bank, a reading of the minutes of the meetings of the Board of
Directors and members of the Bank and consultations with officers of the Bank
responsible for financial and accounting matters, nothing came to their
attention which caused them to believe that: (A) the unaudited financial
statements included in the Prospectus, are not in conformity with the 1933 Act,
applicable accounting requirements of the OTS and generally accepted accounting
principles applied on a basis substantially consistent with that of the audited
financial statements included in the Prospectus; or (B) during the period from
the date of the latest unaudited consolidated financial statements included in
the Prospectus to a specified date not more than three business days prior to
the date of the Prospectus, except as has been described in the Prospectus,
there was any material increase in borrowings, other than normal deposit
fluctuations, by the Bank; or (C) there was any decrease in consolidated net
assets of the Bank at the date of such letter as compared with amounts shown in
the latest unaudited consolidated statement of condition included in the
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Prospectus; and (iii) a statement from S.R. Snodgrass, A.C. that, in addition to
the audit referred to in their opinion included in the Prospectus and the
performance of the procedures referred to in clause (ii) of this subsection (f),
they have compared with the general accounting records of the Bank, which are
subject to the internal controls of the Bank, the accounting system and other
data prepared by the Bank, directly from such accounting records, to the extent
specified in such letter, such amounts and/or percentages set forth in the
Prospectus as Webb may reasonably request; and they have reported on the results
of such comparisons.
(g) At the Closing Date, Webb shall receive a letter from S.R.
Snodgrass, A.C. dated the Closing Date, addressed to Webb, confirming the
statements made by them in the letter delivered by it pursuant to subsection (f)
of this Section 7, the "specified date" referred to in clause (ii) of subsection
(f) thereof to be a date specified in such letter, which shall not be more than
three business days prior to the Closing Date.
(h) At the Closing Date, Webb shall receive a letter from Keller
& Company, Inc., dated the date thereof and addressed to counsel for Webb, (i)
confirming that said firm is independent of the Company and the Bank and is
experienced and expert in the area of corporate appraisals within the meaning of
Title 12 of the Code of Federal Regulations, Part 563b, (ii) stating in effect
that the Appraisal prepared by such firm complies in all material respects with
the applicable requirements of Title 12 of the Code of Federal Regulations, and
(iii) further stating that its opinion of the aggregate pro forma market value
of the Company and the Bank expressed in its Appraisal dated as of September 6,
1996, and most recently updated, remains in effect.
(i) The Company and the Bank shall not have sustained since the
date of the latest audited financial statements included in the Prospectus any
material loss or interference with their businesses from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Registration Statement and Prospectus.
(j) At or prior to the Closing Date, Webb shall receive: (i) a
copy of the letter from the OTS approving the Conversion Application and
authorizing the use of the Prospectus; (ii) a copy of the order from the
Commission declaring the Registration Statement effective; (iii) a certificate
from the OTS evidencing the existence of the Bank; (iv) certificates of good
standing from the State of Delaware evidencing the good standing of the Company;
(v) a certificate of good standing from the State of West Virginia evidencing
the good standing of Advance Service; (vi) a certificate from the FDIC
evidencing the Bank's insurance of accounts; and (vii) a certificate of the
FHLB-Pittsburgh evidencing the Bank's membership thereof; (viii) a copy of the
letter from the OTS approving the Company's Holding Company Application.
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<PAGE>
(k) As soon as available after the Closing Date, Webb shall
receive, upon request, a copy of the Bank's Federal stock charter.
(l) Subsequent to the date hereof, there shall not have occurred
any of the following: (i) a suspension or limitation in trading in securities
generally on the New York Stock Exchange or in the over-the-counter market, or
quotations halted generally on the Nasdaq SmallCap Market, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices for securities
have been required by either of such exchanges or the NASD or by order of the
Commission or any other governmental authority; (ii) a general moratorium on the
operations of commercial banks or federal savings associations or a general
moratorium on the withdrawal of deposits from commercial banks or federal
savings associations declared by federal or state authorities; (iii) the
engagement by the United States in hostilities which have resulted in the
declaration, on or after the date hereof, of a national emergency or war; or
(iv) a material decline in the price of equity or debt securities if the effect
of such a declaration or decline, in Webb's reasonable judgment, makes it
impracticable or inadvisable to proceed with the Offering or the delivery of the
shares on the terms and in the manner contemplated in the Registration Statement
and Prospectus.
Section 8. Indemnification.
(a) The Company and the Bank jointly and severally agree to indemnify
and hold harmless Webb, its officers, directors, agents, servants and employees
and each person, if any, who controls Webb within the meaning of Section 15 of
the 1933 Act or Section 20(a) of the 1934 Act, against any and all loss,
liability, claim, damage or expense whatsoever (including but not limited to
settlement expenses), joint or several, that Webb or any of them may suffer or
to which Webb and any such persons may become subject under all applicable
federal or state laws or otherwise, and to promptly reimburse Webb and any such
persons upon written demand for any expense (including fees and disbursements of
counsel) incurred by Webb or any of them in connection with investigating,
preparing or defending any actions, proceedings or claims (whether commenced or
threatened) to the extent such losses, claims, damages, liabilities or actions:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment or supplement thereto), preliminary or final Prospectus (or any
amendment or supplement thereto), the Conversion Application (or any amendment
or supplement thereto), the Holding Company Application or any blue sky
application or other instrument or document executed by the Company or the Bank
or based upon written information supplied by the Company or the Bank filed in
any state or jurisdiction to register or qualify any or all of the Shares or to
claim an exemption therefrom, or provided to any state or jurisdiction to exempt
the Company as a broker-dealer or its officers, directors and employees as
broker-dealers or agents, under the securities laws thereof (collectively, the
"Blue Sky Application"), or any application or other document, advertisement,
oral statement or communication ("Sales Information") prepared, made or executed
by or on behalf of the Company or the Bank with their consent or based upon
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<PAGE>
written or oral information furnished by or on behalf of the Company or the
Bank, whether or not filed in any jurisdiction, in order to qualify or register
the Shares or to claim an exemption therefrom under the securities laws thereof;
(ii) arise out of or based upon the omission or alleged omission to state in any
of the foregoing documents or information, a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; or (iii) arise from
any theory of liability whatsoever relating to or arising from or based upon the
Registration Statement (or any amendment or supplement thereto), preliminary or
final Prospectus (or any amendment or supplement thereto), the Conversion
Application (or any amendment or supplement thereto), any Blue Sky Application
or Sales Information or other documentation distributed in connection with the
Conversion; provided, however, that no indemnification is required under this
paragraph (a) to the extent such losses, claims, damages, liabilities or actions
arise out of or are based upon any untrue material statement or alleged untrue
material statements in, or material omission or alleged material omission from,
the Registration Statement (or any amendment or supplement thereto), preliminary
or final Prospectus (or any amendment or supplement thereto), the Conversion
Application, any Blue Sky Application or Sales Information made in reliance upon
and in conformity with information furnished in writing to the Company or the
Bank by Webb regarding Webb or statistical information regarding national
averages provided by Webb for the Sales Information and provided further that
such indemnification shall be to the extent permitted by the OTS.
(b) Webb agrees to indemnify and hold harmless the Company and the Bank,
their directors and officers and each person, if any, who controls the Company
or the Bank within the meaning of Section 15 of the 1933 Act or Section 20(a) of
the 1934 Act against any and all loss, liability, claim, damage or expense
whatsoever (including but not limited to settlement expenses), joint or several,
which it, or any of them, may suffer or to which it, or any of them may become
subject under all applicable federal and state laws or otherwise, and to
promptly reimburse the Company, the Bank, and any such persons upon written
demand for any expenses (including reasonable fees and disbursements of counsel)
incurred by it, or any of them, in connection with investigating, preparing or
defending any actions, proceedings or claims (whether commenced or threatened)
to the extent such losses, claims, damages, liabilities or actions arise out of
or are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or any amendment or supplement
thereto), the Conversion Application (or any amendment or supplement thereto) or
the preliminary or final Prospectus (or any amendment or supplement thereto), or
are based upon the omission or alleged omission to state in any of the foregoing
documents a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that Webb's obligations under this
Section 8(b) shall exist only if and only to the extent (i) that such untrue
statement or alleged untrue statement was made in, or such material fact or
alleged material fact was omitted from, the Registration Statement (or any
amendment or supplement thereto), the preliminary or final Prospectus (or any
amendment or supplement thereto) or the Conversion Application (or any
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amendment or supplement thereto), any Blue Sky Application or Sales Information
in reliance upon and in conformity with information furnished in writing to the
Company or the Bank by Webb regarding Webb or statistical information regarding
national averages provided by Webb for the Sales Information.
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced or
threatened), or suit instituted against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may have on account of this Section 8 or
otherwise. An indemnifying party may participate at its own expense in the
defense of such action. In addition, if it so elects within a reasonable time
after receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assumed defense of such action
with counsel chosen by it and approved by the indemnified parties that are
defendants in such action, unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
that are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action,
proceeding or claim, other than reasonable costs of investigation. In no event
shall the indemnifying parties be liable for the fees and expenses of more than
one separate firm of attorneys (and any special counsel that said firm may
retain) for each indemnified party in connection with any one action, proceeding
or claim or separate but similar or related actions, proceeding or claim or
separate but similar or related actions, proceedings or claims in the same
jurisdiction arising out of the same general allegations or circumstances.
(d) The agreements contained in this Section 8 and in Section 9 hereof
and the representations and warranties of the Company and the Bank set forth in
this Agreement shall remain operative and in full force and effect regardless
of: (i) any investigation made by or on behalf of Webb or its officers,
directors or controlling persons, agents or employees or by or on behalf of the
Company or the Bank or any officers, directors or controlling persons, agents or
employees of the Company or the Bank; (ii) delivery of and payment hereunder for
the Shares; or (iii) any termination of this Agreement.
Section 9. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company, the Bank or Webb, the Company, the
Bank and Webb shall contribute to the aggregate losses, claims, damages and
liabilities (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding of any claims asserted, but after deducting any contribution received
by the Company, the Bank or Webb from persons other than the other party
thereto, who may also be liable for contribution) in such proportion so that
Webb are responsible for that portion represented by the percentage that the
fees paid to Webb pursuant to Section 2 of this
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Agreement (not including expenses) bears to the gross proceeds received by the
Company from the sale of the Shares in the Offering and the Company and the Bank
shall be responsible for the balance. If, however, the allocation provided above
is not permitted by applicable law or if the indemnified party failed to give
the notice required under Section 8 above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative fault of the
Company and the Bank on the one hand and Webb and/or FBR on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions, proceedings or claims in respect
thereto), but also the relative benefits received by the Company and the Bank on
the one hand and Webb on the other from the Offering (before deducting
expenses). The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company and/or the Bank on the one hand or Webb on the other and
the parties' relative intent, good faith, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, the
Bank and Webb agree that it would not be just and equitable if contribution
pursuant to this Section 9 were determined by pro-rata allocation or by any
other method of allocation which does not take into account the equitable
considerations referred to above in this Section 9. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions, proceedings or claims in respect thereof) referred to
above in this Section 9 shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action, proceeding or claim. It is expressly agreed that
Webb shall not be required to contribute any amount which in the aggregate
exceeds the amount paid (excluding reimbursable expenses) to Webb under this
Agreement. It is understood that the above stated limitation on Webb's liability
for contribution is essential to Webb and that Webb would not have entered into
this Agreement if such limitation had not been agreed to by the parties to this
Agreement. No person found guilty of any fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not found guilty of such fraudulent misrepresentation.
The obligations of the Company and the Bank under this Section 9 and under
Section 8 shall be in addition to any liability which the Company and the Bank
may otherwise have. For purposes of this Section 9, each of Webb's, the
Company's or the Bank's officers and directors and each person, if any, who
controls Webb or the Company or the Bank within the meaning of the 1933 Act and
the 1934 Act shall have the same rights to contribution as Webb, the Company or
the Bank. Any party entitled to contribution, promptly after receipt of notice
of commencement of any action, suit, claim or proceeding against such party in
respect of which a claim for contribution may be made against another party
under this Section 9, will notify such party from whom contribution may be
sought, but the omission to so notify such party shall not relieve the party
from whom contribution may be sought from any other obligation it may have
hereunder or otherwise than under this Section 9.
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Section 10. Survival of Agreements, Representations and Indemnities. The
respective indemnities of the Company, the Bank and Webb and the representations
and warranties and other statements of the Company and the Bank set forth in or
made pursuant to this Agreement shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Webb, the Company, the Bank or any
controlling person referred to in Section 8 hereof, and shall survive the
issuance of the Shares, and any legal representative, successor or assign of
Webb, the Company, the Bank, and any such controlling person shall be entitled
to the benefit of the respective agreements, indemnities, warranties and
representations.
Section 11. Termination. Webb may terminate its obligations under this
Agreement by giving the notice indicated below in this Section 11 at any time
after this Agreement becomes effective as follows:
(a) In the event the Company fails to sell all of the Shares by
June 30, 1997, and in accordance with the provisions of the Plan or as
required by the Conversion Regulations, and applicable law, this
Agreement shall terminate upon refund by the Bank to each person who has
subscribed for or ordered any of the Shares the full amount which it may
have received from such person, together with interest as provided in
the Prospectus, and no party to this Agreement shall have any obligation
to the other hereunder, except for payment by the Company and/or the
Bank as set forth in Sections 2(a) and (d), 6, 8 and 9 hereof.
(b) If any of the conditions specified in Section 7 shall not
have been fulfilled when and as required by this Agreement unless waived
in writing, or by the Closing Date, this Agreement and all of Webb's
obligations hereunder may be cancelled by Webb by notifying the Company
and the Bank of such cancellation in writing at any time at or prior to
the Closing Date, and any such cancellation shall be without liability
of any party to any other party except as otherwise provided in Sections
2, 6, 8 and 9 hereof.
(c) If Webb elects to terminate this Agreement with respect to it
as provided in this Section, the Company and the Bank shall be notified
promptly by such Agent by telephone or telegram, confirmed by letter.
The Company and the Bank may terminate this Agreement with respect to
Webb in the event Webb is in material breach of the representations and
warranties or covenants contained in Section 5 and such breach has not been
cured after the Company and the Bank have provided Webb with notice of such
breach.
This Agreement may also be terminated by mutual written consent of the
parties hereto.
-33-
<PAGE>
Section 12. Notices. All communications hereunder, except as herein
otherwise specifically provided, shall be mailed in writing and if sent to Webb
shall be mailed, delivered or telegraphed and confirmed to Charles Webb &
Company, 211 Bradenton, Dublin, Ohio 43017-5034, Attention: Patricia A. McJoynt
(with a copy to Elias, Matz, Tiernan & Herrick L.L.P., Attention: John P.
Soukenik) and, if sent to the Company and the Bank, shall be mailed, delivered
or telegraphed and confirmed to the Company and the Bank at Advance Financial
Bancorp, 1015 Commerce Street, Wellsburg, West Virginia 26070, Attention:
Stephen M. Gagliardi, President (with a copy to Malizia, Spidi, Sloane & Fisch,
P.C., 1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005, Attention:
Samuel J. Malizia, Esq.).
Section 13. Parties. The Company and the Bank shall be entitled to act
and rely on any request, notice, consent, waiver or agreement purportedly given
on behalf of Webb when the same shall have been given by the undersigned. Webb
shall be entitled to act and rely on any request, notice, consent, waiver or
agreement purportedly given on behalf of the Company or the Bank, when the same
shall have been given by the undersigned or any other officer of the Company or
the Bank. This Agreement shall inure solely to the benefit of, and shall be
binding upon, Webb, the Company, the Bank, and their respective successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained. It
is understood and agreed that this Agreement, including Exhibit A thereto, is
the exclusive agreement among the parties hereto, and supersedes any prior
agreement among the parties and may not be varied except in writing signed by
all the parties.
Section 14. Closing. The closing for the sale of the Shares shall take
place on the Closing Date at such location as mutually agreed upon by Webb and
the Company and the Bank. At the closing, the Company and the Bank shall deliver
to Webb in next day funds the commissions, fees and expenses due and owing to
Webb as set forth in Sections 2 and 6 hereof and the opinions and certificates
required hereby and other documents deemed reasonably necessary by Webb shall be
executed and delivered to effect the sale of the Shares as contemplated hereby
and pursuant to the terms of the Prospectus.
Section 15. Partial Invalidity. In the event that any term, provision or
covenant herein or the application thereof to any circumstance or situation
shall be invalid or unenforceable, in whole or in part, the remainder hereof and
the application of said term, provision or covenant to any other circumstances
or situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
Section 16. Construction. This Agreement shall be construed in
accordance with the laws of the State of Ohio.
-34-
<PAGE>
Section 17. Counterparts. This Agreement may be executed in separate
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute but one and the same instrument.
If the foregoing correctly sets forth the arrangement among the Company,
the Bank and Webb, please indicate acceptance thereof in the space provided
below for that purpose, whereupon this letter and Webb's acceptance shall
constitute a binding agreement.
Very truly yours,
ADVANCE FINANCIAL BANCORP ADVANCE SAVINGS BANK, F.S.B.
By: By:
------------------------------ ------------------------------
Stephen M. Gagliardi Stephen M. Gagliardi
President and Chief President and Chief
Executive Officer Executive Officer
Accepted as of the date first above written
CHARLES WEBB & COMPANY
By:
------------------------------
Patricia A. McJoynt
Executive Vice President
-35-
EXHIBIT.2
<PAGE>
EXHIBIT A
PLAN OF CONVERSION
FOR
ADVANCE FINANCIAL SAVINGS BANK, F.S.B.
WELLSBURG, WEST VIRGINIA
1. INTRODUCTION
This Plan of Conversion ("Plan") provides for the conversion of Advance
Financial Savings Bank, F.S.B. ("INSTITUTION") into a federal capital stock
savings institution, to be known as "Advance Financial Savings Bank." The Board
of Directors of the INSTITUTION currently contemplates that all of the stock of
the INSTITUTION shall be held by another corporation (the "Holding Company").
The purpose of this conversion is to enable the INSTITUTION to be in the stock
form of organization, like commercial banks and most other corporations. The
conversion will result in an increase in the INSTITUTION's capital available to
support growth and for expansion of its facilities, possible diversification
into other related financial services activities and further enhance the
INSTITUTION's ability to render services to the public and compete with other
financial institutions. The use of the Holding Company would also provide
greater organizational flexibility. Shares of capital stock of the INSTITUTION
will be sold to the Holding Company and the Holding Company will offer the
Conversion Stock upon the terms and conditions set forth herein to Eligible
Account Holders, the tax-qualified employee stock benefit plans (the "Employee
Plans") established by the INSTITUTION or the Holding Company, which may be
funded by the Holding Company, Supplemental Eligible Account Holders, and Other
Members in the respective priorities set forth in this Plan. Any shares of
Conversion Stock not subscribed for by the foregoing classes of persons may be
offered for sale to certain members of the public either directly by the
INSTITUTION and the Holding Company through a Community Offering or through a
Public Offering or Syndicated Public Offering. In the event that the INSTITUTION
decides not to utilize the Holding Company in the conversion, Conversion Stock
of the INSTITUTION, in lieu of the Holding Company, will be sold as set forth
above and in the respective priorities set forth in this Plan. In addition to
the foregoing, the INSTITUTION and the Holding Company intend to implement stock
option plans and other stock benefit plans at the time of or subsequent to the
conversion and may provide employment or severance agreements to certain
management employees and certain other benefits to the directors, officers and
employees of the INSTITUTION as described in the prospectus for the Conversion
Stock.
This Plan, which has been unanimously approved by the Board of Directors of
the INSTITUTION, must also be approved by the affirmative vote of a majority of
the total number of votes entitled to be cast by Voting Members of the
INSTITUTION at a special meeting to be called for that purpose. Prior to the
submission of this Plan to the Voting Members for consideration, the Plan must
be approved by the Office of Thrift Supervision (the "OTS").
Upon conversion, each Account Holder having a Savings Account at the
INSTITUTION prior to conversion will continue to have a Savings Account, without
payment therefor, in the same amount and subject to the same terms and
conditions (except for voting and liquidation rights) as in effect prior to the
conversion. After conversion, the INSTITUTION will succeed to all the rights,
interests, duties
A-1
<PAGE>
and obligations of the INSTITUTION before conversion, including but not limited
to all rights and interests of the INSTITUTION in and to its assets and
properties, whether real, personal or mixed. The INSTITUTION will continue to be
a member of the Federal Home Loan Bank System and all its insured savings
deposits will continue to be insured by the Federal Deposit Insurance
Corporation (the "FDIC") to the extent provided by applicable law.
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - The term Account Holder means any Person holding a Savings
--------------
Account in the INSTITUTION.
Acting in Concert - The Term "Acting in Concert" means (i) knowing
-----------------
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise; or
(iii) a person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also acting in concert with that other party, except that any
tax-qualified employee stock benefit plan will not be deemed to be acting in
concert with its trustee or a person who serves in a similar capacity solely for
the purpose of determining whether stock held by the trustee and stock held by
the plan will be aggregated.
Associate - The term Associate when used to indicate a relationship with
---------
any person, means (i) any corporation or organization (other than the
INSTITUTION or a majority-owned subsidiary of the INSTITUTION) of which such
person is an officer or partner or is, directly or indirectly, the beneficial
owner of 10 percent or more of any class of equity securities, (ii) any trust or
other estate in which such person has a substantial beneficial interest or as to
which such person serves as trustee or in a similar fiduciary capacity except
that for the purposes of Sections 8 and 14 hereof, the term "Associate" does not
include any Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified
Employee Stock Benefit Plan in which a person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity, and except
that, for purposes of aggregating total shares that may be held by Officers and
Directors the term "Associate" does not include any Tax-Qualified Employee Stock
Benefit Plan, and (iii) any relative or spouse of such person, or any relative
of such spouse, who has the same home as such person or who is a Director or
Officer of the INSTITUTION or the Holding Company, or any of its parents or
subsidiaries.
Community Offering - The term Community Offering means the offering for
------------------
sale to certain members of the general public directly by the Holding Company,
of shares not subscribed for in the Subscription Offering.
Conversion Stock - The term Conversion Stock means the $.10 par value
----------------
common stock offered and issued by the Holding Company upon conversion.
Director - The term Director means a member of the Board of Directors of
--------
the INSTITUTION and, where applicable, a member of the Board of Directors of the
Holding Company.
A-2
<PAGE>
Eligible Account Holder - The term Eligible Account Holder means any person
-----------------------
holding a Qualifying Deposit in a Savings Account at the INSTITUTION on the
Eligibility Record Date.
Eligibility Record Date - The term Eligibility Record Date means the date
-----------------------
for determining Eligible Account Holders in the INSTITUTION and is the close of
business on August 31, 1995.
Employees - The term Employees means all Persons who are employed by the
---------
INSTITUTION.
Employee Plans - The term Employee Plans means the Tax-Qualified Employee
--------------
Stock Benefit Plans, including the Employee Stock Ownership Plan, approved by
the Board of Directors of the INSTITUTION.
Estimated Valuation Range. The term Estimated Valuation Range means the
-------------------------
range of the estimated pro forma market value of the Conversion Stock as
determined by the Independent Appraiser prior to the Subscription Offering and
as it may be amended from time to time thereafter.
FDIC - The term FDIC means the Federal Deposit Insurance Corporation.
----
Holding Company - The term Holding Company means the corporation formed for
---------------
the purpose of acquiring all of the shares of capital stock of the INSTITUTION
to be issued upon its conversion to stock form unless the Holding Company form
of organization is not utilized. Shares of common stock of the Holding Company
will be issued in the Conversion to Participants and others in a Subscription,
Community, Public or Syndicated Public Offering, or through a combination
thereof.
Independent Appraiser - The term Independent Appraiser means an appraiser
---------------------
retained by the INSTITUTION to prepare an appraisal of the pro forma market
value of the Conversion Stock.
Institution - The term INSTITUTION means Advance Financial Savings Bank,
-----------
F.S.B., Wellsburg, West Virginia.
Local Community - The term local community means the incorporated cities
---------------
and counties in which the INSTITUTION has offices.
Member - The term Member means any Person or entity who qualifies as a
------
member of the INSTITUTION pursuant to its charter and bylaws.
OTS - The term OTS means Office of Thrift Supervision of the Department of
---
the Treasury.
Officer - The term Officer means an executive officer of the INSTITUTION
-------
and may include the Chairman of the Board, Chief Executive Officer, Vice
Presidents in charge of principal business functions, Secretary and Treasurer
and any individual performing functions similar to those performed by the
foregoing persons.
Order Form - The term Order Form means any form together with attached
----------
cover letter, sent by the INSTITUTION to any Person containing among other
things a description of the alternatives available to such Person under the Plan
and by which any such Person may make elections regarding subscriptions for
Conversion Stock in the Subscription and Community Offerings.
A-3
<PAGE>
Other Member - The term Other Member means any person, who is a Member of
------------
the INSTITUTION (other than Eligible Account Holders or Supplemental Eligible
Account Holders) at the close of business on the voting record date.
Participants - The term Participants means the Eligible Account Holders,
------------
Employee Plans, Supplemental Eligible Account Holders and Other Members.
Person - The term Person means an individual, a corporation, a partnership,
------
an association, a joint-stock company, a trust (including Individual Retirement
Accounts and KEOGH Accounts), any unincorporated organization, a government or
political subdivision thereof or any other entity.
Plan - The term Plan means this Plan of Conversion of the INSTITUTION as it
----
exists on the date hereof and as it may hereafter be amended in accordance with
its terms.
Public Offering - The term Public Offering means the offering for sale
---------------
through the Underwriter to the general public of any shares of Conversion Stock
not subscribed for in the Subscription Offering.
Purchase Order - The term Purchase Order means any form together with
--------------
attached cover letter, sent by the Underwriter to any Person containing among
other things a description of the alternatives available to such Person under
the Plan and by which any such Person may make elections regarding subscriptions
for Conversion Stock in the Public Offering.
Purchase Price - The term Purchase Price means the per share price at which
--------------
the Conversion Stock will be sold in accordance with the terms hereof.
Qualifying Deposit - The term Qualifying Deposit means the balance of each
------------------
Savings Account of $50 or more in the INSTITUTION at the close of business on
the Eligibility Record Date or Supplemental Eligibility Record Date. Savings
Accounts with total deposit balances of less than $50 shall not constitute a
Qualifying Deposit.
SEC - The term SEC refers to the Securities and Exchange Commission.
---
Savings Account - The term Savings Account includes savings accounts as
---------------
defined in Section 561.42 of the Rules and Regulations of the OTS and includes
certificates of deposit.
Special Meeting of Members - The term Special Meeting of Members means the
--------------------------
special meeting and any adjournments thereof held to consider and vote upon this
Plan.
Subscription Offering - The term Subscription Offering means the offering
---------------------
of Conversion Stock for purchase through Order Forms to Participants.
Supplemental Eligibility Record Date - The term Supplemental Eligibility
------------------------------------
Record Date means the close of business on the last day of the calendar quarter
preceding the approval of the Plan by the OTS.
Supplemental Eligible Account Holder - The term Supplemental Eligible
------------------------------------
Account Holder means a holder of a Qualifying Deposit in the INSTITUTION (other
than an officer or trustee or their Associates) at the close of business on the
Supplemental Eligibility Record Date.
A-4
<PAGE>
Tax-Qualified Employee Stock Benefit Plan - The term Tax-Qualified Employee
-----------------------------------------
Stock Benefit Plan means any defined benefit plan or defined contribution plan,
such as an employee stock ownership plan, stock bonus plan, profit-sharing plan
or other plan, which, with its related trust, meets the requirements to be
"qualified" under Section 401 of the Internal Revenue Code.
Syndicated Public Offering - The term Syndicated Public Offering means the
--------------------------
offering of Conversion Stock following the Subscription, Community (if
applicable) or Public Offerings through a syndicate of broker-dealers.
Underwriter - The term Underwriter means the investment banking firm or
-----------
firms through which the Conversion Stock will be offered and sold in the Public
Offering.
Voting Members - The term Voting Members means those Persons qualifying as
--------------
voting members of the INSTITUTION pursuant to its charter and bylaws.
Voting Record Date - The term Voting Record Date means the date fixed by
------------------
the Directors in accordance with OTS regulations for determining eligibility to
vote at the Special Meeting of Members.
3. PROCEDURE FOR CONVERSION
After approval of the Plan by the Board of Directors of the INSTITUTION,
the Plan shall be submitted together with all other requisite material to the
OTS for its approval. Notice of the adoption of the Plan by the Board of
Directors of the INSTITUTION will be published in a newspaper having general
circulation in each community in which an office of the INSTITUTION is located
and copies of the Plan will be made available at each office of the INSTITUTION
for inspection by the Members. Upon filing the application with the OTS, the
INSTITUTION also will cause to be published a notice of the filing with the OTS
of an application to convert in accordance with the provisions of the Plan.
Following approval by the OTS, the Plan will be submitted to a vote of the
Voting Members at a Special Meeting of Members called for that purpose. Upon
approval of the Plan by a majority of the total votes eligible to be cast by the
Voting Members, the INSTITUTION will take all other necessary steps pursuant to
applicable laws and regulations to convert the INSTITUTION to stock form. The
conversion must be completed within 24 months of the approval of the Plan by the
Voting Members, unless a longer time period is permitted by governing laws and
regulations.
The Board of Directors of the INSTITUTION intends to take all necessary
steps to form the Holding Company including the filing of an Application on Form
H-(e)1 or H-(e)1-S, if available to the Holding Company, with the OTS. Upon
conversion, the INSTITUTION will issue its capital stock to the Holding Company
and the Holding Company will issue and sell the Conversion Stock in accordance
with this Plan.
The Board of Directors of the INSTITUTION may determine for any reason at
any time prior to the issuance of the Conversion Stock not to utilize a holding
company form of organization in the Conversion, in which case, the Holding
Company's registration statement on Form S-1 or Form SB-2 will be withdrawn from
the SEC, the INSTITUTION will take all steps necessary to complete the
conversion from the mutual to the stock form of organization, including filing
any necessary documents with the OTS and will issue and sell the Conversion
Stock in accordance with this Plan. In such event, any subscriptions or orders
received for Conversion Stock of the Holding Company shall be deemed to be
subscriptions or orders for Conversion Stock of the INSTITUTION without any
further action by the
A-5
<PAGE>
INSTITUTION or the subscribers for the Conversion Stock. Any references to the
Holding Company in this Plan shall mean the INSTITUTION in the event the Holding
Company is eliminated in the Conversion.
The Conversion Stock will not be insured by the FDIC. The INSTITUTION will
not knowingly lend funds or otherwise extend credit to any Person to purchase
shares of the Conversion Stock.
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an Application on Form H-(e)1 or an H-(e)1-S, if
available to the Holding Company, to be filed with the OTS and a Registration
Statement on Form S-1 or Form SB-2 to be filed with the SEC. The INSTITUTION
shall be a wholly owned subsidiary of the Holding Company.
5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the Subscription
Offering to the Eligible Account Holders, Employee Plans, Supplemental Eligible
Account Holders and Other Members in the respective priorities set forth in
Sections 8 through 11 of this Plan. The Subscription Offering may be commenced
as early as the mailing of the Proxy Statement for the Special Meeting of
Members and must be commenced in time to complete the conversion within the time
period specified in Section 3.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering may be offered for sale in the Community Offering, if any, as provided
in Section 12 of this Plan or offered in a Public Offering or Syndicated Public
Offering, as provided in Section 13, if necessary and feasible. The
Subscription Offering may be commenced prior to the Special Meeting of Members
and, in that event, the Community Offering or Public Offering may also be
commenced prior to the Special Meeting of Members. The offer and sale of
Conversion Stock, prior to the Special Meeting of Members shall, however, be
conditioned upon approval of the Plan by the Voting Members.
Shares of Conversion Stock may be sold in a Syndicated Public Offering or
in a Public Offering, as provided in Section 13 of this Plan in a manner that
will achieve the widest distribution of the Conversion Stock as determined by
the INSTITUTION. In the event of a Syndicated Public Offering or Public
Offering, the sale of all Conversion Stock subscribed for in the Subscription
Offering will be consummated simultaneously on the date the sale of Conversion
Stock in the Syndicated Public Offering or Public Offering is consummated and
only if all unsubscribed for Conversion Stock is sold.
The INSTITUTION may elect to pay fees on either a fixed fee or commission
basis or combination thereof to an investment banking firm which assists it in
the sale of the Conversion Stock in the offerings.
The INSTITUTION may also elect to offer to pay fees on a per share basis to
brokers who assist Persons in determining to purchase shares in the Syndicated
Public Offering and whose broker's name appears on the Order Form of the Person.
A-6
<PAGE>
6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock to be
issued and offered for sale will be determined by the Boards of Directors of the
INSTITUTION and the Holding Company, immediately prior to the commencement of
the Offerings, subject to adjustment thereafter if necessitated by a change in
the appraisal due to changes in market or financial conditions, with the
approval of the OTS, if necessary.
All shares sold in the Conversion will be sold at a uniform price per share
referred to in this Plan as the Purchase Price. The aggregate Purchase Price for
all shares of Conversion Stock will not be inconsistent with the estimated
consolidated pro forma market value of the INSTITUTION. The estimated
consolidated pro forma market value of the INSTITUTION will be determined for
such purpose by the Independent Appraiser. Prior to the commencement of the
Subscription and Community Offerings, an Estimated Valuation Range will be
established, which range will vary within 15% above to 15% below the midpoint of
such range. The number of shares of Conversion Stock to be issued and/or the
Purchase Price may be increased or decreased by the INSTITUTION. In the event
that the aggregate Purchase Price of the Conversion Stock is below the minimum
of the Estimated Valuation Range, or materially above the maximum of the
Estimated Valuation Range, resolicitation of purchasers may be required,
provided that up to a 15% increase above the maximum of the Estimated Valuation
Range will not be deemed material so as to require a resolicitation. Any such
resolicitation shall be effected in such manner and within such time as the
INSTITUTION shall establish, with the approval of the OTS, if required. Up to a
15% increase in the number of shares to be issued which is supported by an
appropriate change in the estimated pro forma market value of the INSTITUTION or
in order to fill the order by the Employee Plans will not be deemed to be
material so as to require a resolicitation of subscriptions.
Based upon the independent valuation, as updated prior to the consummation
of the Subscription and Community Offerings, the Boards of Directors of the
INSTITUTION and the Holding Company will fix the Purchase Price.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the INSTITUTION and Holding Company and to the OTS that, to the best
knowledge of the Independent Appraiser, nothing of a material nature has
occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Conversion
Stock sold at the Purchase Price is incompatible with its estimate of the
aggregate consolidated pro forma market value of the INSTITUTION. If such
confirmation is not received, the INSTITUTION may cancel the Subscription
Offering, Community Offering and/or the Public Offering and Syndicated Public
Offering, reopen or hold new Offerings to take such other action as the OTS may
permit.
The Conversion Stock to be issued in the Conversion shall be fully paid and
nonassessable.
7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE INSTITUTION
Upon the consummation of the sale of all of the Conversion Stock, the
Holding Company will purchase from the INSTITUTION all of the capital stock of
the INSTITUTION to be issued by the INSTITUTION in the conversion in exchange
for the Conversion proceeds that are not permitted to be retained by the Holding
Company.
A-7
<PAGE>
The Holding Company will apply to the OTS to retain up to 50% of the
proceeds of the Conversion. Assuming the Holding Company is not eliminated, a
lesser percentage may be acceptable.
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, without payment,
nontransferable subscription rights to subscribe for shares of Conversion Stock
equal to the greater of: (i) the maximum established for the Community Offering;
(ii) one-tenth of one percent of the Conversion Stock offered; or (iii) 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock offered by a fraction of which the
numerator is the amount of the Qualifying Deposit of such Eligible Account
Holder and the denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders but in no event greater than the maximum purchase
limitation specified in Section 14 hereof. All such purchases are subject to the
maximum and minimum purchase limitations specified in Section 14 and are
exclusive of an increase in the total number of shares issued due to an increase
in the maximum of the Estimated Valuation Range of up to 15%.
B. 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. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
C. Subscription rights as Eligible Account Holders received by Directors
and Officers and their Associates which are based on deposits made by such
persons during the twelve (12) months preceding the Eligibility Record Date
shall be subordinated to the Subscription Rights of all other Eligible Account
Holders.
9. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY)
Subject to the availability of sufficient shares after filling subscription
orders of Eligible Account Holders under Section 8, the Employee Plans shall
receive without payment nontransferable subscription rights to purchase in the
Subscription Offering the number of shares of Conversion Stock requested by such
Plans, subject to the purchase limitations set forth in Section 14.
The Employee Plans shall not be deemed to be associates or affiliates of or
Persons Acting in Concert with any Director or Officer of the Holding Company or
the INSTITUTION.
A-8
<PAGE>
10. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD PRIORITY)
A. In the event that the Eligibility Record Date is more than 15 months
prior to the date of the latest amendment to the Application filed prior to OTS
approval, then, and only in that event, each Supplemental Eligible Account
Holder shall receive, without payment, nontransferable subscription rights
entitling such Supplemental Eligible Account Holder to purchase that number of
shares of Conversion Stock which is equal to the greater of: (i) the maximum
purchase limitation established for the Community Offering; (ii) one-tenth of 1%
of the Conversion Stock Offered; and (iii) or 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of shares of
Conversion 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 the Qualifying Deposits of all Supplemental
Eligible Account Holders. All such purchases are subject to the maximum and
minimum purchase limitations in Section 14 and are exclusive of an increase in
the total number of shares issued due to an increase in the maximum of the
Estimated Valuation Range of up to 15%.
B. Subscription rights received pursuant to this Category shall be
subordinated to the subscription rights received by Eligible Account Holders and
by the Employee Plans.
C. Any subscription rights to purchase shares of Conversion Stock
received by an Eligible Account Holder in accordance with Section 8 shall reduce
to the extent thereof the subscription rights to be distributed pursuant to this
Section.
D. In the event of an oversubscription for shares of Conversion Stock
pursuant to this Section, shares of Conversion Stock shall be allocated among
the subscribing Supplemental Eligible Account Holders as follows:
(1) Shares of Conversion Stock shall be allocated so as to
permit each such Supplemental Eligible Account Holder, to the
extent possible, to purchase a number of shares of Conversion
Stock sufficient to make his total allocation (including the
number of shares of Conversion Stock, if any, allocated in
accordance with Section 8) equal to 100 shares of Conversion
Stock or the total amount of his subscription, whichever is less.
(2) Any shares of Conversion Stock not allocated in
accordance with subparagraph (1) above shall be allocated among
the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective
Qualifying Deposits as compared to the total Qualifying Deposits
of all subscribing Supplemental Eligible Account Holders.
11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, nontransferable
subscription rights to subscribe for shares of Conversion Stock in an amount
equal to the greater of the maximum purchase limitation established for the
Community Offering or one-tenth of one percent of the Conversion Stock offered,
subject to the maximum and minimum purchase limitations specified in Section 14
and exclusive of an increase in the total number of shares issued due to an
increase in the maximum of the Estimated Valuation Range of up to 15%, which
will be allocated only after first allocating to Eligible Account
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Holders, the Employee Plans and Supplemental Eligible Account Holders all shares
of Conversion Stock subscribed for pursuant to Sections 8, 9 and 10 above.
B. In the event that such Other Members subscribe 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 Employee Plans and the
Supplemental Eligible Account Holders is in excess of the total number of shares
of Conversion Stock 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 total allocation of Conversion Stock equal to the lesser
of 100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining will be allocated among the subscribing Other Members whose
subscriptions remain unsatisfied on a 100 shares (or whatever lesser amount is
available) per order basis until all orders have been filled or the remaining
shares have been allocated.
12. COMMUNITY OFFERING
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, shares
remaining unsubscribed may be made available for purchase in the Community
Offering to certain members of the general public, which may subscribe together
with any Associate or group of persons Acting in Concert for up to that number
of shares of Conversion Stock as shall equal $100,000 divided by the Purchase
Price, subject to the maximum and minimum purchase limitations specified in
Section 14 and exclusive of an increase in the total number of shares issued due
to an increase in the maximum of the Estimated Valuation Range of up to 15%. The
shares may be made available in the Community Offering through a direct
community marketing program which may provide for utilization of a broker,
dealer, consultant or investment banking firm, experienced and expert in the
sale of savings institution securities. In the Community Offering, if any,
shares will be available for purchase by the general public with preference
given first to natural persons residing in the Local Community and second, to
natural persons residing in the State of West Virginia. Subject to these
preferences, the INSTITUTION shall make distribution of the Conversion Stock to
be sold in the Community Offering in such a manner as to promote the widest
distribution of Conversion Stock.
If the Community Purchasers in the Community Offering, whose orders would
otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among persons
submitting orders in the Community Offering in an equitable manner as determined
by the Board of Directors. The INSTITUTION may establish all terms and
conditions of such offer.
The Community Offering, if any, may commence simultaneously with, during or
subsequent to the completion of the Subscription Offering and if commenced
simultaneously with or during the Subscription Offering the Community Offering
may be limited to Community Purchases. The Community Offering must be completed
within 45 days after the completion of the Subscription Offering unless
otherwise extended by the OTS.
The INSTITUTION and the Holding Company, in their absolute discretion,
reserve the right to reject any or all orders in whole or in part which are
received in the Community Offering, at the time of receipt or as soon as
practicable following the completion of the Community Offering.
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13. PUBLIC OFFERING AND SYNDICATED PUBLIC OFFERING
Any shares of Conversion Stock not sold in the Subscription Offering or in
the Community Offering, if any, may then be sold through the Underwriter to the
general public at the Purchase Price in the Public Offering, subject to such
terms, conditions and procedures as may be determined by the Boards of Directors
of the INSTITUTION and the Holding Company, in a manner that will achieve the
widest distribution of the Conversion Stock and subject to the right of the
INSTITUTION and the Holding Company, in their absolute discretion, to accept or
reject in whole or in part all subscriptions in the Public Offering. In the
Public Offering, if any, any person together with any Associate or group of
persons Acting in Concert may purchase up to the maximum purchase limitation
established for the Community Offering, subject to the maximum and minimum
purchase limitations specified in Section 14 and exclusive of an increase in the
total number of shares issued due to an increase in the maximum of the Estimated
Valuation Range of up to 15%. Shares purchased by any Person together with any
Associate or group of persons Acting in Concert pursuant to Section 12 shall be
counted toward meeting the maximum purchase limitation specified for this
Section. Provided that the Subscription Offering has commenced, the INSTITUTION
may commence the Public Offering at any time after the mailing to the Members of
the Proxy Statement to be used in connection with the Special Meeting of
Members, provided that the completion of the offer and sale of the Conversion
Stock shall be conditioned upon the approval of this Plan by the Voting Members.
It is expected that the Public Offering, if any, will commence just prior to, or
as soon as practicable after, the termination of the Subscription Offering. The
Public Offering shall be completed within 45 days after the termination of the
Subscription Offering, unless such period is extended as provided in Section 3,
above.
Shares of Conversion Stock not subscribed for in the Subscription Offering,
Community Offering, if any, and Public Offering may be sold in a Syndicated
Public Offering, subject to such terms, conditions and procedures as may be
determined by the Boards of Directors of the INSTITUTION and the Holding
Company, in a manner that will achieve the widest distribution of the Conversion
Stock subject to the right of the INSTITUTION and the Holding Company, in their
absolute discretion, to accept or reject in whole or in part all subscriptions
in the Syndicated Public Offering. In the Syndicated Public Offering, any person
together with any Associate or group of persons Acting in Concert may purchase
up to the maximum purchase limitation established for the Public Offering,
subject to the maximum and minimum purchase limitations specified in Section 14
and exclusive of an increase in the total number of shares issued due to an
increase in the maximum of the Estimated Valuation Range of up to 15%. Shares
purchased by any Person together with any Associate or group of persons Acting
in Concert pursuant to Section 12 shall be counted toward meeting the maximum
purchase limitation specified for this Section. Provided that the Subscription
Offering has commenced, the INSTITUTION may commence the Syndicated Public
Offering at any time after the mailing to the Members of the Proxy Statement to
be used in connection with the Special Meeting of Members, provided that the
completion of the offer and sale of the Conversion Stock shall be conditioned
upon the approval of this Plan by the Voting Members. If the Syndicated Public
Offering is not sooner commenced pursuant to the provisions of the preceding
sentence, the Syndicated Public Offering will be commenced as soon as
practicable following the date upon which the Subscription Offering and
Community Offering, if any, terminate.
If for any reason a Public Offering or Syndicated Public Offering of shares
of Conversion Stock not sold in the Subscription and Community Offerings can not
be effected, other purchase arrangements will be made for the sale of
unsubscribed shares by the INSTITUTION, if possible. Such other purchase
arrangements will be subject to the approval of the OTS.
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14. LIMITATION ON PURCHASES
The following limitations shall apply to all purchases of shares of
Conversion Stock:
A. The maximum number of shares of Conversion Stock which may be
purchased in the Subscription Offering by any person in the First Priority,
Third Priority and Fourth Priority shall not exceed such number of shares as
shall equal $100,000 divided by the Purchase Price.
B. The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the Conversion by any Person
(or persons through a single account) or Participant together with any Associate
or group of persons Acting in Concert shall not exceed such number of shares as
shall equal $150,000 divided by the Purchase Price, except for Employee Plans,
which in the aggregate may subscribe for up to 10% of the Conversion Stock
issued.
C. The maximum number of shares of Conversion Stock which may be
purchased in all categories in the conversion by Officers and Directors of the
INSTITUTION and their Associates in the aggregate shall not exceed 34% of the
total number of shares of Conversion Stock issued.
D. A minimum of 25 shares of Conversion Stock must be purchased by each
Person purchasing shares in the conversion to the extent those shares are
available; provided, however, that the minimum number of shares requirement will
not apply if the number of shares of Conversion Stock purchased times the price
per share exceeds $500.
If the number of shares of Conversion Stock otherwise allocable pursuant to
Sections 8 through 13, inclusive, to any Person or that Person's Associates
would be in excess of the maximum number of shares permitted as set forth above,
the number of shares of Conversion Stock allocated to each such person shall be
reduced to the lowest limitation applicable to that Person, and then the number
of shares allocated to each group consisting of a Person and that Person's
Associates shall be reduced so that the aggregate allocation to that Person and
his Associates complies with the above maximums, and such maximum number of
shares shall be reallocated among that Person and his Associates as they may
agree, or in the absence of an agreement, in proportion to the shares subscribed
by each (after first applying the maximums applicable to each Person,
separately).
Depending upon market or financial conditions, the Board of Directors of
the INSTITUTION and the Holding Company, without further approval of the
Members, may decrease or increase the purchase limitations in this Plan,
provided that the maximum purchase limitations may not be increased to a
percentage in excess of 5%. Notwithstanding the foregoing, the maximum purchase
limitation may be increased up to 9.99% provided that orders for Conversion
Stock exceeding 5% of the shares being offered shall not exceed, in the
aggregate, 10% of the total offering. If the INSTITUTION and the Holding Company
increase the maximum purchase limitations, the INSTITUTION and the Holding
Company are only required to resolicit Persons who subscribed for the maximum
purchase amount and may, in the sole discretion of the INSTITUTION and the
Holding Company, resolicit certain other large subscribers. For purposes of this
Section 14, the Directors of the INSTITUTION and the Holding Company shall not
be deemed to be Associates or a group affiliated with each other or otherwise
Acting in Concert solely as a result of their being Directors of the INSTITUTION
or the Holding Company.
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In the event of an increase in the total number of shares offered in the
conversion due to an increase in the maximum of the Estimated Valuation Range of
up to 15% (the "Adjusted Maximum") the additional shares will be used in the
following order of priority: (i) to fill the Employees Plan's subscription to up
to 10% of the Adjusted Maximum; (ii) in the event that there is an
oversubscription at the Eligible Account Holder level, to fill unfilled
subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum
according to Section 8, with preference given to Community Purchasers; (iii) in
the event that there is an oversubscription at the Supplemental Eligible Account
Holder level, to fill unfilled subscriptions of Supplemental Eligible Account
Holders exclusive of the Adjusted Maximum according to Section 10, with
preference given to Community Purchasers; (iv) in the event that there is an
oversubscription at the Other Member level, to fill unfilled subscriptions of
Other Members exclusive of the Adjusted Maximum in accordance with Section 11,
with preference given to Community Purchasers; and (v) to fill unfilled
Subscriptions in the Community Offering exclusive of the Adjusted Maximum, with
preference given to Community Purchasers.
Each Person purchasing Conversion Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the above purchase
limitations contained in this Plan.
For a period of three years following the conversion, no Officer, Director
or their Associates shall purchase, without the prior written approval of the
OTS, any outstanding shares of common stock of the Holding Company, except from
a broker-dealer registered with the SEC. This provision shall not apply to
negotiated transactions involving more than one percent of the outstanding
shares of common stock of the Holding Company, the exercise of any options
pursuant to a stock option plan or purchases of common stock of the Holding
Company, made by or held by any Tax-Qualified Employee Stock Benefit Plan or
Non-Tax Qualified Employee Stock Benefit Plan of the INSTITUTION or the Holding
Company (including the Employee Plans) which may be attributable to any Officer
or Director. As used herein, the term "negotiated transaction" means a
transaction in which the securities are offered and the terms and arrangements
relating to any sale are arrived at through direct communications between the
seller or any person acting on its behalf and the purchaser or his investment
representative. The term "investment representative" shall mean a professional
investment advisor acting as agent for the purchaser and independent of the
seller and not acting on behalf of the seller in connection with the
transaction.
15. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community, Public and Syndicated Public Offerings must be delivered in full to
the INSTITUTION, together with a properly completed and executed Order Form, or
Purchase Order in the case of the Public or Syndicated Public Offering, on or
prior to the expiration date specified on the Order Form or Purchase Order, as
the case may be, unless such date is extended by the INSTITUTION; provided,
however, that if the Employee Plans subscribes for shares during the
Subscription Offering, the Employee Plan will not be required to pay for the
shares at the time they subscribe but rather may pay for such shares of
Conversion Stock upon consummation of the Conversion. The INSTITUTION may make
scheduled discretionary contributions to an Employee Plan provided such
contributions do not cause the INSTITUTION to fail to meet its regulatory
capital requirement.
Notwithstanding the foregoing, the INSTITUTION and the Holding Company
shall have the right, in their sole discretion, to permit institutional
investors to submit contractually irrevocable orders in the Community Offering,
Public Offering or Syndicated Public Offering and to thereafter submit payment
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for the Conversion Stock for which they are subscribing in the Community
Offering, Public Offering or Syndicated Public Offering at any time prior to the
completion of the Conversion.
Payment for Conversion Stock subscribed for shall be made either in cash
(if delivered in person), check or money order. Alternatively, subscribers in
the Offerings may pay for the shares subscribed for by authorizing the
INSTITUTION on the Order Form or Purchase Order to make a withdrawal from the
subscriber's Savings Account at the INSTITUTION in an amount equal to the
purchase price of such shares. Such authorized withdrawal, whether from a
savings passbook or certificate account, shall be without penalty as to
premature withdrawal. If the authorized withdrawal is from a certificate
account, and the remaining balance does not meet the applicable minimum balance
requirement, the certificate shall be canceled at the time of withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate. Funds for which a withdrawal is authorized will remain in the subscriber's
Savings Account but may not be used by the subscriber until the Conversion Stock
has been sold or the 45-day period (or such longer period as may be approved by
the OTS) following the Subscription Offering has expired, whichever occurs
first. Thereafter, the withdrawal will be given effect only to the extent
necessary to satisfy the subscription (to the extent it can be filled) at the
Purchase Price per share. Interest will continue to be earned on any amounts
authorized for withdrawal until such withdrawal is given effect. Interest will
be paid by the INSTITUTION at not less than the passbook annual rate on payments
for Conversion Stock received in cash or by money order or check. Such interest
will be paid from the date payment is received by the INSTITUTION until
consummation or termination of the conversion. If for any reason the Conversion
is not consummated, all payments made by subscribers in the Offerings will be
refunded to them with interest. In case of amounts authorized for withdrawal
from Savings Accounts, refunds will be made by canceling the authorization for
withdrawal.
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding Company
and INSTITUTION has been declared effective by the OTS and the SEC, Order Forms
will be distributed to the Participants at their last known addresses appearing
on the records of the INSTITUTION for the purpose of subscribing to shares of
Conversion Stock in the Subscription Offering and will be made available for use
in the Community Offering. Notwithstanding the foregoing, the INSTITUTION may
elect to send Order Forms only to those Persons who request them after such
notice as is approved by the OTS and is adequate to apprise the Participants of
the pendency of the Subscription Offering has been given. Such notice may be
included with the proxy statement for the Special Meeting of Members and may
also be included in a notice of the pendency of the conversion and the Special
Meeting of Members sent to all Eligible Account Holders in accordance with
regulations of the OTS.
Each Order Form or Purchase Order will be preceded or accompanied by the
Prospectus (if a holding company form of organization is utilized) or the
Offering Circular (if the holding company form of organization is not utilized)
describing the Holding Company (if utilized), the INSTITUTION, the Conversion
Stock and the Offerings. Each Order Form or Purchase Order will contain, among
other things, the following:
A. A specified date by which all Order Forms and Purchase Orders must be
received by the INSTITUTION, which date shall be not less than twenty (20), nor
more than forty-five (45) days, following the date on which the Order Forms are
mailed by the INSTITUTION, and which date will constitute the termination of the
Subscription Offering;
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B. The purchase price per share for shares of Conversion Stock to be sold
in the Offerings;
C. A description of the minimum and maximum number of shares of
Conversion Stock which may be subscribed for pursuant to the exercise of
Subscription Rights or otherwise purchased in the Community Offering, Public
Offering or Syndicated Public Offering;
D. Instructions as to how the recipient of the Order Form or Purchase
Order is to indicate thereon the number of shares of Conversion Stock for which
such person elects to subscribe and the available alternative methods of payment
therefor;
E. An acknowledgment that the recipient of the Order Form or Purchase
Order has received a final copy of the Prospectus or Offering Circular, as the
case may be, prior to execution of the Order Form or Purchase Order.
F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering within the subscription period such properly
completed and executed Order Form, together with cash (if delivered in person),
check or money order in the full amount of the purchase price as specified in
the Order Form for the shares of Conversion Stock for which the recipient elects
to subscribe in the Subscription Offering (or by authorizing on the Order Form
that the INSTITUTION withdraw said amount from the subscriber's Savings Account
at the INSTITUTION) to the INSTITUTION; and
G. A statement to the effect that the executed Order Form or Purchase
Order, once received by the INSTITUTION, may not be modified or amended by the
subscriber without the consent of the INSTITUTION.
Notwithstanding the above, the INSTITUTION and the Holding Company reserve
the right in their sole discretion to accept or reject orders received on
photocopied or facsimiled order forms or whose payment is to be made by wire
transfer.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
INSTITUTION by the United States Postal Service or the INSTITUTION is unable to
locate the addressee, (b) are not received back by the INSTITUTION or are
received by the INSTITUTION after the expiration date specified thereon, (c) are
defectively filled out or executed, (d) are not accompanied by the full required
payment, or, in the case of institutional investors in the Community Offering,
Public Offering or Syndicated Public Offering, by delivering irrevocable orders
together with a legally binding commitment to pay in cash, check, money order or
wire transfer the full amount of the purchase price prior to 48 hours before the
completion of the conversion for the shares of Conversion Stock subscribed for
(including cases in which savings accounts from which withdrawals are authorized
are insufficient to cover the amount of the required payment), or (e) are not
mailed pursuant to a "no mail" order placed in effect by the account holder, the
subscription rights of the person to whom such rights have been granted will
lapse as though such person failed to return the completed Order Form within the
time period specified thereon; provided, however, that the INSTITUTION may, but
will not be required to, waive any immaterial irregularity on any Order Form or
Purchase Order or require the submission of corrected Order Forms or Purchase
Orders or the remittance of full payment for subscribed shares by such date as
the INSTITUTION may
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specify. The interpretation of the INSTITUTION of terms and conditions of the
Plan and of the Order Forms or Purchase Orders will be final, subject to the
authority of the OTS.
18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Conversion Stock purchased by Directors or Officers of
the INSTITUTION or the Holding Company in the conversion shall be subject to the
restriction that, except as provided in Section 18B, below, or as may be
approved by the OTS, no interest in such shares may be sold or otherwise
disposed of for value for a period of one (1) year following the date of
purchase.
B. The restriction on disposition of shares of Conversion Stock set forth
in Section 18A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the INSTITUTION or the Holding Company, which has been
approved by the OTS; and
(ii) Any disposition of such shares following the death of the
person to whom such shares were initially sold under the terms of the Plan.
C. With respect to all shares of Conversion Stock subject to restrictions
on resale or subsequent disposition, each of the following provisions shall
apply;
(i) Each certificate representing shares restricted within the
meaning of Section 18A, above, shall bear a legend prominently stamped on its
face giving notice of the restriction;
(ii) Instructions shall be issued to the stock transfer agent for
the Holding Company not to recognize or effect any transfer of any certificate
or record of ownership of any such shares in violation of the restriction on
transfer; and
(iii) Any shares of capital stock of the Holding Company issued with
respect to a stock dividend, stock split, or otherwise with respect to ownership
of outstanding shares of Conversion Stock subject to the restriction on transfer
hereunder shall be subject to the same restriction as is applicable to such
Conversion Stock.
19. VOTING RIGHTS OF STOCKHOLDERS
Upon conversion, the holders of the capital stock of the INSTITUTION shall
have the exclusive voting rights with respect to the INSTITUTION as specified in
its charter. The holders of the common stock of the Holding Company shall have
the exclusive voting rights with respect to the Holding Company.
20. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The INSTITUTION shall establish at the time of conversion a liquidation
account in an amount equal to its net worth as of the latest practicable date
prior to conversion. The liquidation account will be maintained by the
INSTITUTION for the benefit of the Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain their Savings Accounts at the
INSTITUTION. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to his Savings
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Account, hold a related inchoate interest in a portion of the liquidation
account balance, in relation to his Savings Account balance at the Eligibility
Record Date and Supplemental Eligibility Record Date or to such balance as it
may be subsequently reduced, as hereinafter provided.
In the unlikely event of a complete liquidation of the INSTITUTION (and
only in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the
INSTITUTION's capital stock. No merger, consolidation, purchase of bulk assets
with assumption of Savings Accounts and other liabilities, or similar
transactions with an FDIC institution, in which the INSTITUTION is not the
surviving institution, shall be deemed to be a complete liquidation for this
purpose. In such transactions, the liquidation account shall be assumed by the
surviving institution.
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction, the
numerator of which is the amount of such Eligible Account Holder's and
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the INSTITUTION. Such
initial subaccount balance shall not be increased, but shall be subject to
downward adjustment as described below.
If, at the close of business on any annual closing date, commencing on or
after the effective date of conversion, the deposit balance in the Savings
Account of an Eligible Account Holder or Supplemental Eligible Account Holder is
less than the lesser of (i) the balance in the Savings Account at the close of
business on any other annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, as applicable, or (ii) the amount
of the Qualifying Deposit in such Savings Account, the subaccount balance of
such Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
such downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any subsequent increase in the deposit balance of the
related Savings Account. If any such Savings Account is closed, the related
subaccount shall be reduced to zero.
The creation and maintenance of the liquidation account shall not operate
to restrict the use or application of any of the net worth accounts of the
INSTITUTION.
21. TRANSFER OF SAVINGS ACCOUNTS
Each person holding a Savings Account at the INSTITUTION at the time of
conversion shall retain an identical Savings Account at the INSTITUTION
following conversion in the same amount and subject to the same terms and
conditions (except as to voting and liquidation rights).
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22. RESTRICTIONS ON ACQUISITION OF THE INSTITUTION AND HOLDING COMPANY
A. In accordance with OTS regulations, for a period of three years from
the date of consummation of conversion, no Person, other than the Holding
Company, shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of an equity security of the INSTITUTION
without the prior written consent of the OTS.
B.1. The charter of the INSTITUTION contains a provision stipulating that
no person, except the Holding Company, for a period of five years following the
date of conversion shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
INSTITUTION, without the prior written approval of the OTS. In addition, such
charter may also provide that for a period of five years following the
conversion, shares beneficially owned in violation of the above-described
charter provision shall not be entitled to vote and shall not be voted by any
person or counted as voting stock in connection with any matter submitted to
stockholders for a vote. In addition, special meetings of the stockholders
relating to changes in control or amendment of the charter may only be called by
the Board of Directors, and shareholders shall not be permitted to cumulate
their votes for the election of directors.
B.2. The Certificate of Incorporation of the Holding Company will contain a
provision stipulating that in no event shall any record owner of any outstanding
shares of the Holding Company's common stock who beneficially owns in excess of
10% of such outstanding shares be entitled or permitted to any vote in respect
to any shares held in excess of 10%. In addition, the Certificate of
Incorporation and Bylaws of the Holding Company provide for staggered terms of
the directors, noncumulative voting for directors, limitations on the calling of
special meetings, a fair price provision for certain business combinations and
certain notice requirements.
C. For the purposes of this Section 22, B.1.:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution;
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise; and
(iv) The term "security" includes non-transferable subscription
rights issued pursuant to a plan of conversion as well as a "security" as
defined in 15 U.S.C. (S)78c(a)(10).
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23. PAYMENT OF DIVIDENDS AND REPURCHASES OF STOCK
The INSTITUTION shall not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause its regulatory
capital to be reduced below (i) the amount required for the Liquidation Account
or (ii) the federal regulatory capital requirement in Section 567.2 of the Rules
and Regulations of the OTS. Otherwise, the INSTITUTION may declare dividends or
make capital distributions in accordance with applicable law and regulations.
24. AMENDMENT OF PLAN
If deemed necessary or desirable, 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 INSTITUTION's Board of Directors, and at any time
thereafter by such vote of such Board of Directors with the concurrence of the
OTS. Any amendment to the Plan made after approval by the Members with the
approval of the OTS shall not necessitate further approval by the Members unless
otherwise required by the OTS. The Plan may be terminated by majority vote of
the INSTITUTION's Board of Directors at any time prior to the Special Meeting of
Members to vote on the Plan, and at any time thereafter with the concurrence of
the OTS.
By adoption of the Plan, the Members of the INSTITUTION authorize the Board
of Directors to amend or terminate the Plan under the circumstances set forth in
this Section.
25. CHARTER AND BYLAWS
By voting to adopt the Plan, members of the INSTITUTION will be voting to
adopt a charter and bylaws to read in the form of charter and bylaws for a
federally chartered stock institution. The effective date of the INSTITUTION's
amended charter and bylaws shall be the date of issuance and sale of the
Conversion Stock as specified by the OTS.
26. CONSUMMATION OF CONVERSION
The conversion of the INSTITUTION shall be deemed to take place and be
effective upon the completion of all requisite organizational procedures for
obtaining the federal stock charter for the INSTITUTION and sale of all
Conversion Stock.
27. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
Holding Company will register the securities issued in connection with the
conversion pursuant to the Securities Exchange Act of 1934 and will not
deregister such securities for a period of at least three years thereafter,
except that the maintenance of registration for three years requirement may be
fulfilled by any successor to the Holding Company. In addition, the Holding
Company will use its best efforts to encourage and assist a market-maker to
establish and maintain a market for the Conversion Stock and to list those
securities on a national or regional securities exchange or the NASDAQ System.
A-19
<PAGE>
28. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The INSTITUTION will make reasonable efforts to comply with the securities
laws of all States in the United States in which Persons entitled to subscribe
for shares of Conversion Stock pursuant to the Plan reside. However, no such
Person will be issued subscription rights or be permitted to purchase shares of
Conversion Stock in the Subscription Offering if such Person resides in a
foreign country or in a state of the United States with respect to which any of
the following apply: (i) a small number of Persons otherwise eligible to
subscribe for shares under the Plan reside in such state; (ii) the issuance of
subscription rights or the offer or sale of shares of Conversion Stock to such
Persons would require the INSTITUTION or the Holding Company, as the case may
be, under the securities laws of such state, to register as a broker, dealer,
salesman or agent or to register or otherwise qualify its securities for sale in
such state; or (iii) such registration or qualification would be impracticable
for reasons of cost or otherwise.
29. EXPENSES OF CONVERSION
The INSTITUTION shall use its best efforts to assure that expenses incurred
by it in connection with the conversion shall be reasonable.
30. CONDITIONS TO CONVERSION
The conversion of the INSTITUTION pursuant to this Plan is expressly
conditioned upon the following:
(a) Prior receipt by the INSTITUTION of rulings of the United States
Internal Revenue Service and the State of West Virginia taxing authorities, or
opinions of counsel, substantially to the effect that the conversion will not
result in any adverse federal or state tax consequences to Eligible Account
Holders or the INSTITUTION and the Holding Company before or after the
conversion;
(b) The sale of all of the Conversion Stock offered in the conversion; and
(c) The completion of the conversion within the time period specified in
Section 3 of this Plan.
31. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the
INSTITUTION shall be final, subject to the authority of the OTS.
A-20
SNODGRASS
Certified Public Accountants
October 1, 1996
[LOGO]
Board of Directors
Advance Financial Savings Bank, f.s.b.
1015 Commerce Street
Wellsburg, WV 26070
RE: West Virginia State Income Tax Opinion Relating to Conversion of the
Savings Bank from a Federally Chartered Mutual Savings Bank to a
Federally Chartered Stock Institution and Simultaneous Acquisition of
the Stock of the Stock Savings Bank by Holding Company
Members of the Board:
You have requested an opinion from this firm regarding the tax consequences
under the laws of the State of West Virginia relating to the proposed conversion
of Advance Financial Savings Bank, f.s.b. (the "Bank") from a
federally-chartered mutual savings bank to a federally-chartered capital stock
savings bank (the "Stock Bank"), and simultaneous formation of a parent holding
company (the "Holding Company") which will acquire all of the outstanding stock
of Stock Bank.
You have previously received an opinion of counsel ("Federal Tax Opinion")
stating that the conversion of the Bank would not result in adverse federal
income tax consequences to the Bank, the Stock Bank, or its account holders
under the Internal Revenue Code of 1986, as amended ("Code"). The Federal Tax
Opinion holds that such a transaction qualifies as a tax-free reorganization
under IRC Section 368(a)(1)(F). The Federal Tax Opinion is predicated upon
Revenue Ruling 80-105, 1980-1 CB 78, which holds that a similar transaction
qualified as a tax- free reorganization under IRC Section 368(a)(1)(F).
Based upon the facts and circumstances attendant to the conversion as detailed
in the Plan of Conversion, adopted by the Bank on September 3, 1996, as amended,
("Plan of Conversion"), and as described in the Federal Tax Opinion, and the
provision of the Code and the Federal Tax Opinion rendered, it is our opinion
that the laws of the State of West Virginia will, for income tax purposes, treat
the conversion transaction as detailed in the Plan of Conversion in an identical
manner as it is treated by the Internal Revenue Service for income tax purposes,
and that under such state law no adverse income tax consequences will be
incurred by either the Bank, the Stock Bank, or its account holders as a result
of the implementation of the Plan of Conversion.
S.R. Snodgrass, A.C.
101 Bradford Road, Wexford, PA 15090-6909 Phone: 412-934-0344
Facsimile: 412-934-0345
<PAGE>
Board of Directors
October 1, 1996
Page 2
The opinion herein expressed specifically does not include, without limitation
by the specification thereof, an opinion with respect to any franchise tax or
capital stock taxes which might result from the implementation of the Plan of
Conversion.
We hereby consent to the filing of this opinion as an exhibit to the Application
for Conversion on Form AC ("Form AC") or similar filing of the Bank filed with
the Office of Thrift Supervision, and filing of this opinion as an exhibit to
the Registration Statement of Form S-1 ("Form S-1") to be filed with the
Securities and Exchange Commission, and to reference to our firm in the offering
circular contained in the Form AC, Form S-1, and associated documents related to
this opinion.
Very truly yours,
/s/ S.R. Snodgrass, A.C.
S.R. Snodgrass, A.C.
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF S.R. SNODGRASS, A.C.]
INDEPENDENT AUDITOR'S CONSENT
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated August 19, 1996, except for the subsequent events
as described in Note 17, which is as of September 30, 1996 on the consolidated
financial statements of Advance Financial Savings Bank, f.s.b., to Amendment #1
to the Registration Statement (Form S-1), Application for Conversion (Form AC),
and related Prospectus of Advance Financial Bancorp.
/s/ S.R. Snodgrass, A.C.
Steubenville, Ohio
October 28, 1996
STOCK ORDER FORM & Advance Financial Bancorp
CERTIFICATION FORM (Proposed Holding Company for Advance Financial Savings Bank)
Note: Please read the Stock Order Form Guide and Instructions on the back of
this form before completion.
- --------------------------------------------------------------------------------
Deadline
The Subscription Offering ends at X.XX p.m., Eastern Time, in Wellsburg, West
Virginia XXXX xx, 1996. Your Stock Order Form and Certification Form, properly
executed and with the correct payment, must be received at the address on the
bottom of this form by this deadline, or it will be considered void.
- --------------------------------------------------------------------------------
Number of Shares
(1) Number of Shares Price Per Share (2) Total Amount Due
- ---------------------------- --------------------
X $10.00 =
- ---------------------------- --------------------
The minimum number of shares that may be subscribed for is 25 and the maximum
purchase is x,xxx shares in the Subscription Offering. No person, together with
associates of and persons acting in concert with such person, may purchase more
than xx,xxx shares of the Common stock in the Subscription Offering. The price
per share is based upon a valuation that is subject to review prior to filling
individual stock orders.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Method of Payment Purchaser Information
(3) [ ]I authorize Advance Financial Savings Bank to make (5) [ ]Check here if you are a director, officer or employee
withdrawals from my Advance Financial Savings Bank of Advance Financial Savings Bank or a member of such
account(s) shown below, and understand that the person's immediate family.
amounts will not otherwise be available for [ ]Check here if you are a depositor or a borrower and
withdrawal: enter below information for all accounts you had at
the Eligibility Record Date (August 31, 1995),
(4) [ ]Enclosed is a check, bank draft or money order Supplemental Eligibility Record Date (September 30, 1996)
payable to Advance Financial Bancorp for or the Voting Record Date (, 1996). If additional space
$__________ (or cash if presented in person). is needed, please utilize the back of this form.
Please confirm account(s) by initializing here. __________
Account Number(s) Amount(s)
- -------------------------------------------- -----------
Account Title (Names on Accounts) Account Number
- -------------------------------------------- ----------- --------------------------------------------------- --------------
- -------------------------------------------- ----------- ---------------------------------------------------
- -------------------------------------------- ----------- --------------------------------------------------- --------------
- -------------------------------------------- ----------- ---------------------------------------------------
Total Withdrawal
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(6) Stock Registration
<S> <C> <C>
[ ] Individual [ ] Uniform Transfer to Minors [ ] Partnership
[ ] Joint Tenants [ ] Uniform Gift to Minors [ ] Individual Retirement Account
[ ] Tenants in Common [ ] Corporation [ ] Fiduciary/Trust (Under Agreement Dated __________)
</TABLE>
- --------------------------------------------------------------------------------
Name Social Security or Tax I.D.
- --------------------------------------------------------------------------------
Name Daytime Telephone
- --------------------------------------------------------------------------------
Street Address Evening Telephone
- --------------------------------------------------------------------------------
City State Zip Code County of Residence
- --------------------------------------------------------------------------------
NASD Affiliation (This section only applies to those individuals who meet the
delineated criteria)
[ ] Check here if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of the
immediate family of any such person to whose support such person contributes,
directly or indirectly, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest. To comply with
conditions under which an exemption from the NASD's Interpretation With Respect
to Free-Riding and Withholding is available, you agree, if you have checked the
NASD affiliation box: (1) not to sell, transfer or hypothecate the stock for a
period of 90 days following the issuance, and (2) to report this subscription in
writing to the applicable NASD member within one day of the payment therefor.
- --------------------------------------------------------------------------------
Acknowledgment By signing below, I acknowledge receipt of the Prospectus dated
XXXX xx, 1996 and understand I may not change or revoke my order once it is
received by Advance Financial Savings Bank. I also certify that this stock order
is for my account and there is no agreement or understanding regarding any
further sale or transfer of these shares. Federal regulations prohibit any
persons from transferring, or entering into any agreement directly or indirectly
to transfer, the legal or beneficial ownership of conversion subscription rights
or the underlying securities to the account of another person. Advance Financial
Savings Bank will pursue any and all legal and equitable remedies in the event
it becomes aware of the transfer of subscription rights and will not honor
orders known by it to involve such transfer. Under penalties of perjury, I
further certify that: (1) the social security number or taxpayer identification
number given above is correct; and (2) I am not subject to backup withholding.
You must cross out this item, (2) above, if you have been notified by the
Internal Revenue Service that you are subject to backup withholding because of
underreporting interest or dividends on your tax return. By signing below, I
also acknowledge that I have not waived any rights under the Securities Act of
1933 and the Securities Exchange Act of 1934.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Signature Sign and date this form. When Signature Title (if applicable) Date
purchasing as a custodian, corporate
officer, etc., include title. An
additional signature is required only if
payment is by withdrawal from an account --------------------------------------------------------------------
that requires more than one signature
to withdraw funds. YOUR ORDER WILL BE
FILLED IN ACCORDANCE WITH THE PROVISIONS
OF THE PROSPECTUS. THIS ORDER IS NOT Signature Title (if applicable) Date
VALID IF THE STOCK ORDER FORM AND
CERTIFICATION FORM ARE NOT BOTH SIGNED.
If you need help completing this Form,
you may call the Stock Information Center ---------------------------------------------------------------------
at (304 xxx-xxxx. THE SHARES OF COMMON
STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE SAVINGS ASSOCIATION INSURANCE FUND OR
ANY OTHER GOVERNMENTAL AGENCY.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Date Rec'd ___/___/___ Order # ____ Batch # ____ STOCK INFORMATION CENTER
OFFICE USE Check # ___________ Category ____ 1015 Commerce Street
Amount $___________ Initials ____ Wellsburg, West Virginia 26070
(XXX) XXX-XXXX
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
Stock Ownership Guide
- --------------------------------------------------------------------------------
Individual- The Stock is to be registered in an individual's name only. You may
not list beneficiaries for this ownership.
Joint Tenants- Joint tenants with right of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of survivorship,
ownership automatically passes to the surviving joint tenant(s) upon the death
of any joint tenant. You may not list beneficiaries for this ownership.
Tenants in Common- Tenants in common may also identify two or more owners. when
stock is to be held by tenants in common, upon the death of one co-tenant,
ownership of the stock will be held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant. All parties must agree to the transfer or sale
of shares held by tenants in common. You may not list beneficiaries for this
ownership.
Individual Retirement Account- Individual Retirement Account ("IRA") holders may
make stock purchases from their deposits through a pre-arranged
"trustee-to-trustee" transfer. Stock may only be held in a self-directed IRA.
The Advance Financial Savings Bank does not offer a self-directed IRA. Please
contact the Stock Information Center if you have any questions about your IRA
account or to obtain a list of local brokers who will open a self-directed IRA,
or check with your broker. There will be no early withdrawal or IRS penalties
incurred by these transactions.
Uniform Gift to Minors- For residents of many states, stock may be held in the
name of a custodian for the benefit of a minor under the Uniform Transfer to
Minors Act. For residents in other states, stock may be held in a similar type
of ownership under the Uniform Gift to Minors Act of the individual states. For
either ownership, the minor is the actual owner of the stock with the adult
custodian being responsible for the investment until the child reaches legal
age.
Instructions: See your legal advisor if you are unsure about the correct
registration of your stock.
On the first line, print the first name, middle initial and last name of the
custodian, with the abbreviation "CUST" after the name. Print the first name,
middle initial and last name of the minor on the second "NAME" line. Only one
custodian and one minor may be designated.
Corporation/Partnership- Corporations/Partnerships may purchase stock. Please
provide the Corporation/Partnership's legal name and Tax I.D. To have depositor
rights, the Corporation/Partnership must have an account in the legal name.
Please contact the Stock Information Center to verify depositor rights and
purchase limitations.
Fiduciary/Trust- Generally, fiduciary relationships (such as Trusts, Estates,
Guardianships, etc.) are established under a form of trust agreement or are
pursuant to a court order. Without a legal document establishing a fiduciary
relationship, your stock may not be registered in a fiduciary capacity.
Instructions: On the first "NAME" line, print the first name, middle initial and
last name of the fiduciary if the fiduciary is an individual. If the fiduciary
is a corporation, list the corporate title on the first "NAME" line. Following
the name, print the fiduciary "title" such as trustee, executor, personal
representative, etc.
On the second "NAME" line, print either the name of the maker, donor or testator
OR the name of the beneficiary. Following the name, indicate the type of legal
document establishing the fiduciary relationship (agreement, court order, etc.).
In the blank after "Under Agreement Dated", fill in the date of the document
governing the relationship. The date of the document need not be provided for a
trust created by a will.
An example of fiduciary ownership of stock in the case of a trust is: John D.
Smith, Trustee for Thomas A. Smith Under Agreement Dated 06/09/87
Definition of Associate
- --------------------------------------------------------------------------------
The term "associate" of a person defined to mean (i) any corporation or other
organization (other than Advance Financial Bancorp ("Bancorp"), the Bank, or a
majority owned subsidiary of the Bank) of which such person is a director,
officer or partner or is directly or indirectly the beneficial interest or as to
which such person serves a trustee or in a similar fiduciary capacity, provided,
however, that such term shall not include any tax-qualified employee stock
benefit plan of Bancorp or 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 person,
who either has the same home as such person or who is a director or officer of
Bancorp or the Bank or any of their subsidiaries.
<PAGE>
CERTIFICATION FORM
(This Form Must Accompany A Signed Stock Order Form)
I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, $0.10 PAR VALUE PER SHARE
("COMMON STOCK"), OF ADVANCE FINANCIAL BANCORP ARE NOT FEDERALLY INSURED AND ARE
NOT GUARANTEED BY THE BANK OR THE FEDERAL GOVERNMENT.
If anyone asserts that the shares of Common Stock are federally insured or
guaranteed, or are as safe as an insured deposit, I should call the Office of
Thrift Supervision Acting Regional Director, Robert C. Albanese, at (201)
413-1000.
I further certify that, before purchasing the shares of Common Stock of
Bancorp, I received a copy of the Prospectus dated, __________ ___, 1996 which
discloses the nature of the shares of Common Stock being offered thereby and
describes the following risks involved in an investment in the Common Stock
under the heading "Risk Factors" beginning on page 1 of the Prospectus:
1. Potential Impact of Changes in Interest Rates
2. Disparity in Insurance Premiums and Special Assessment
3. Lack of Growth in the Bank's Market Areas
4. Possible Increase in Loan Loss Provision following Expansion
of Loan Portfolio
5. Default Rates on Adjustable-Rate Mortgage Loans After Interest
Rate Increases
6. Decrease in Profitability Since 1994
7. Anti-Takeover Provisions
8. Possible Voting Control by Management and The Board of
Directors
9. Possible Dilutive Effect of RSP and Stock Options and Effect
of Purchase by the RSP and ESOP
10. Possible Negative Impact caused by Regulatory Oversight
11. Possible Adverse Income Tax Consequences of the Distribution
of Subscription Rights
12. Decreased Return on Equity Immediately After Conversion
13. Lack of Liquidity for the Common Stock
- --------------------------------------------------------------------------------
Signature Signature
- --------------------------------------------------------------------------------
(Note: If stock is to be held jointly, both parties must sign)
Date:
---------------------------
<PAGE>
ITEM INSTRUCTION
- --------------------------------------------------------------------------------
Items 1 and 2- Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying the number of
shares by the subscription price of $10.00 per share. The minimum purchase is 25
shares. The maximum purchase amount in the Conversion by any person is
__________ shares in the Subscription Offering. No person, together with
associates of and persons acting in concert with such person, may purchase more
than __________ shares of the Common Stock in the Subscription Offering.
Advance Financial Savings Bank has reserved the right to reject the subscription
of any order received in the Public Offering, if any, in whole or in part.
Item 3- Payment for shares may be made in cash (only if delivered by you in
person) or by check, bank draft or money order made payable to Advance Financial
Savings Bank. DO NOT MAIL CASH. If you choose to make a cash payment, take your
Stock Order Form, signed Certification Form and payment in person to Advance
Financial Savings Bank. Your funds will earn interest at Advance Financial
Savings Bank's passbook rate, currently ____% per annum.
Item 4- To pay by withdrawal from a savings account or certificate at Advance
Financial Savings Bank, insert the account number(s) and the Amount(s) you wish
to withdraw from each account. If more than one signature is required to
withdraw, each must sign in the Signature box on the front of this form. To
withdraw from an account with checking privileges, please write a check. No
early withdrawal penalty will be charged on funds used to purchase stock. A hold
will be placed on the account(s) for the amount(s) you show. Payments will
remain in certificate account(s) until the stock offering closes. However, if a
partial withdrawal reduces the balance of a certificate account to less than the
applicable minimum, the remaining balance will thereafter earn interest at the
passbook rate.
Item 5- Please check this box if you were a depositor on the Eligibility Record
Date (August 31, 1995), and/or a depositor on the Supplemental Eligibility
Record Date (September 30, 1996) or a depositor on the Voting Record Date
(__________ ___, 1996) and list all names on the account(s) and all account
number(s) of those accounts you had at these dates to ensure proper
identification of your purchase rights.
Items 6 and 7- The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of Bancorp common
stock. Print the name(s) in which you want the stock registered and the mailing
address of the registration. Include the first name, middle initial and last
name of the shareholder. Avoid the use of two initials. Please omit words that
do not affect ownership rights, such as "Mrs.", "Mr.", "Dr.", "special account",
etc.
Subscription rights are not transferable. If you are a qualified member, to
protect your priority over other purchasers as described in the Prospectus, you
must take ownership in at least one of the account holder's names.
Enter the Social Security or Tax I.D. number of one registered owner. This
registered owner must be listed on the first "NAME" line. Be sure to include
your telephone number because we will need to contact you if we cannot execute
your order as given. Review the Stock Ownership Guide on this page and refer to
the instructions for Uniform Gift to Minors/Uniform Transfer to Minors and
Fiduciaries.
Account Title (Names on Accounts) Account Number
- --------------------------------------------------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
CONVERSION VALUATION APPRAISAL REPORT
Prepared for:
Advance Financial Bancorp
and
Advance Financial Savings Bank, f.s.b.
Wellsburg, West Virginia
As Of:
September 6, 1996
Prepared By:
Michael R. Keller
President
<PAGE>
[KELLER & COMPANY, INC. LETTERHEAD]
555 METRO PLACE NORTH
SUITE 524
DUBLIN, OHIO 43017
(614) 766-1426
(614) 766-1459 FAX
October 1, 1996
Board of Directors
Advance Financial Savings Bank, f.s.b.
1015 Commerce Street
Wellsburg, WV 26070
Gentlemen:
We hereby submit an independent appraisal of the pro forma market value of the
to-be-issued stock of Advance Financial Bancorp (the "Corporation"), which is
the newly formed holding company of Advance Financial Savings Bank, f.s.b.,
Wellsburg, West Virginia ("Advance" or the "Bank"). The Corporation will hold
all of the shares of the common stock of the Bank. Such stock is to be issued in
connection with the Bank's conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank in accordance with the Bank's
Plan of Conversion. This appraisal was prepared and provided to the Bank in
accordance with the conversion requirements and regulations of the Office of
Thrift Supervision of the United States Department of the Treasury.
Keller & Company, Inc. is an independent financial institution consulting firm
that serves both banks and thrift institutions. The firm is a full-service
consulting organization, as described in more detail in Exhibit A, specializing
in market studies, business and strategic plans, stock valuations, conversion
appraisals, and fairness opinions for thrift institutions and banks. The firm
has affirmed its independence in this transaction with the preparation of its
Affidavit of Independence, a copy of which is included as Exhibit C.
Our appraisal is based on the assumption that the data provided to us by Advance
and the material provided by the independent auditor, S. R. Snodgrass, A.C.,
Steubenville, Ohio, are both accurate and complete. We did not proceed to verify
the financial statements provided to us, nor did we conduct independent
valuations of the Bank's assets and liabilities. We have also used information
from other public sources, but we cannot assure the accuracy of such material.
<PAGE>
Board of Directors
Advance Financial Savings Bank, f.s.b.
October 1, 1996
Page 2
In the completion of this appraisal, we held discussions with the management of
Advance, with the law firm of Malizia, Spidi, Sloane & Fisch, P.C., Washington,
D.C., the Bank's conversion counsel, and with S. R. Snodgrass, A.C. Further, we
viewed the Bank's local economy and primary market area.
This valuation must not be considered as a recommendation as to the purchase of
stock in the Corporation, and we can provide no guarantee or assurance that any
person who purchases shares of the Corporation's stock in this conversion will
be able to later sell such shares at a price equivalent to the price designated
in this appraisal.
Our valuation will be updated as required and will give consideration to any new
developments in the Bank's operation that have an impact on operations or
financial condition. Further, we will give consideration to any changes in
general market conditions and to specific changes in the market for
publicly-traded thrift institutions. Based on the material impact of any such
changes on the pro forma market value of the Bank as determined by this firm, we
will proceed to make necessary adjustments to the Bank's appraised value in such
appraisal update.
It is our opinion that as of September 6, 1996, the pro forma market value or
appraised value of the Corporation is $8,200,000. Further, a range for this
valuation is from a minimum of $6,970,000 to a maximum of $9,430,000, with a
super-maximum of $10,844,500.
Very truly yours,
KELLER & COMPANY, INC.
/s/Michael R. Keller
Michael R. Keller
President
<PAGE>
TABLE OF CONTENTS
PAGE
INTRODUCTION 1
I. Description of Advance Financial Savings Bank, f.s.b.
General 4
Performance Overview 9
Income and Expense 11
Yields and Costs 16
Interest Rate Sensitivity 17
Lending Activities 19
Non-Performing Assets 23
Investments 25
Deposit Activities 26
Borrowings 26
Subsidiaries 27
Office Properties 27
Management 27
II. Description of Primary Market Area 28
III. Comparable Group Selection
Introduction 34
General Parameters
Merger/Acquisition 35
Mutual Holding Companies 36
Trading Exchange 36
IPO Date 37
Geographic Location 37
Asset Size 38
Balance Sheet Parameters
Introduction 39
Cash and Investments to Assets 39
Mortgage-Backed Securities to Assets 40
One- to Four-Family Loans to Assets 40
Total Net Loans to Assets 41
Total Net Loans and Mortgage-Backed Securities to Assets 41
Borrowed Funds to Assets 41
Equity to Assets 42
Performance Parameters
Introduction 43
<PAGE>
TABLE OF CONTENTS (cont.)
PAGE
III. Comparable Group Selection (cont.)
Performance Parameters (cont.)
Return on Average Assets 43
Return on Average Equity 44
Net Interest Margin 44
Operating Expenses to Assets 45
Noninterest Income to Assets 45
Asset Quality Parameters
Introduction 46
Nonperforming Assets to Asset Ratio 46
Repossessed Assets to Assets 46
Loans Loss Reserves to Assets 47
The Comparable Group 47
Summary of Comparable Group Institutions 49
IV. Analysis of Financial Performance 51
V. Market Value Adjustments
Earnings Performance 54
Market Area 54
Financial Condition 58
Dividend Payments 60
Subscription Interest 60
Liquidity of Stock 61
Management 61
Marketing of the Issue 62
VI. Valuation Methods 64
Price to Book Value Ratio Method 65
Price to Earnings Method 66
Price to Net Assets Method 67
Valuation Conclusion 69
<PAGE>
LIST OF EXHIBITS
NUMERICAL PAGE
EXHIBITS
1 Balance Sheet - June 30, 1996 70
2 Balance Sheet - June 30, 1992 through 1995 71
3 Income Statement - Year Ended June 30, 1996 72
4 Income Statement - June 30, 1992 through 1995 73
5 Selected Consolidated Financial Information 74
6 Income and Expense Trends 75
7 Normalized Earnings Trend 76
8 Performance Indicators 77
9 Volume/Rate Analysis 78
10 Yield and Cost Trends 79
11 Interest Rate Sensitivity of Net Portfolio Value 80
12 Loan Portfolio Composition 81
13 Loan Maturity Schedule 82
14 Loan Originations 83
15 Nonperforming Assets 84
16 Classified Assets 85
17 Allowance for Loan Losses 86
18 Investment Portfolio Composition 87
19 Mix of Deposits 88
20 Deposit Activity 89
21 Offices of Advance Financial Savings Bank, f.s.b. 90
22 List of Key Officers and Directors 91
23 Key Demographic Data and Trends 92
24 Key Housing Data 93
25 Major Sources of Employment 94
26 New Housing Permits and Growth Rates 95
27 Unemployment Rates 96
28 Market Share of Deposits 97
29 National Interest Rates by Quarter 98
30 Thrift Stock Prices and Pricing Ratios 99
31 Key Financial Data and Ratios 110
32 Recently Converted Thrift Institutions 122
33 Acquisitions and Pending Acquisitions 124
34 Thrift Stock Prices and Pricing Ratios -
Mutual Holding Companies 125
<PAGE>
LIST OF EXHIBITS (cont.)
NUMERICAL PAGE
EXHIBITS
35 Key Financial Data and Ratios -
Mutual Holding Companies 126
36 Balance Sheets Parameters -
Comparable Group Selection 127
37 Operating Performance and Asset Quality Parameters -
Comparable Group Selection 130
38 Balance Sheet Ratios -
Final Comparable Group 133
39 Operation Performance and Asset Quality Ratios
Final Comparable Group 134
40 Balance Sheet Totals - Final Comparable Group 135
41 Market Area Comparison - Final Comparable Group 136
42 Balance Sheet - Asset Composition
Most Recent Quarter 137
43 Balance Sheet - Liability and Equity
Most Recent Quarter 138
44 Income and Expense Comparison
Trailing Four Quarters 139
45 Income and Expense Comparison as a Percent of
Average Assets - Trailing Four Quarters 140
46 Yields, Costs & Earnings Ratios
Trailing Four Quarters 141
47 Dividends, Reserves and Supplemental Data 142
48 Market Pricing and Financial Ratios - Stock Prices
Comparable Group 143
49 Valuation Analysis and Conclusions 144
50 Pro Forma Minimum Valuation 145
51 Pro Forma Mid-Point Valuation 146
52 Pro Forma Maximum Valuation 147
53 Pro Forma Superrange Valuation 148
54 Summary of Valuation Premium or Discount 149
<PAGE>
ALPHABETICAL EXHIBITS
PAGE
A Background and Qualifications 150
B RB 20 Certification 154
C Affidavit of Independence 155
<PAGE>
INTRODUCTION
Keller & Company, Inc., an independent appraisal firm for financial
institutions, has prepared this Conversion Appraisal Report ("Report") which
provides the pro forma market value of the to-be-issued common stock of Advance
Financial Bancorp (the "Corporation"), a Delaware corporation, formed as a
holding company to own all of the to-be-issued shares of common stock of Advance
Financial Savings Bank, f.s.b., ("Advance" or the "Bank"). The stock is to be
issued in connection with the Bank's Application for Approval of Conversion from
a federally chartered mutual savings bank to a federally chartered stock savings
bank. The Application is being filed with the Office of Thrift Supervision
("OTS") of the Department of the Treasury and the Securities and Exchange
Commission ("SEC"). In accordance with the Bank's conversion, there will be a
simultaneous issuance of all the Bank's stock to the Corporation, which will be
formed by the Bank. Such Application for Conversion has been reviewed by us,
including the Prospectus and related documents, and discussed with the Bank's
management and the Bank's conversion counsel, Malizia, Spidi, Sloane & Fisch,
P.C., Washington, D.C.
This conversion appraisal was prepared based on the guidelines provided by
OTS entitled "Guidelines for Appraisal Reports for the Valuation of Savings
Institutions Converting from the Mutual to Stock Form of Organization", in
accordance with the OTS application requirements of Regulation Section 563b and
the OTS's Revised Guidelines for Appraisal Reports, and represents a full
appraisal report. The Report provides detailed exhibits based on the Revised
Guidelines and a discussion on each of the fourteen factors that need to be
considered. Our valuation will be updated in accordance with the Revised
Guidelines and will consider any changes in market conditions for thrift
institutions.
The pro forma market value is defined as the price at which the stock of
the Corporation after conversion would change hands between a typical willing
buyer and a typical willing seller when the former is not under any compulsion
to buy and the latter is not under any compulsion to sell, and with both parties
having reasonable knowledge
1
<PAGE>
Introduction (cont.)
of relevant facts in an arms-length transaction. The appraisal assumes the Bank
is a going concern and that the shares issued by the Corporation in the
conversion are sold in non- control blocks.
In preparing this conversion appraisal, we have reviewed the audited
financial statements for the five fiscal years ended June 30, 1992 through 1996,
and discussed them with Advance's management and with Advance's independent
auditors, S. R. Snodgrass, A.C., Steubenville, Ohio. We have also discussed and
reviewed with management other financial matters. We have reviewed the
Corporation's preliminary Form S-1 and the Bank's preliminary Form AC and
discussed them with management and with the Bank's conversion counsel.
We have visited Advance's home office in Wellsburg and branch in
Follansbee, West Virginia and have traveled the surrounding area. The Bank has
also just received approval to establish a branch in Wintersville, Ohio, across
the Ohio River in Jefferson County. There is no scheduled date for opening at
this point in time. We have studied the economic and demographic characteristics
of the Bank's primary market area relative to West Virginia and the United
States. We have also examined the competitive financial institution environment
within which Advance operates, giving consideration to the area's key
characteristics, both positive and negative.
We have given consideration to the market conditions for securities in
general and for publicly-traded thrift stocks in particular. We have examined
the performance of selected publicly-traded thrift institutions and compared the
performance of Advance to those selected institutions.
2
<PAGE>
Introduction (cont.)
Our valuation is not intended to represent and must not be interpreted to
be a recommendation of any kind as to the desirability of purchasing the
to-be-outstanding shares of common stock of the Corporation. Giving
consideration to the fact that this appraisal is based on numerous factors that
can change over time, we can provide no assurance that any person who purchases
the stock of the Corporation in this mutual-to-stock conversion will
subsequently be able to sell such shares at prices similar to the pro forma
market value of the Corporation as determined in this conversion appraisal.
3
<PAGE>
I. DESCRIPTION OF ADVANCE FINANCIAL SAVINGS BANK, f.s.b.
GENERAL
Advance Financial Savings Bank, f.s.b., Wellsburg, West Virginia, was
chartered in 1935 as a federally chartered savings and loan association with the
name of Advance Federal Savings and Loan Association. The Bank adopted its
current name in 1989.
Advance conducts its business from its home office in Wellsburg, West
Virginia, and its branch in Follansbee, West Virginia, both located in Brooke
County. The Bank's primary market area for deposits consists of Brooke County,
with Wellsburg being the county seat and largest community in the county. The
Bank's lending market extends into the adjacent counties in West Virginia and
into Jefferson County, Ohio, located to the west and across the Ohio River. The
Bank's lending market extends into the adjacent counties in West Virginia and
into Jefferson County, Ohio, located to the west and across the Ohio River.
Advance's deposits are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC") in the Savings Association Insurance Fund
("SAIF"). The Bank is also subject to certain reserve requirements of the Board
of Governors of the Federal Reserve Bank (the "FRB"). Advance is a member of the
Federal Home Loan Bank (the "FHLB") of Pittsburgh and is regulated by the OTS,
and by the FDIC. As of June 30, 1996, Advance had assets of $91,852,000,
deposits of $80,771,000 and equity of $6,200,000.
In the past five years, legislation has had an impact on the operations in
the financial institution industry. In 1989, the Financial Institution Reform,
Recovery, and Enforcement Act ("FIRREA") became effective and put into place
more stringent supervisory standards and higher capital requirements for the
thrift industry. FIRREA established new capital requirements and strengthened
OTS' enforcement powers. These capital requirements continue today under the
FDIC and the FRB and include a tier one capital requirement of 4.0 percent of
total assets, and a risk-based capital requirement of 8.0 percent of
risk-weighted assets. OTS now has the power to assess civil money
4
<PAGE>
General (cont.)
penalties and issue cease and desist orders for violations of regulations deemed
unsafe and unsound practices.
FIRREA also resulted in an increase in deposit insurance premiums which
thrifts must pay to the FDIC. A plan for a one-time premium of 0.70 percent to
0.80 percent of deposits or possibly less to capitalize the SAIF does exist, and
such an increase would have an adverse effect on Advance's equity and net
income. Further, there has been a recent significant decrease in premiums on
Bank Insurance Fund ("BIF") deposits, which has an adverse competitive impact on
Advance and could affect its ability to compete effectively with BIF-insured
banks for deposits. Such impact could result in a downward impact on prices of
publicly traded thrift institutions.
FIRREA's objective was strengthened when the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") was passed, resulting in additional
provisions relating to thrift institutions. FDICIA provided for the
recapitalization of the insurance fund. FDICIA requires federally-insured
financial institutions to be examined at least annually and submit independently
audited financial reports based on the size of the institution. Advance meets
the standards for a well capitalized institution.
Advance is a community-oriented institution which has been principally
engaged in the business of serving the financial needs of the public in its
savings market area and its lending market, which extends beyond Brooke County
into adjacent counties and across the Ohio River into Jefferson County. Advance
has been actively and consistently involved in the origination of residential
mortgage loans for the purchase and construction of one- to four-family
dwellings, comprising 43.7 percent of its loan originations during the year
ended June 30, 1996, and 55.2 percent of its loan originations during the fiscal
year ended June 30, 1995. At June 30, 1996, 69.1 percent of its gross loans
consisted of residential real estate loans on one- to four-family dwellings, not
including construction
5
<PAGE>
General (cont.)
loans of 2.4 percent compared to a higher 73.5 percent at June 30, 1992, with
the primary source of its funds being retail deposits from residents in its
local communities. The Bank is also an originator of multifamily loans,
nonresidential real estate loans, commercial loans, construction loans and also
offers consumer loans on an active basis. Consumer loans include automobile
loans, home equity loans, education loans, secured and unsecured personal loans,
and loans on savings accounts. Consumer loans represented 12.4 percent of gross
loans at June 30, 1996. Nonresidential real estate loans represented a strong
10.3 percent of the Bank's total loans at June 30, 1996, multifamily loans
represented 2.1 percent and commercial loans represented 3.8 percent.
The Bank had $9.4 million, or 10.2 percent of its assets in cash and
investments including FHLB stock. The Bank had an additional $537,000, or 0.6
percent of its assets, in mortgage-backed securities, with the combined total of
investment securities, mortgage-backed securities and cash and cash equivalents
being $10.0 million or 10.8 percent of assets. Deposits and retained earnings
have been the primary sources of funds for the Bank's lending and investment
activities with FHLB advances having also served as an additional source of
funds.
The management of Advance is aware of the emphasis being placed on
matching the maturities of assets and liabilities and monitoring the Bank's
interest rate sensitivity position and market value of portfolio equity. The
Bank understands the nature of interest rate risk and the potential earnings
impact during times of rapidly changing rates, either rising or falling. Advance
also recognizes the need and importance of attaining a competitive net interest
margin due to its more moderate levels of fee and other income.
The Bank's gross amount of stock to be sold in the conversion will be
$8,200,000 or 820,000 shares at $10 per share based on the midpoint of the
appraised value, with net conversion proceeds of $7,750,000 reflecting
conversion expenses of $450,000. The
6
<PAGE>
General (cont.)
actual cash proceeds to the Bank of $3.9 million will represent fifty percent of
the net conversion proceeds, including the ESOP of $656,000, and will be
invested in mortgage loans, construction loans, and consumer loans over time,
and initially invested in short term investments. The Bank may also use the
proceeds to expand services, expand operations or other financial service
organizations, diversification into other businesses, or for any other purposes
authorized by law. The Holding Company will use its proceeds to fund the ESOP
and to invest in short- and intermediate-term government securities.
Advance has seen strong overall deposit growth over the past five fiscal
years with deposits increasing a strong 36.7 percent from June 30, 1992, to June
30, 1996, or an average of 9.1 percent per year. The Bank anticipates growth to
continue in the future. The Bank has focused on increasing its loan portfolio
during the past five years, decreasing its level of investments, decreasing its
mortgage-backed securities, reducing nonperforming assets to assets, monitoring
its earnings and increasing its capital to assets ratio. Equity to assets
increased from 5.30 percent of assets at June 30, 1992, to 6.75 percent at June
30, 1996.
Advance's primary lending strategy has been to originate and retain both
adjustable-rate and fixed-rate residential mortgage loans with emphasis on
adjustable-rate mortgage loans and also on consumer loans.
Advance's share of one- to four-family mortgage loans has decreased
moderately from 73.5 percent of gross loans at June 30, 1992, to 69.1 percent as
of June 30, 1996. Construction loans decreased from 3.8 percent of gross loans
at June 30, 1992, to 2.4 percent at June 30, 1996. Nonresidential real estate
loans increased from 6.0 percent of gross loans at June 30, 1992, to 10.3
percent at June 30, 1996. Multifamily loans increased from 1.7 percent in 1992
to 2.1 percent in 1996. The decrease in one- to four-family loans was offset by
the Bank's increase in nonresidential real estate loans. The
7
<PAGE>
General (cont.)
Bank's share of consumer loans witnessed a decrease from 13.6 percent at June
30, 1992, to 12.4 percent at June 30, 1996, and commercial loans increased from
1.4 percent to 3.8 percent over the same time period.
Management's internal strategy has also included continued emphasis on
maintaining an adequate and appropriate allowance for loan losses relative to
loans and nonperforming assets in recognition of the more stringent requirements
within the industry to establish and maintain a higher level of general
valuation allowances and also in recognition of the Bank's planned increase in
lending. At June 30, 1992, Advance had $119,000 in its loan loss allowance or
0.23 percent of gross loans, which increased to $325,000 and represented a
higher 0.40 percent of gross loans at June 30, 1996.
Interest income from loans and investments has been the basis of earnings
with the net interest margin being the key determinant of net earnings. With a
dependence on net interest margin for earnings, current management will focus on
maintaining the Bank's net interest margin without undertaking excessive credit
risk and will not pursue any significant change in its interest rate risk
position.
8
<PAGE>
PERFORMANCE OVERVIEW
Advance's financial position over the past five fiscal years of June 30,
1992, through June 30, 1996, is highlighted through the use of selected
financial data in Exhibit 5. Advance has focused on strengthening its equity
position, controlling its overhead ratio, increasing its savings and loan
levels, and maintaining its net interest margin. Advance has experienced a
strong rise in assets from 1992 to 1996 and a smaller but still strong rate of
increase in deposits with a greater than average increase in equity over the
past five fiscal years. Due to the strong growth, the resultant impact has been
a moderate increase in the Bank's equity to assets ratio from 1992 to 1996.
Advance witnessed a total increase in assets of $27.5 million or 42.7
percent for the period of June 30, 1992, to June 30, 1996, representing an
average annual increase in assets of 10.7 percent. For the year ended June 30,
1996, assets increased $8.1 million or 9.7 percent. Of those fiscal periods, the
Bank experienced its largest dollar rise in assets of $12.7 million in fiscal
year 1994, which represented a 19.1 percent increase in assets funded by a rise
in deposits and increase in FHLB advances. The increase in assets was succeeded
by a $4.8 million or 6.1 percent increase in assets in fiscal year 1995 and a
10.7 percent increase in 1996.
The Bank's net loan portfolio, including mortgage loans and non-mortgage
loans, increased from $50.0 million at June 30, 1992, to $77.6 million at June
30, 1996, and represented a total increase of $27.6 million, or 55.2 percent.
The average annual increase during that period was 13.8 percent. That increase
was the result of high levels of loan originations of both mortgage loans and
consumer loans. For the year ended June 30, 1996, loans increased $4.5 million
or 6.2 percent.
Advance has pursued obtaining funds through deposit growth in accordance
with the demand for loans, and has also made use of FHLB advances during the
past. The Bank's competitive rates for savings in its local market in
conjunction with its focus on services
9
<PAGE>
Performance Overview (cont.)
have been the sources of retail deposits. Deposits witnessed a minimal increase
from 1992 to 1993, followed by strong increases in fiscal years 1994 and 1995
and a moderate increase in 1996, with an average annual rate of increase of 9.1
percent from June 30, 1992, to June 30, 1996. The Bank's strongest fiscal year
deposit growth was in fiscal year 1994, when deposits increased $7.9 million or
13.4 percent.
Advance has been able to increase its equity each fiscal year from 1992
through 1996. At June 30, 1992, the Bank had equity (GAAP basis) of $3.4 million
representing a 5.30 percent equity to assets ratio, increasing to $6.2 million
at June 30, 1996, and representing a 6.75 percent equity to assets ratio. The
rise in the equity to assets ratio is the result of the Bank's stronger earnings
performance in 1993 through 1995 with the impact reduced by a strong rise in
assets. Equity increased 81.7 percent from June 30, 1992, to June 30, 1996,
representing an average annual increase of 20.4 percent.
10
<PAGE>
INCOME AND EXPENSE
Exhibit 6 presents selected operating data for Advance, reflecting the
Bank's income and expense trends. This table provides selected audited income
and expense figures in dollars for the fiscal years of 1992 through 1996.
Advance has witnessed an increase in its dollar level of interest income
from June 30, 1992, through June 30, 1996, ranging from a high of $6.6 million
in 1996 to a low of $5.2 million in 1993, with a total increase of 23.8 percent,
or an average increase of 5.9 percent per year. This overall trend was a
combination of a minimal decrease from 1992 to 1993 followed by a moderate
increase from 1993 to 1996. In fiscal year 1996, interest income increased
$683,000, or 11.5 percent to $6.6 million. The overall increase in interest
income was due primarily to the Bank's increase in loan volume.
The Bank's interest expense experienced a declining trend from fiscal year
1992 to 1994, followed by strong increases in 1995 and 1996. Interest expense
decreased $978,000, or 28.5 percent, from 1992 to 1994, compared to an increase
in interest income of $42,000, or 0.8 percent, for the same time period.
Interest expense then increased $685,000 or 27.8 percent from 1994 to 1995,
compared to an increase in interest income of $657,000 or 20.9 percent. Such
increase in interest income, was more than offset by the increase in interest
expense and resulted in a decrease in annual net interest income to $2,783,000
for the fiscal year ended June 30, 1995, and a decrease in net interest margin.
For the year ended June 30, 1996, interest expense increased $657,000 or 20.9
percent compared to an increase in interest income of a larger $683,000 or 11.5
percent and resulting in an increase in net interest income.
The Bank has made provisions for loan losses in each of the past five
fiscal years of 1992 through 1996. The amounts of those provisions were
determined in recognition of the Bank's level of loan originations,
nonperforming assets, charge-offs, repossessed assets and current industry
norms. The loan loss provisions were $37,000 in 1992,
11
<PAGE>
Income and Expense (cont.)
$23,000 in 1993, $57,000 in 1994, $48,000 in 1995 and $263,000 in 1996. The
impact of these loan loss provisions has been to provide Advance with a general
valuation allowance of $325,000 at June 30, 1996, or 0.40 percent of gross loans
and 73.5 percent of nonperforming assets.
Total other income or noninterest income indicated an overall rising trend
from fiscal year 1993 to 1996. The highest level of noninterest income was in
fiscal year 1992 at $304,000 or 0.47 percent of assets and the lowest level at
$218,000 was in 1993, representing 0.33 percent of assets. The average
noninterest income level for the past five fiscal years was $256,400 or 0.33
percent of average assets. In 1996, noninterest income was $294,00 or 0.32
percent of assets. Noninterest income consists primarily of service charges on
deposit accounts.
The Bank's general and administrative expenses or noninterest expenses
increased from $1,511,000 for the fiscal year of 1992 to $2,146,000 for the
fiscal year ended June 30, 1996. The dollar increase in noninterest expenses was
$635,000 from 1992 to 1996, representing an average annual increase of $158,750
or 8.8 percent. The average annual increase in other expenses was due to the
Bank's normal rise in overhead expenses. On a percent of assets basis, operating
expenses decreased from 2.35 percent of assets for the fiscal year ended June
30, 1992, to 2.34 percent for the fiscal year ended June 30, 1996, which was
similar to current industry averages of approximately 2.35 percent.
The net earnings position of Advance has indicated profitable performance
in each of the past five fiscal years ended June 30, 1992 through 1996. The
annual net income figures for the past five fiscal years of 1992, 1993, 1994,
1995 and 1996 have been $436,000, $729,000, $856,000, $715,000, and $417,000,
representing returns on average assets of 0.69 percent, 1.09 percent, 1.22
percent, .89 percent, and .48 percent, respectively. The average return on
assets for the past five fiscal years was .87 percent.
12
<PAGE>
Income and Expense (cont.)
Exhibit 7 provides the Bank's normalized earnings or core earnings for
fiscal years 1994 to 1996. The Bank's normalized earnings eliminate any
nonrecurring income and expense items. There were no income or expense
adjustments in fiscal years 1994, 1995 or 1996.
The key performance indicators comprised of selected operating ratios,
asset quality ratios and capital ratios are shown in Exhibit 8 to reflect the
results of performance. The Bank's return on assets increased from .69 percent
in fiscal year 1992 to its highest level of 1.22 percent in fiscal year 1994,
decreasing to .89 percent in fiscal year 1995, and then down to 0.48 percent in
1996.
The Bank's average net interest rate spread strengthened from 2.95 percent
in fiscal year 1992 to 3.74 percent in fiscal year 1993, then increased in 1994
to 4.18 percent followed by decreases in 1995 and 1996 to 3.13 percent. The
Bank's net interest margin indicated a similar trend, increasing from 3.15
percent in fiscal year 1992, to 4.33 percent in fiscal year 1994, then
decreasing to 3.59 percent in fiscal 1995, and then decreasing to 3.36 percent
for the year ended June 30, 1996. Advance's net interest rate spread increased
79 basis points in 1993 to 3.74 percent from 2.95 percent in 1992, and then
increased 44 basis points in 1994 to 4.18 percent as the result of a decrease in
cost of funds. Net interest rate spread then decreased 80 basis points to 3.38
percent for fiscal year 1995 and decreased another 25 basis points to 3.13
percent for the fiscal year ended June 30, 1996. The Bank's net interest margin
followed a similar trend, increasing 81 basis points to 3.96 percent in 1993 and
then increasing 37 basis points to 4.33 percent in 1994. Net interest margin
decreased 74 basis points to 3.59 percent in 1995 and continued to decrease by
20 basis points to 3.39 percent in 1996.
13
<PAGE>
Income and Expense (cont.)
The Bank's return on average equity increased from 1992 to 1993, but
decreased in 1993 through 1995. The return on average equity increased from
13.81 percent in 1992 to 19.48 percent in fiscal year 1993, and then went down
to 18.05 percent in fiscal year 1994. The return on equity then decreased to
12.84 percent in fiscal year 1995, and decreased further to 6.77 percent for the
fiscal year ended June 30, 1996.
The Bank's ratio of net interest income after provision for loan losses to
total other expenses. This ratio reflects an institution's ability to maintain
its net interest income relative to noninterest expenses. The Bank's ratio of
net interest income after provision for loan losses to noninterest expenses was
103.6 percent in 1992 and was a slightly higher 105.0 percent in 1996. Another
key noninterest expense ratio reflecting efficiency of operation is the ratio of
noninterest expenses to net interest income and other income referred to as the
"efficiency ratio". The industry norm is 60.0 percent. The Bank has been
characterized with a higher ratio which was 69.2 percent in 1996.
Earnings performance can be affected by an institution's asset quality
position. The ratio of nonperforming assets to total assets is a key indicator
of asset quality. Advance has witnessed a minimal change in its nonperforming
asset ratio from 1992 to 1996. Nonperforming assets consist of loans delinquent
90 days or more, nonaccruing loans and repossessed assets. The ratio of
nonperforming assets to total assets was 0.64 percent at June 30, 1992, and
decreased to 0.41 percent at June 30, 1993. The ratio then increased to 0.63
percent in 1994, up to 0.69 percent in 1995 and down to 0.48 percent in 1996.
The Bank's allowance for loan losses was a modest 28.81 percent of nonperforming
assets at June 30, 1992, and was a higher 73.53 percent at June 30, 1996. As a
percentage of loans, Advance's allowance for loan losses decreased to 0.30
percent in 1993, increased to 0.65 percent in 1994, decreased to 0.33 percent in
1995 and increased to 0.55 percent in 1996.
14
<PAGE>
Income and Expense (cont.)
Exhibit 9 provides the changes in net interest income due to rate and
volume changes for the past two fiscal years of 1995 and 1996. In fiscal year
1995, net interest income decreased $140,000, due to an increase in interest
expense of $685,000 partially offset by a $545,000 increase in interest income.
The increase in interest income was due to an increase due to a change in volume
of $799,000 reduced by a decrease due to change in rate of $254,000. The
increase in interest expense was due to an increase due to rate of $292,000
accented by an increase due to a change in volume of $393,000.
In fiscal year 1996, net interest income increased $26,000, due to a
$657,000 increase in interest expense more than offset by a $683,000 increase in
interest income. The increase in interest income was due to a $486,000 increase
due to volume accented by a $197,000 increase due to rate. The increase in
interest expense was due to a $275,000 increase due to volume accented by a
$382,000 increase due to rate.
15
<PAGE>
YIELDS AND COSTS
The overview of yield and cost trends for the years ended June 30, 1994 to
1996, and at June 30, 1996, can be seen in Exhibit 10, which offers a summary of
key yields on interest-earning assets and costs of interest-bearing liabilities.
Advance's weighted average yield on its loan portfolio decreased only 6
basis points from fiscal year 1994 to 1996, from 8.15 percent to 8.09 percent.
The yield on mortgage-backed securities increased 85 basis points from fiscal
year 1994 to 1996 from 8.11 percent to 8.96 percent. The yield on investment
securities decreased 46 basis points from 6.14 percent in 1994 to 5.68 percent
in 1996. The combined weighted average yield on all interest-earning assets
decreased 8 basis points to 7.90 percent from 1994 to 1996. The weighted average
yield decreased another 18 basis points to 7.72 percent at June 30, 1996.
Advance's weighted average cost of interest-bearing liabilities increased
46 basis points to 4.26 percent from fiscal year 1994 to 1995, which was greater
than the Bank's 34 basis point decrease in yield, resulting in the decline in
the Bank's interest rate spread of 80 basis points from 4.18 percent to 3.38
percent from 1994 to 1995. The Bank's average cost of interest-bearing
liabilities continued to increase from 1995 to 1996 by 51 basis points to 4.77
percent compared to a 26 basis point increase in yield on interest-earning
assets. The result was a continued decrease in the Bank's interest rate spread
of 25 basis points to 3.13 percent for fiscal year 1996. The Bank's cost of
funds then decreased 19 basis points to 4.58 percent at June 30, 1996, compared
to a 18 basis points decrease in yield resulting in a one basis point increase
in interest rate spread to 3.14 percent. The Bank's net interest margin
decreased 74 basis points from 4.33 percent in fiscal year 1994 to 3.59 percent
in fiscal year 1995, decreasing further to 3.36 percent for the year ended June
30, 1996. The Bank's net interest margin was a similar 3.38 percent at June 30,
1996.
16
<PAGE>
INTEREST RATE SENSITIVITY
Advance has monitored its interest rate sensitivity position with an
emphasis on adjustable-rate mortgage loans which make up 52.2 percent of loans
and a higher 62.3 percent of one-to-four family mortgage loans. Advance is aware
of the thrift industry's historically higher interest rate risk exposure in the
1980's, which caused a negative impact on earnings and market value of portfolio
equity as a result of significant fluctuations in interest rates, specifically
rising rates. Such exposure was due to the disparate rate of maturity and/or
repricing of assets relative liabilities commonly referred to as an
institution's "gap". The larger an institution's gap, the greater the risk
(interest rate risk) of earnings loss due to a decrease in net interest margin
and a decrease in market value of equity or portfolio loss. In response to the
potential impact of interest rate volatility and negative earnings impact, many
institutions have taken steps in the 1990's to minimize their gap position. This
frequently results in a decline in the institution's net interest margin and
overall earnings performance. The Bank has taken steps to increase its share of
adjustable-rate mortgage loans, however, the Bank does have a higher level of
consumer loans totaling $9.6 million which are all fixed rate but shorter term.
The Bank measures its interest rate risk through the use of its net
portfolio value ("NPV") of the expected cash flows from interest-earning assets
and interest-bearing liabilities and any off-balance sheet contracts. The NPV
for the Bank is calculated on a quarterly basis by the OTS as well as the change
in the NPV for the Bank under rising and falling interest rates. Such changes in
NPV under changing rates is reflective of the Bank's interest rate risk
exposure.
There are other factors which have a measurable influence on interest rate
sensitivity. Such key factors to consider when analyzing interest rate
sensitivity include loan origination activity, the loan payoff schedule,
accelerated principal payments, deposit maturities, interest rate caps on
adjustable-rate mortgage loans, and deposit withdrawals.
17
<PAGE>
Interest Rate Sensitivity (cont.)
Exhibit 11 provides the Bank's NPV as of June 30, 1996, and the change in
the Bank's NPV under rising and declining interest rates. Such calculations are
provided by OTS, and the focus of this exposure table is a 200 basis points
change in interest rates either up or down.
The Bank's change in its NPV at June 30, 1996, based on a rise in interest
rates of 200 basis points was a 26.0 percent decrease, representing a dollar
decrease in equity value of $2,232,000. In comparison, based on a decline in
interest rates of 200 basis points, the Bank's NPV was estimated to increase
10.0 percent or $857,000 at June 30, 1996. The Bank's exposure at June 30, 1996,
increases to a 59.0 percent decrease under a 400 basis point rise in rates, and
the NPV is estimated to increase 27.0 percent based on a 400 basis point
decrease in rates.
The Bank is aware of its higher interest rate risk exposure under rapidly
rising rates and strongly positive exposure under falling rates. Due to
Advance's recognition of the need to control its interest rate exposure, the
Bank has been more active in adjustable-rate residential mortgage loans and
short term consumer loans.
18
<PAGE>
LENDING ACTIVITIES
Advance has focused its lending activity on the origination of
conventional mortgage loans secured by one- to four-family dwellings. Exhibit 12
provides a summary of Advance's loan portfolio, by loan type, at June 30, 1992
through 1996.
Residential loans secured by one- to four-family dwellings excluding
residential construction loans was the primary loan type representing 69.1
percent of the Bank's gross loans as of June 30, 1996. This share has seen a
decrease from 73.5 percent at June 30, 1992. The second largest real estate loan
type as of June 30, 1996, was nonresidential real estate loans which comprised
10.3 percent of gross loans compared to a smaller 6.0 percent as of June 30,
1992. The nonresidential real estate loan category was also the second largest
real estate loan type in 1992. The third key real estate loan type was
construction loans, which represented 2.4 percent of gross loans as of June 30,
1996, compared to a larger 3.8 percent at June 30, 1992. Construction loans were
also the third largest loan category in 1992. Multifamily loans were the fourth
largest real estate loan type at June 30, 1996, with 2.1 percent of gross loans
compared to a lower 1.7 percent in 1992 and making it the fourth largest real
estate loan category in 1992. Most of the Bank's construction loans are
single-family residential loans. These four real estate loan categories
represented 83.8 percent of gross loans at June 30, 1996, compared to a slightly
larger 85.0 percent of gross loans at June 30, 1992. Commercial loans
represented 3.8 percent of gross loans at June 30, 1996, and a smaller 1.4
percent at June 30, 1992.
The consumer loan category was the other loan type at June 30, 1996, and
represented 12.4 percent of gross loans compared to a larger 13.6 percent at
June 30, 1992. Consumer loans were the second largest overall loan type at June
30, 1996, and also the second largest loan type in 1992. The Bank originates
savings account loans, automobile loans, education loans, home equity loans, and
other secured and unsecured personal loans. The overall mix of loans has
witnessed moderate change from fiscal year-end 1992 to June 30, 1996, with the
Bank having increased its share of commercial loans to offset its decrease in
share of consumer loans and real estate loans.
19
<PAGE>
Lending Activities (cont.)
The emphasis of Advance's lending activity is the origination of
conventional mortgage loans secured by one- to four-family residences. Such
residences are located in Advance's retail deposit market area of Brooke County
and extending into adjacent West Virginia counties and into Jefferson County,
located across the Ohio River in Ohio. The Bank also originates interim
construction loans on single-family residences primarily to individual owners
and to developers. At June 30, 1996, 69.1 percent of Advance's gross loans
consisted of loans secured by one- to four-family residential properties,
excluding construction loans. Construction loans represented another 2.4 percent
of gross loans.
The Bank originates adjustable-rate mortgage loans, ("ARMs") with
adjustment/maturity periods of one, three, and five years. The interest rates on
ARMs are indexed to the weekly average yield on the one year U.S. Treasury bill.
The Bank does offer ARMs with initial interest rates set below the fully indexed
rate. The one-year, three-year and five-year ARMs have a maximum rate adjustment
of 1.0 to 2.0 percent at each adjustment period and a 6.0 to 7.0 percent maximum
adjustment over the life of the loan with payments based on up to a 30 year loan
term.
The majority of ARMs have terms of 15 to 30 years, and fixed rate loans
have terms of up to 30 years. The Bank retains its fixed rate loans.
Historically, the majority of Advance's mortgage loans are adjustable-rate
mortgage loans, which represented 53.3 percent of loans due after June 30, 1997.
All of Advance's consumer loans were fixed rate.
The original loan to value ratio for conventional mortgage loans to
purchase or refinance one-to four-family dwellings generally does not exceed 80
percent at Advance, even though the Bank will grant loans with up to a 95
percent loan to value ratio, but private mortgage insurance is required for the
amount in excess of 80 percent.
20
<PAGE>
Lending Activities (cont.)
Advance has also been an originator of nonresidential real estate loans,
commercial loans and has been less active in multifamily loans in the past. The
Bank will continue to make multifamily, commercial, and nonresidential real
estate loans. The Bank had a total of $8.3 million in nonresidential real estate
loans at June 30, 1996, or 10.3 percent of gross loans, compared to $3.1 million
or 6.0 percent of gross loans at June 30, 1992. Commercial loans have increased
from $732,000 or 1.4 percent of gross loans at June 30, 1992, to $3.1 million or
3.8 percent of gross loans at June 30, 1996. Multifamily loans have increased
from $885,000 or at June 30, 1992, to $1.7 million at June 30, 1996, and their
share of loans has increased from 1.7 percent to 2.1 percent over the same time
period. The major portion of nonresidential real estate loans are secured by
office buildings, churches, mixed residential, restaurants, retail stores and
other commercial properties.
Advance has also been active in consumer lending. Consumer loans
originated consist primarily of automobile loans, home equity loans, education
loans, savings account loans, and personal loans, which represented a combined
total of 12.4 percent of gross loans at June 30, 1996, down from 13.6 percent in
1992. At June 30, 1996, consumer loans totaled $10.1 million.
Exhibit 13 provides a breakdown and summary of Advance's fixed- and
adjustable-rate loans, indicating a predominance of adjustable-rate loans. At
June 30, 1996, 53.3 percent of the Bank's total loans due after June 30, 1997,
were adjustable-rate, and 46.7 percent were fixed-rate. It is also evident that
a relatively strong 54.8 percent of one- to four-family residential mortgage
loans and 62.4 percent of total loans have maturities of less than 15 years.
21
<PAGE>
Lending Activities (cont.)
As indicated in Exhibit 14, Advance experienced a moderate decrease in its
one-to four-family loan originations and a minimal increase in total loan
originations from fiscal years 1994 to 1996. Total loan originations in fiscal
year 1996 were $27.6 million compared to $26.7 million in fiscal year 1994, with
fiscal year 1995 indicating a lower $23.9 million, reflective of reductions in
one-to four-family loans and commercial loans. The decrease in one-to
four-family residential loan originations from 1994 to 1996 constituted a $4.2
million decrease with total loan originations increasing $880,000 due to the
decrease in one- to four-family and construction loans, more than offset by
increases in consumer and commercial loans. Loan originations for the purchase
of one- to four-family residences, including construction loans, represented
57.2 percent of total loan originations in fiscal year 1994, compared to a
lesser 43.5 percent in fiscal year 1995 and a lower 33.6 percent in fiscal year
1996. Consumer loans increased their share of loan originations from 13.6
percent in 1994 to a strong 29.3 percent in 1996, and commercial loan
originations increased their share from 17.5 percent in 1994 to 28.3 percent of
originations in 1996. Overall, loan originations exceeded principal payments and
repayments in fiscal 1994 by $12.6 million, exceeded reductions in fiscal year
1995 by $5.9 million, and exceeded reductions in fiscal 1996 by $4.5 million.
22
<PAGE>
NONPERFORMING ASSETS
Advance understands asset quality risk and the direct relationship of such
risk to delinquent loans and nonperforming assets including real estate owned.
The quality of assets has been a key concern to financial institutions
throughout many regions of the country. A number of financial institutions have
been confronted with rapid increases in their levels of nonperforming assets and
have been forced to recognize significant losses, setting aside major valuation
allowances. A sharp increase in nonperforming assets has often been related to
specific regions of the country and has frequently been associated with higher
risk loans, including purchased nonresidential real estate loans. Advance has
witnessed some volatility in its nonperforming assets and has made a concerted
effort to control its nonperforming assets during the past five years.
Advance's loans delinquent 90 days or more totaled $303,000 at June 30,
1996, or 0.37 percent of gross loans, with delinquent loans of 30 to 89 days
totaling $792,000 or 0.98 percent of gross loans at June 30, 1996.
Advance reviews each loan when it becomes delinquent 60 days or more, to
assess its collectibility and to initiate direct contact with the borrower. The
Bank sends the borrower a late payment notice within 15 days after the payment
is due. The Bank then initiates both written and oral communication with the
borrower if the loan remains delinquent. When the loan becomes delinquent at
least 90 days, the Bank will consider foreclosure proceedings. The Bank does not
normally accrue interest on loans past due 90 days or more. Loans delinquent 90
days or more and in management's opinion not adequately secured to insure
collection of the entire balance are placed on a non-accrual status, and at that
point in time, the Bank may contact an attorney to pursue foreclosure
procedures. Advance had no real estate owned as of June 30, 1996, but had
$334,000 in real estate owned at June 30, 1995.
23
<PAGE>
Nonperforming Assets (cont.)
Exhibit 15 provides a summary of Advance's nonperforming assets at June
30, 1992 through 1996. Nonperforming assets consist of non-accrual loans, which
includes loans delinquent 90 days or more, real estate acquired in settlement of
loans, and real estate owned. The Bank has historically carried a lower than
average level of nonperforming assets when compared to its peer group and the
thrift industry in general. Advance's level of nonperforming assets ranged from
a high of $582,000 or 0.69 percent of total assets at June 30, 1995, to a low of
$270,000 or 0.41 percent of assets at June 30, 1993. At June 30, 1996,
nonperforming assets totaled $442,000 and represented .48 percent of total
assets.
Advance's level of nonperforming assets is higher than its level of
classified assets. The Bank's level of classified assets was $20,000 or .02
percent of assets at June 30, 1996 (reference Exhibit 16). The Bank's classified
assets consisted of $19,000 in substandard assets, with $1,000 in assets
classified as doubtful and no assets classified as loss. The Bank also had
$172,000 in assets classified as special mention.
Exhibit 17 shows Advance's allowance for loan losses for fiscal years 1992
through 1996, indicating the activity and the resultant balances. Advance has
witnessed a moderate increase in its balance of allowance for loan losses from
$119,000 in 1992 to $325,000 at June 30, 1996, $37,000 in 1992, $23,000 in 1993
with provisions of $57,000 in 1994, $48,000 in fiscal 1995 and $263,000 in 1996.
The Bank had net charge-offs of $7,000 in 1992, $23,000 in 1993, $2,000 in 1994,
$24,000 in 1995, and $136,000 in 1996. The Bank's ratio of allowance for loan
losses to gross loans increased from 0.23 percent at June 30, 1992, to a still
moderate .40 percent at June 30, 1996, due to an increase in allowances with a
significant increase in loans. Allowance for loan losses to nonperforming assets
were 73.5 percent at June 30, 1996.
24
<PAGE>
INVESTMENTS
The securities portfolio of Advance has been comprised of U.S. government
and federal agency securities, interest-bearing deposits in other financial
institutions, money fund securities, and FHLB stock. Exhibit 18 provides a
summary of Advance's investment portfolio at June 30, 1994 through 1996.
Investments were $8.5 million at June 30, 1996, compared to $6.7 million at June
30, 1995, and $8.8 million at June 30, 1994. The primary component of
investments at June 30, 1996, was U.S. government and federal agency securities
representing 56.5 percent of investments, followed by interest-bearing deposits
in other financial institutions representing 36.1 percent, for a combined total
of 92.6 percent. The third key component was FHLB stock representing 6.6 percent
of investment securities. The securities portfolio had a weighted average yield
of 5.68 percent, and the mortgage-backed securities had a weighted average yield
of 8.96 percent for fiscal year 1996. The Bank also had cash and non-interest
bearing cash equivalents of $949,000 or 1.0 percent of assets at June 30, 1996.
The Bank had mortgage-backed securities with a book value of $537,000 at
June 30, 1996, which decreased from $1.1 million at June 30, 1994.
Mortgage-backed securities represented a modest 0.6 percent of assets at June
30, 1996, and 1.4 percent at June 30, 1994, with such lower levels reflective of
the Bank's higher share of loans.
25
<PAGE>
DEPOSIT ACTIVITIES
The mix of deposits at June 30, 1996 is provided in Exhibit 19. The Bank
has a relatively strong share of transaction accounts which totaled $29.9
million at June 30, 1996, and represented 37.0 percent of total deposits.
Transaction accounts include passbook/regular savings, NOW accounts, money
market accounts, and non-interest bearing accounts with passbook/regular savings
representing 58.1 percent of transaction accounts. Certificates of deposits
represented 63.0 percent of total deposits with short term certificates of 7 to
9 months being the largest certificate category representing 24.5 percent of
certificates followed by jumbo certificates representing 15.3 percent of
certificates and then 11-12 month certificates representing 11.3 percent of
certificates.
Exhibit 20 shows the Bank's deposit activity for the three years ended
June 30, 1994 to 1996. Advance experienced net increases in deposits in fiscal
years 1994 through 1996, both including and excluding interest credited. In
fiscal year 1994, there was a net increase in deposits including interest
credited of $7.9 million or 13.4 percent, followed by a $7.5 million increase or
11.1 percent in 1995. In fiscal year 1996, an increase in deposits of $6.1
million resulted in a 8.1 percent increase in deposits.
BORROWINGS
Advance has relied on retail deposits as its primary source of funds but
has made use of FHLB advances during the past five fiscal years ended June 30,
1996. The Bank's balance of FHLB advances has increased from $1,350,000 or 2.1
percent of assets at June 30, 1992, to $4,376,452 at June 30, 1996, or 4.8
percent of assets.
26
<PAGE>
SUBSIDIARIES
Advance has one wholly-owned subsidiary, Advance Financial Service
Corporation of West Virginia ("AFSC"), whose primary purpose is to own stock in
Intrieve Corporation, the Bank's data processing company. The Bank's investment
in the subsidiary was $15,000 at June 30, 1996.
OFFICE PROPERTIES
Advance has two offices, its home office located in downtown Wellsburg and
a regular branch in Follansbee, West Virginia. Advance owns its home office,
which provides off-street parking, drive-in window access and ATM access and
leases its branch facility (reference Exhibit 21). The Bank's net investment in
its office premises, excluding furniture, fixtures and equipment, totaled $1.9
million or 2.1 percent of assets at June 30, 1996. The Bank currently plans to
open a new branch office in Wintersville, Ohio, in the future and has just
received regulatory approval to open such office.
MANAGEMENT
The president, chief executive officer, and managing officer of Advance is
Stephen M. Gagliardi. Mr. Gagliardi joined the Bank in 1978 and became
president, chief executive officer and a director in 1983. Mr. Gagliardi is the
past Director of the West Virginia Appraiser Licensing and Certification Board
(reference, Exhibit 22).
27
<PAGE>
II. DESCRIPTION OF PRIMARY MARKET AREA
Advance's primary market area includes the cities of Wellsburg and
Follansbee and those outerlying communities surrounding its offices, including
all of Brooke County, West Virginia ("the market area"). The Bank's home office
is located in the city of Wellsburg and its branch is located in Follansbee,
both located in Brooke County.
The market area is characterized by average levels of income, a lower than
average housing value and a slightly lower current unemployment rate. The market
area's strongest employment categories are wholesale/retail trade, services and
manufacturing with a lower level of residents employed in the finance, insurance
and real estate industry category.
Exhibit 23 provides a summary of key demographic data and trends for the
market area, West Virginia and the United States for the periods of 1990, 1995,
and 2000. The market area showed a decrease in population than West Virginia,
while West Virginia and the United States both showed increases from 1990 to
1995. Overall, the period of 1990 to 1995 was characterized by a decrease of 1.2
percent in the market area population, which decreased from 26,992 to 26,662
residents, compared to an increase in population of 1.9 percent in West Virginia
and a rise in the national population level by 5.7 percent. During the period of
1995 through 2000, population is projected to continue to decline in the market
area by a small 0.5 percent, decreasing to 26,529 residents, while population is
expected to increase in West Virginia by 2.0 percent, and in the United States
by 5.4 percent.
In conformance with its modestly decreasing trend in population, the
market area witnessed a decrease in households (families) of 1.0 percent and 0.6
percent, from 1990 to 1995 and from 1995 to 2000, respectively, while West
Virginia had increases of 1.7 percent and 1.9 percent for the same time periods.
The United States continued to have the largest increases, growing by 5.6
percent from 1990 to 1995, and by 5.3 percent from
28
<PAGE>
Description of Primary Market Area (cont.)
1995 to 2000. From 1990 to 1995, the market area witnessed a decline in its
households from 10,131 to 10,027. By the year 2000, the market area is projected
to have 9,966 households.
The market area had higher per capita income levels than West Virginia but
lower per capital income than the United States in 1990 and 1995. In 1990, the
market area had an average per capita income of $11,916. West Virginia had a per
capita income of $10,044, while the United States had a higher per capita income
of $12,313. From 1990 to 1995, the United States had the largest percent
increase in per capita income, followed by West Virginia. The market area
experienced a decrease in its per capita income level of 2.9 percent to $11,573
in 1995, West Virginia had an increase in its per capita income of 4.7 percent
to $10,512, while the United States had an increase in its per capita income of
33.2 percent to $16,405.
Median household income figures for the market area were at higher levels
than West Virginia or the United States for 1990. In 1990, the average median
household income for the market area was $30,563. The median household income
levels for West Virginia and the United States were $22,866 and $28,255,
respectively. From 1990 to 1995, the market area's median household income
decreased by 15.6 percent to $25,791. West Virginia witnessed a decrease of 13.4
percent to $19,826 in 1995. The United States had an increase in its median
household income level by a much larger 19.0 percent to $33,610 during that same
tine period. By the year 2000, the market area, West Virginia and the United
States are projected to witness declines in their median household income levels
to $24,375, $18,516 and $32,972, respectively.
Exhibit 24 provides a summary of key housing data for the market area,
West Virginia, and the United States. Advance's market area had a 79.1 percent
rate of owner- occupancy, which was higher than the 74.1 percent owner-occupancy
rate for West
29
<PAGE>
Description of Primary Market Area (cont.)
Virginia and much higher than the 64.2 percent for the United States. As a
result, the market area supports a lower rate of renter-occupied housing at 20.9
percent compared to 25.9 percent for West Virginia and a higher 35.8 percent for
the United States.
The market area's median housing value of $44,100 is lower than both West
Virginia and the United States. West Virginia's median housing value of $47,900
is 7.9 percent higher than the market area's median housing value. The United
States' $79,098 median housing value is 44.2 percent greater than that of the
market area. The average median rent of the market area is surpassed by the
median rent of West Virginia and the United States. The market area had a median
rent of $198, which was lower than West Virginia's median rent of $221 and the
United States' median rent value of $374.
The major business source of employment by industry group, based on number
of employees for the market area, West Virginia and the United States was the
services industry responsible for 35.9 percent, 33.2 percent and 34.0 percent of
employment in 1993 respectively (reference Exhibit 25), compared to a lower 16.1
percent in West Virginia and 19.2 percent in the United States. The
manufacturing industry was the second major employer in the market area at 31.2
percent. The wholesale/retail trade group was the third major employer in the
market area at 18.6 percent, compared to a much higher 28.2 percent in West
Virginia and 27.5 percent in the United States. The construction group, finance,
insurance and real estate group, transportation/utilities group, and the
agriculture/mining group combined to provide 15.2 percent of employment in the
market area, 22.4 percent of employment in West Virginia, and 19.3 percent in
the United States.
An economic indicator that pertains more directly to the banking and
thrift industries is the issuance of new housing permits and permits for
commercial buildings because of its direct relationship to lending activity
(reference Exhibit 26). In 1991, 11 new housing permits were authorized in the
market area, 2,457 in West Virginia, and 796,647 in the United States. In 1992,
the issuance of new housing permits authorized
30
<PAGE>
Description of Primary Market Area (cont.)
decreased in the market area by 9.1 percent to 10 new permits. West Virginia and
the United States witnessed positive growth rates of 22.4 percent and 20.1
percent, respectively, with 3,000 and 956,494 new housing permits authorized. In
1993, the market area and the U.S. increased their issuance of new housing
permits, while West Virginia witnessed a decrease in the number of new housing
permits authorized. The market area authorized 22 new permits, an increase of
120.0 percent, West Virginia authorized 2,662 new permits, a decrease of 11.5
percent, while the United States exhibited a growth of 8.6 percent with
1,038,907 new permits.
Commercial building permits in West Virginia increased from 1991 through
1993, with a moderate increase in 1992 followed by a large increase in 1993.
West Virginia increased its permit activity by 10.5 percent from 1991 to 1992
issuing commercial building permits with a value of $147 million in 1992
compared to $133 million in 1991. In 1993, West Virginia experienced a large
increase of 93.9 percent in commercial building permit valuations to $285
million. In 1992, the United States witnessed a slight decline in commercial
building permit valuations of 0.1 percent, from $56.9 billion in 1991 to $56.8
billion in 1992. The United States rebounded in 1993 with growth of 8.1 percent,
rising to $61.43 billion in the value of new commercial building permits issued.
The unemployment rate is another key economic indicator. Exhibit 27 shows
the average unemployment rates in the market area, West Virginia, and the United
States in 1994, 1995 and July, 1996. The market area has historically been
characterized by a volatile rate of unemployment when compared to West Virginia
and the United States. The market area had a decrease in its unemployment rate
from 8.5 percent in 1994 down to 6.2 percent in 1995. West Virginia had a
decrease in its unemployment rate from 8.9 percent to 7.9 percent, and the
United States' unemployment rate decreased from 6.1 percent to 5.2 percent in
that same time period. In July, 1996, unemployment decreased
31
<PAGE>
Description of Primary Market Area (cont.)
further in the market area and West Virginia but increased in the United States.
The market area's unemployment decreased to 5.0 percent, compared to West
Virginia at 6.5 percent, and the United States at 5.6 percent.
Exhibit 28 provides deposit data for banks, thrifts and credit unions in
Brooke County. Advance's deposit base in Brooke County was $74.7 million or
100.0 percent of the total thrift deposits, corresponding to a smaller but
strong 39.4 percent share of total deposits, which totaled $189.7 million. The
market area is dominated by the banking industry. Total deposits in the county
were $189.7 million, with 59.3 percent of deposits held by banks, compared to a
lower $74.7 million or 39.4 percent of deposits held by thrifts and $2.6 million
or 1.4 percent of total deposits held by credit unions. It is evident from the
size of both thrift deposits and bank deposits that Brooke County has a moderate
deposit base with the Bank being the only thrift in the market area and having a
relatively strong penetration for total deposits.
Exhibit 29 provides interest rate data for each quarter for the years 1992
through 1995 and for the first two quarters of 1996. The interest rates tracked
are the Prime Rate, as well as 90-Day, One-Year and Thirty-Year Treasury Bills.
Interest rates experienced a declining trend in the first two quarters of 1992,
but then began to rise in the second half of the year. In 1993 rates experienced
slight volatility until the last two quarters, which indicated the beginning of
a rising trend. This rising trend continued throughout all of 1994 and into the
first quarter of 1995 with prime at 9.00 percent. However, throughout 1995,
interest rates saw dramatic decreases, as the prime rate fell to its 1994 year
end level of 8.50 percent. Such decrease in the prime rate continued through the
first quarter of 1996 as it fell to 8.25 percent and then remained at 8.25
percent through the second quarter in 1996. Rates on T-bills, however, witnessed
an increase with 30-Year Treasury Bills experiencing the largest increase.
32
<PAGE>
SUMMARY
To summarize, Advance's market area represents an area with a decreasing
population base and number of households during the mid 1990s. The market area
has evidenced higher per capita income and median household income compared to
West Virginia but lower than the United States. The market area did have a lower
median housing value and a lower average median rent level than both West
Virginia and the United States. The market area currently has a lower
unemployment rate than West Virginia, but historically has been characterized
with a higher than normal unemployment rate. Further, the market area has a
moderately competitive financial institution market dominated by banks with a
total deposit base of approximately $189.7 million for all of Brooke County.
33
<PAGE>
III. COMPARABLE GROUP SELECTION
Introduction
Integral to the valuation of Advance Financial Bancorp is the selection of
an appropriate group of publicly-traded thrift institutions, hereinafter
referred to as the "comparable group". This section identifies the comparable
group and describes each parameter used in the selection of each institution in
the group, resulting in a comparable group based on such specific and detailed
parameters, current financials and recent trading prices. The various
characteristics of the selected comparable group provide the primary basis for
making the necessary adjustments to the Corporation's pro forma value relative
to the comparable group. There is also a recognition and consideration of
financial comparisons with all publicly-traded, SAIF- insured thrifts in the
United States and all publicly-traded, SAIF-insured thrifts in the Midwest and
Ohio.
Exhibits 30 and 31 present Thrift Stock Prices and Pricing Ratios and Key
Financial Data and Ratios, respectively, both individually and in aggregate, for
the universe of 338 publicly-traded, SAIF-insured thrifts in the United States
("all thrifts"), excluding mutual holding companies, used in the selection of
the comparable group and other financial comparisons. Exhibits 30 and 31 also
subclassify all thrifts by region, including the 154 publicly-traded Midwest
thrifts ("Midwest thrifts") and the 1 publicly-traded thrift in West Virginia
("West Virginia thrifts"), and by trading exchange. Exhibit 32 presents prices,
pricing ratios and price trends for all SAIF-insured thrifts completing their
conversions between January 1, 1996, and September 6, 1996.
The selection of the comparable group was based on the establishment of
both general and specific parameters using financial, operating and asset
quality characteristics of Advance as determinants for defining those
parameters. The determination of parameters was also based on the uniqueness of
each parameter as a normal indicator of a thrift
34
<PAGE>
Introduction (cont.)
institution's operating philosophy and perspective. The parameters established
and defined are considered to be both reasonable and reflective of Advance's
basic operation. In as much as the comparable group must consist of at least ten
institutions, the parameters relating to asset size and geographic location have
been expanded as necessary in order to fulfill this requirement.
GENERAL PARAMETERS
Merger/Acquisition
The comparable group will not include any institution that is in the
process of a merger or acquisition due to the price impact of such a pending
transaction. The thrift institutions that were potential comparable group
candidates but were not considered due to their involvement in a
merger/acquisition or a potential merger/acquisition include the following:
Institution State
----------- -----
Financial Security Corp. Illinois
Workingmens Capital Holdings Indiana
Home Federal Corp. Maryland
Circle Financial Corp. Ohio
Seven Hills Financial Corp. Ohio
Third Financial Corp. Ohio
Bridgeville Savings Bank Pennsylvania
Fidelity Financial Bankshares Virginia
No thrift institution in Advance's city, county or market area is
currently involved in merger/acquisition activity or have been recently so
involved, as indicated in Exhibit 33.
35
<PAGE>
Mutual Holding Companies
The comparable group will not include any mutual holding companies. Mutual
holding companies typically demonstrate higher price to book valuation ratios
that are the result of their minority ownership structure that are inconsistent
with those of conventional, publicly-traded institutions. Exhibit 34 presents
pricing ratios and Exhibit 35 presents key financial data and ratios for all
publicly-traded, SAIF-insured mutual holding companies in the United States. The
following thrift institutions were potential comparable group candidates, but
were not considered due to their mutual holding company form:
Institution State
----------- -----
Webster City Federal Savings Bank, MHC Iowa
Leeds Federal Savings Bank, MHC Maryland
Wayne Savings & Loan Co., MHC Ohio
Greater Delaware Valley Savings Bank, MHC Pennsylvania
Trading Exchange
It is necessary that each institution in the comparable group be listed on
one of the two major stock exchanges, the New York Stock Exchange or the
American Stock Exchange, or traded over-the-counter ("OTC") and listed on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). Such a listing indicates that an institution's stock has
demonstrated trading activity and is responsive to normal market conditions,
which are requirements for listing. Of the 356 publicly-traded, SAIF-insured
institutions, including 18 mutual holding companies, 14 are traded on the New
York Stock Exchange, 17 are traded on the American Stock Exchange and 325 are
listed on NASDAQ.
36
<PAGE>
IPO Date
Another general parameter for the selection of the comparable group is the
initial public offering ("IPO") date, which must be at least four quarterly
periods prior to the trading date of September 6, 1996, used in this report, in
order to insure at least four consecutive quarters of reported data as a
publicly-traded institution. The resulting parameter is a required IPO date
prior to March 31, 1995.
Geographic Location
The geographic location of an institution is a key parameter due to the
impact of various economic and thrift industry conditions on the performance and
trading prices of thrift institution stocks. Although geographic location and
asset size are the two parameters that have been developed incrementally to
fulfill the comparable group requirements, the geographic location parameter has
definitely eliminated regions of the United States distant to Advance, including
the western states, the southwestern states and the New England states.
The geographic location parameter consists of West Virginia, its
surrounding states of Maryland, Ohio, Pennsylvania, Virginia and Kentucky, as
well as the states of Illinois and Indiana, for a total of eight states. To
extend the geographic parameter beyond those states could result in the
selection of similar thrift institutions with regard to financial conditions and
operating characteristics, but with different pricing ratios due to their
geographic regions. The result could then be an unrepresentative comparable
group with regard to price relative to the parameters and, therefore, an
inaccurate value.
37
<PAGE>
Asset Size
Asset size was another key parameter used in the selection of the
comparable group. The maximum total assets for any comparable group institution
considered was $350 million, due to the typically different operating
strategies, expansion capabilities, liquidity of stock and acquisition appeal of
larger institutions when compared to Advance, with assets of approximately $92
million. Such an asset size parameter was necessary to obtain a comparable group
of at least ten institutions.
In connection with asset size, we did not consider the number of offices
or branches in selecting or eliminating candidates since this characteristic is
directly related to operating expenses, which are recognized as an operating
performance parameter.
SUMMARY
Exhibits 36 and 37 show the 47 institutions considered as comparable group
candidates after applying the general parameters, with the shaded lines denoting
the institutions ultimately selected for the comparable group using the balance
sheet, performance and asset quality parameters established in this section.
38
<PAGE>
BALANCE SHEET PARAMETERS
Introduction
The balance sheet parameters focused on seven balance sheet ratios as
determinants for selecting a comparable group, as presented in Exhibit 36. The
balance sheet ratios consist of the following:
1. Cash and Investments/Assets
2. Mortgage-Backed Securities/Assets
3. One- to Four-Family Loans/Assets
4. Total Net Loans/Assets
5. Total Net Loans and Mortgage-Backed Securities/Assets
6. Borrowed Funds/Assets
7. Equity/Assets
The parameters enable the identification and elimination of thrift
institutions that are distinctly and functionally different from Advance with
regard to asset mix. The balance sheet parameters also distinguish institutions
with a significantly different capital position from Advance. The ratio of
deposits to assets was not used as a parameter as it is directly related to and
affected by an institution's equity and borrowed funds ratios, which are
separate parameters.
Cash and Investments to Assets
Advance's level of cash and investments to assets was 9.7 percent at June
30, 1996, and reflects the Bank's level of investments lower than national and
regional averages. The Bank's investments consist primarily of U. S. government
and federal agency securities and deposits in other institutions. During its
last five fiscal years, Advance's ratio of cash and investments to assets has
averaged 11.0 percent, from a high of 13.8 percent at June 30, 1992, to a low of
8.3 percent in fiscal year 1995. It should be noted that Federal Home
39
<PAGE>
Cash and Investments to Assets (cont.)
Loan Bank stock is not included in cash and investments, but rather is part of
other assets in order to be consistent with reporting requirements and sources
of statistical and comparative analysis.
The parameter range for cash and investments is broad due to the
volatility of this parameter and to prevent the elimination of otherwise good
potential comparable group candidates. The range has been defined as 4.0 percent
of assets to 40.0 of assets, with a midpoint of 22.0 percent.
Mortgage-Backed Securities to Assets
At June 30, 1996, Advance's ratio of mortgage-backed securities to assets
was a minimal 0.6 percent, much lower than both the regional average of 10.3
percent and the national average of 13.7 percent. Inasmuch as many institutions
purchase mortgage-backed securities as an alternative to lending relative to
cyclical loan demand and prevailing interest rates, this parameter is moderately
broad at 25.0 percent or less of assets and a midpoint of 12.5 percent.
One- to Four-Family Loans to Assets
Advance's lending activity is focused on the origination of residential
mortgage loans secured by one- to four-family dwellings. One- to four-family
loans, not including construction loans, represented 57.7 percent of the Bank's
assets at June 30, 1996, which is similar to industry averages. The parameter
for this characteristic requires any comparable group institution to have from
40.0 percent to 70.0 percent of its assets in one- to four-family loans with a
midpoint of 55.0 percent.
40
<PAGE>
Total Net Loans to Assets
At June 30, 1996, Advance had a ratio of total net loans to assets of 85.9
percent and a consistent five fiscal year average of 83.4 percent, which is
moderately higher than the national and regional averages of 67.3 percent and
68.0 percent, respectively. The parameter for the selection of the comparable
group is from 50.0 percent to 95.0 percent with a midpoint of 72.5 percent. The
wider range is simply due to the fact that, as the referenced national and
regional averages indicate, many larger institutions purchase a greater volume
of investment securities and/or mortgage-backed securities as a cyclical
alternative to lending, but may otherwise be similar to Advance.
Total Net Loans and Mortgage-Backed Securities to Assets
As discussed previously, Advance's shares of mortgage-backed securities to
assets and total net loans to assets were 9.7 percent and 85.9 percent,
respectively, for a combined share of 86.6 percent. Recognizing the industry and
regional ratios of 13.7 percent and 10.3 percent, respectively, of
mortgage-backed securities to assets, the parameter range for the comparable
group in this category is 60.0 percent to 97.0 percent, with a midpoint of 78.5
percent.
Borrowed Funds to Assets
Advance had FHLB advances of $4.4 million or 4.8 percent of total assets
at June 30, 1996, which was higher than its balance of $2.8 million or 3.3
percent of total assets at June 30, 1995. At the end of fiscal years 1992, 1993
and 1994, the Bank indicated advances of $1.4 million, $2.4 million and $6.2
million, respectively, resulting in a five year average of 4.3 percent. The use
of borrowed funds by some thrift institutions indicates
41
<PAGE>
Borrowed Funds to Assets (cont.)
an alternative to retail deposits and may provide a source of term funds for
lending. The federal insurance premium on deposits has also increased the
attractiveness of borrowed funds.
The public demand for longer term funds increased in 1995 and the first
half of 1996 due to the higher cost of deposits. The result was competitive
rates on longer term Federal Home Loan Bank advances, and an increase in
borrowed funds by many institutions as an alternative to higher cost, long term
certificates. The ratio of borrowed funds to assets, therefore, does not
typically indicate higher risk or more aggressive lending, but primarily an
alternative to retail deposits.
The range of borrowed funds to assets is 30.0 percent or less with a
midpoint of 15.0 percent, similar to the national average of 13.2 percent.
Equity to Assets
Advance's equity to assets ratio as of June 30, 1996, was 6.75 percent.
After conversion, based on the midpoint value of $8,200,000 and net proceeds to
the Bank of approximately $3.9 million, Advance's equity is projected to
stabilize in the area of 10.5 percent. Based on those equity ratios, we have
defined the equity ratio parameter to be 5.0 percent to 18.0 percent with a
midpoint ratio of 11.5 percent.
42
<PAGE>
PERFORMANCE PARAMETERS
Introduction
Exhibit 37 presents five parameters identified as key indicators of
Advance's earnings performance and the basis for such performance. The primary
performance indicator is the Bank's return on average assets ("ROAA"). The
second performance indicator is the Bank's return on average equity ("ROAE"). To
measure the Bank's ability to generate net interest income, we have used net
interest margin. The supplemental source of income for the Bank is noninterest
income, and the parameter used to measure this factor is noninterest income to
assets. The final performance indicator that has been identified is the Bank's
ratio of operating expenses, also referred to as noninterest expenses, to
assets, a key factor in distinguishing different types of operations,
particularly institutions that are aggressive in secondary market activities,
which often results in much higher operating costs and overhead ratios.
Return on Average Assets
The key performance parameter is the ROAA. Advance's most recent ROAA was
0.48 percent for the twelve months ended June 30, 1996, based on net earnings
after taxes and an identical 0.48 percent based on core earnings after taxes, as
detailed in Item I of this report and presented in Exhibit 7. The Bank's ROAA
over the past five fiscal years, based on net earnings, has ranged from a low of
0.48 percent in 1996 to a high of 1.22 percent in 1994 with an average ROAA of
0.87 percent. ROAA has declined steadily since June 30, 1994. For the four
quarters following conversion in late 1996, Advance's ROAA is projected to range
between 0.55 percent and 0.70 percent.
Considering the historical, current and projected earnings performance of
Advance, the range for the ROAA parameter based on net income has been defined
as 0.45 percent to a high of 0.95 percent with a midpoint of 0.70 percent.
43
<PAGE>
Return on Average Equity
The ROAE has been used as a secondary parameter to eliminate any
institutions with an unusually high or low ROAE that is inconsistent with the
Bank's position. This parameter does not provide as much meaning for a newly
converted thrift institution as it does for established stock institutions, due
to the newness of the capital structure of the newly converted thrift and the
inability to accurately reflect a mature ROAE for the newly converted thrift
relative to other stock institutions.
The consolidated ROAE for the Bank and the Corporation on a pro forma
basis at the time of conversion will be 4.33 percent based on the midpoint
valuation. Prior to conversion, the Bank's ROAE was 6.77 percent for the twelve
months ended June 30, 1996, based on net income, with a five year average net
ROAE of 14.19 percent. The parameter range for the comparable group, based on
net income, is from 3.0 percent to 15.0 percent with a midpoint of 9.0 percent.
Net Interest Margin
Advance had a net interest margin of 3.36 percent based on the twelve
months ended June 30, 1996, indicating a declining trend since June 30, 1994.
The Bank's range of net interest margin for the past five fiscal years has been
from a low of 3.15 percent in 1992 to a high of 4.33 percent in 1994 with an
average of 3.68 percent.
The parameter range for the selection of the comparable group is from a
low of 2.50 percent to a high of 4.00 percent with a midpoint of 3.25 percent.
44
<PAGE>
Operating Expenses to Assets
Advance had an average operating expense to average assets ratio of 2.48
percent for the twelve months ended June 30, 1996. Although modestly higher than
industry averages, the Bank's operating expenses have been stable in recent
years, ranging from a low of 2.33 percent in fiscal year 1995 to a high of 2.49
percent in fiscal year 1993, with an average of 2.42 percent. The thrift
industry average was 2.29 percent at June 30, 1996.
The operating expense to assets parameter for the selection of the
comparable group is from a low of 1.75 percent to a high of 3.00 percent with a
midpoint of 2.38 percent.
Noninterest Income to Assets
Advance has experienced a somewhat lower than average dependence on
noninterest income as a source of additional income. The Bank's noninterest
income to average assets was 0.34 percent for the twelve months ended June 30,
1996, which is below the industry average of 0.44 percent for that period.
Advance's noninterest income for the past five fiscal years has fluctuated from
a high of 0.47 percent of average assets in fiscal year 1992 to a low of 0.29
percent of assets in fiscal year 1995 with an average ratio of 0.35 percent.
The range for this parameter for the selection of the comparable group is
0.60 percent or less of average assets with a midpoint of 0.30 percent, lower
than the national average of 0.44 percent.
45
<PAGE>
ASSET QUALITY PARAMETERS
Introduction
The final set of financial parameters used in the selection of the
comparable group are asset quality parameters, also shown in Exhibit 37. The
purpose of these parameters is to insure that any thrift institution in the
comparable group has an asset quality position reasonably similar to that of
Advance. The three defined asset quality parameters are the ratios of
nonperforming assets to total assets, repossessed assets to total assets and
loan loss reserves to total assets at the end of the most recent period.
Nonperforming Assets to Assets Ratio
Advance's ratio of nonperforming assets to assets was 0.48 percent at June
30, 1996, which is lower than the national average of 1.20 percent, lower than
the Midwest regional average of 0.56 percent and lower than to its ratio of 0.69
percent at June 30, 1995. For the five fiscal years ended June 30, 1992 to 1996,
the Bank's ratio fluctuated considerably, from a high of 0.69 percent at June
30, 1995, to a low of 0.41 percent at June 30, 1993, with a five year average of
0.57 percent.
The parameter range for nonperforming assets to assets has been defined as
1.00 percent of assets or less with a midpoint of 0.50 percent.
Repossessed Assets to Assets
Advance was absent repossessed assets at June 30, 1996, but had a ratio of
repossessed assets to total assets of 0.40 percent at June 30, 1995. For its
five most recent fiscal years, the Bank had ratios of repossessed assets ranging
from a high of 0.40 percent at June 30, 1995, to a low of zero at the end of
fiscal year 1996, with a five fiscal year
46
<PAGE>
Repossessed Assets to Assets (cont.)
average of 0.21 percent. National and regional averages were 0.65 percent and
0.47 percent, respectively, at June 30, 1996.
The range for the repossessed assets to total assets parameter is 0.60
percent of assets or less with a midpoint of 0.30 percent.
Loans Loss Reserves to Assets
Advance had a loan loss reserve or allowance for loan losses of $325,000,
representing a loan loss allowance to total assets ratio of 0.35 percent at June
30, 1996, which is higher than to its ratio of 0.24 percent at June 30, 1995,
reflecting a larger provision for loan losses taken in fiscal year 1996. For its
last five fiscal years, the Bank's loan loss reserve averaged 0.23 percent of
assets.
The loan loss allowance to assets parameter range used for the selection
of the comparable group focused on a minimum required ratio of 0.15 percent of
assets.
THE COMPARABLE GROUP
With the application of the parameters previously identified and applied,
the final comparable group represents ten institutions identified in Exhibits
38, 39 and 40. The comparable group institutions range in size from $76.4
million to $332.5 million with an average asset size of $217.8 million and have
an average of 4.6 offices per institution compared to Advance with assets of
$91.9 million and two offices. Two of the comparable group institutions were
converted in 1988, one in 1990, three in 1993 and four in 1994.
47
<PAGE>
The Comparable Group (cont.)
Exhibit 41 presents a comparison of Advance's market area demographic data
with that of each of the institutions in the comparable group.
48
<PAGE>
SUMMARY OF COMPARABLE GROUP INSTITUTIONS
Enterprise Federal Bancorp, Lockland, Ohio, is the holding company for
Enterprise Federal Savings Bank, which operates five offices in the Cincinnati,
Ohio, area. With assets of $213.9 million and equity of $31.6 million,
Enterprise reported an ROAA of 0.92 percent and an ROAE of 5.39 percent for its
most recent four quarters.
Equitable Federal Savings Bank, Wheaton, Maryland, is a federally
chartered stock savings bank, operating four branches and serving Montgomery and
Prince George's Counties, Maryland. With current assets of $267.8 million and
equity of $14.2 million, the Bank reported an ROAA of 0.78 percent and an ROAE
of 14.98 percent for its most recent four quarters.
First Financial Bancorp, Inc., Belvidere, Illinois, is the holding company
for First Federal Savings Bank of Belvidere. The Bank serves Boone and Winnebago
Counties in Illinois with two full service offices in Belvidere and a loan
origination office in Rockford, Illinois. The Bank has assets of $94.5 million
and equity of $7.8 million, and reported an ROAA of 0.68 percent for its most
recent four quarters.
First Franklin Corporation, Cincinnati, Ohio, is the holding company of
Franklin Savings & Loan Company which operates seven branches in the Greater
Cincinnati Metropolitan Area, all in Hamilton County. The Company has assets of
$216.5 million and equity of $20.3 million. For its most recent four quarters,
the Company reported an ROAA of 0.62 percent and an ROAE of 6.56 percent.
Glenway Financial Corp., Cincinnati, Ohio, is the holding company for
Centennial Savings Bank, which serves the Hamilton County and Greater Cincinnati
market area from its six full service offices. The Bank currently has total
assets of $273.8 million and total equity of $26.5 million, and reported an ROAA
of 0.56 percent and an ROAE of 5.82 percent for its most recent four quarters..
49
<PAGE>
Summary of Comparable Group Institutions (cont.)
Harvest Home Financial Corporation, Cincinnati, Ohio, is the holding
company for Harvest Home Savings Bank, which operates three offices serving the
Greater Cincinnati area. The Bank had assets of 76.4 million and equity of 12.7
million at the end of its most recent quarter, and reported an ROAA of 0.75
percent for its trailing four quarters.
MFB Corp., Mishawaka, Indiana, is the holding company for Mishawaka
Federal Savings. Mishawaka Federal operates four offices in Mishawaka and
surrounding St. Joseph County. As of the most recent quarter, Mishawaka Federal
had total assets of $210.6 million, and total equity of $37.7 million. For the
most recent four quarters, Mishawaka Federal reported an ROAA of 0.73 percent.
OHSL Financial Corp., Cincinnati, Ohio, is the holding company for Oak
Hills Savings and Loan Company, F.A. The Company's headquarters and three
offices are all in Hamilton County, and serve the Greater Cincinnati
Metropolitan Area. The Company currently has total assets of $209.0 million and
equity of $25.4 million, and reported an ROAA of 0.95 percent and an ROAE of
7.55 percent for its most recent four quarters..
Western Ohio Financial Corporation, Springfield, Ohio, is the holding
company for Springfield Federal Savings and Loan Association. The Association
operates six full-service offices serving Clark and Hamilton Counties. The
Association had assets of $332.5 million and equity of $55.6 million at the end
of its most recent quarter and reported an ROAA of 0.89 percent and an ROAE of
3.88 percent for its trailing four quarters.
Winton Financial Corp., Cincinnati, Ohio, is the holding for Winton
Savings and Loan Company, which operates four branches in the western Hamilton
County area around Cincinnati. At the end of its most recent quarter, the
Company had total assets of $282.8 million and equity of $21.0 million, and
reported an ROAA of 0.94 percent and an ROAE of 12.39 percent for its most
recent four quarters.
50
<PAGE>
IV. ANALYSIS OF FINANCIAL PERFORMANCE
This section reviews and compares the financial performance of Advance to
all thrifts, regional thrifts, West Virginia thrifts and the ten institutions
constituting Advance's comparable group, as selected and described in the
previous section. The comparative analysis focuses on financial condition,
earning performance and pertinent ratios as presented in Exhibits 42 through 47.
As presented in Exhibits 42 and 43, at June 30, 1996, Advance's total
equity of 6.75 percent of assets was lower than the 11.84 percent for the
comparable group, the 13.10 for all thrifts, the 14.69 percent ratio for Midwest
thrifts, and the 12.01 percent ratio for West Virginia thrifts. The Bank had a
85.94 percent share of net loans in its asset mix, higher than the comparable
group at 70.07 percent, and also higher than all thrifts at 67.29 percent and
Midwest thrifts at 67.95 percent and considerably higher than West Virginia
thrifts at 38.07 percent. Advance's share of net loans, higher than industry
averages, is primarily the result of its lower levels of cash and investments
and mortgage-backed securities of 9.67 percent 0.58 percent, respectively. The
comparable group had a higher 11.97 percent share of mortgage-backed securities,
and also a higher 12.94 percent share of cash and investments. All thrifts had
13.73 percent of assets in mortgage-backed securities and 15.09 percent in cash
and investments. Advance's share of deposits of 87.93 percent of assets was
higher than the comparable group, and also higher than the three geographic
categories, reflecting the Bank's lower 5.21 percent share of FHLB advances. The
comparable group had deposits of 74.34 percent and borrowings of 12.93 percent.
All thrifts averaged a 72.25 percent share of deposits and 13.16 percent of
borrowed funds, while Midwest thrifts had a 71.03 percent share of deposits and
an 13.07 percent share of borrowed funds. West Virginia thrifts averaged a 71.82
percent share of deposits and a 15.46 percent share of borrowed funds. Advance
was absent goodwill and other intangibles, compared to 0.15 percent for the
comparable group, 0.32 percent for all thrifts, 0.15 percent for Midwest thrifts
and 0.62 percent for West Virginia thrifts.
51
<PAGE>
Analysis of Financial Performance (cont.)
Operating performance indicators are summarized in Exhibits 44 and 45 and
provide a synopsis of key sources of income and key expense items for Advance in
comparison to the comparable group, all thrifts, and regional thrifts for the
trailing four quarters.
As shown in Exhibit 46, for the twelve months ended June 30, 1996, Advance
had a yield on average interest-earning assets higher than the comparable group
and also higher than the three geographical categories. The Bank's yield on
interest-earning assets was 7.90 percent compared to the comparable group at
7.53 percent, all thrifts at 7.73 percent, Midwest thrifts at 7.70 percent and
West Virginia thrifts at 7.53 percent.
The Bank's cost of funds for the twelve months ended June 30, 1996, was
lower than the comparable group and two of the three geographical categories.
Advance had an average cost of interest-bearing liabilities of 4.77 percent
compared to 5.06 percent for the comparable group, 4.92 percent for all thrifts,
5.02 percent for Midwest thrifts and a lower 4.40 percent for West Virginia
thrifts. The Bank's interest income and interest expense ratios resulted in an
interest rate spread of 3.13 percent, which was higher than the comparable group
at 2.47 percent, all thrifts at 2.80 percent and Midwest thrifts at 2.68
percent, and identical to West Virginia thrifts at 3.13 percent. Advance
demonstrated a net interest margin of 3.36 percent for the twelve months ended
June 30, 1996, based on average interest-earning assets, which was higher than
the comparable group ratio of 3.08 percent. All thrifts averaged a similar 3.35
percent net interest margin for the trailing four quarters, as did Midwest
thrifts at 3.33 percent, with West Virginia thrifts at a higher 3.69 percent.
Advance's major source of income is interest earnings, as is evidenced by
the operations ratios presented in Exhibit 45. The Bank made a $263,000
provision for loan losses during the twelve months ended June 30, 1996,
representing 0.30 percent of average assets. Such a provision reflects the
Bank's objective to strengthen its reserves for loan losses as it increases its
level of higher risk consumer loans following conversion and to be more similar
to industry norms with regard to its ratio of general valuation allowance to
52
<PAGE>
Analysis of Financial Performance (cont.)
loans. The comparable group indicated a provision representing 0.02 percent of
assets, with all thrifts at 0.12 percent, Midwest thrifts at 0.08 percent and
West Virginia thrifts at 0.03 percent.
The Bank's non-interest income was $294,000 or 0.34 percent of average
assets for the twelve months ended June 30, 1996. Such non-interest income was
higher than the comparable group at 0.20 percent and West Virginia thrifts at
0.19 percent, but lower than all thrifts at 0.44 percent and Midwest thrifts at
0.40 percent. For the twelve months ended June 30, 1996, Advance's operating
expense ratio was 2.48 percent, higher than the comparable group and the three
geographical averages. The comparable group's operating expense ratio was 2.14
percent, while all thrifts averaged 2.29 percent, Midwest thrifts averaged 2.20
percent and West Virginia thrifts averaged 2.18 percent.
The overall impact of Advance's income and expense ratios is reflected in
the Bank's net income and return on assets. For the twelve months ended June 30,
1996, the Bank had an ROAA of 0.48 percent based on net income and an almost
identical ROAA of 0.47 percent based core income. For its most recent four
quarters, the comparable group had a higher net ROAA of 0.78 percent, and also a
higher ROAA of 0.69 percent based on core income. All thrifts also averaged a
higher net ROAA of 0.88 percent, while Midwest thrifts and West Virginia thrifts
averaged a lower 0.93 percent and 1.00 percent, respectively. All thrifts
indicated a core ROAA of 0.81 percent, while Midwest thrifts and West Virginia
thrifts averaged a core ROAA of 0.87 percent and 1.00 percent, respectively,
both of which were higher than the core ROAA of Advance.
53
<PAGE>
V. MARKET VALUE ADJUSTMENTS
This is a conclusive section where adjustments are made to determine the
pro forma market value or appraised value of the Corporation based on a
comparison of Advance with the comparable group. These adjustments will take
into consideration such key items as earnings performance, market area,
financial condition, dividend payments, subscription interest, liquidity of the
stock to be issued, management, and market conditions or marketing of the issue.
It must be noted, however, that all of the institutions in the comparable group
have their differences, and as a result, such adjustments become necessary.
EARNINGS PERFORMANCE
In analyzing earnings performance, consideration was given to the level of
net interest income, the level and volatility of interest income and interest
expense relative to changes in market area conditions and to changes in overall
interest rates, the quality of assets as it relates to the presence of problem
assets which may result in adjustments to earnings, the level of current and
historical classified assets and real estate owned, the level of valuation
allowances to support any problem assets or nonperforming assets, the level and
volatility of non-interest income, and the level of non-interest expenses.
As discussed earlier, the Bank's historical business philosophy has
focused on maintaining its net interest income, further reducing its current
ratio of nonperforming assets, increasing its level of interest sensitive assets
relative to interest sensitive liabilities and thereby improving its sensitivity
measure and its overall interest rate risk, maintaining an adequate level of
general valuation allowances to reduce the impact of any unforeseen losses, and
closely monitoring and improving its level of overhead expenses. The Bank's
current philosophy will continue to focus on maintaining its net interest spread
and net interest margin, reducing its overhead expenses, increasing its net
income and return on assets, generating additional non-interest income, and
increasing its level of interest sensitive assets relative to interest sensitive
liabilities.
54
<PAGE>
Earnings Performance (cont.)
Earnings are often related to an institution's ability to generate loans.
The Bank was an active and consistent originator of mortgage and non-mortgage
loans in fiscal years 1994 to 1996. During the twelve months ended June 30,
1996, originations exceeded those in fiscal year 1995 by 15.3 percent, with the
increases in the categories of non-residential real estate loans, commercial
loans and consumer loans. Originations during the twelve months ended June 30,
1996, were approximately $25.6 million compared to $23.9 million in fiscal year
1995 and a similar $26.7 million in fiscal year 1994.
Notwithstanding a moderate increase in principal repayment levels from
fiscal year 1994 to fiscal year 1995 and also from fiscal year 1995 to fiscal
year 1996, the Bank experienced a net increase of $12.4 million in its
outstanding loans during that period. The Bank's focus has historically been on
the origination of one- to four-family mortgage loans, but in fiscal years 1995
and 1996, non-mortgage loans, consisting of commercial and consumer loans,
exceeded one- to four-family loans. In fiscal year 1994, one- to four-family
loans constituted 39.3 percent of originations, with that loan category
decreasing to 30.1 percent and 22.9 percent in fiscal years 1995 and 1996,
respectively. Non-mortgage loans constituted 31.1 percent, 50.7 percent and 57.6
percent of loan originations in fiscal years 1994, 1995 and 1996, respectively.
During those three years, construction loan originations declined modestly from
17.9 percent to 10.7 percent, and non-residential originations remained
generally constant. The impact of these primary lending efforts has been to
generate a yield on average interest-earning assets of 7.90 percent for Advance
for the twelve months ended June 30, 1996, compared to 7.53 percent for the
comparable group, 7.73 percent for all thrifts and 7.70 for Midwest thrifts. The
Bank's level of interest income to average assets was 7.62 percent for the
twelve months ended June 30, 1996, which was modestly higher than the comparable
group at 7.31 percent, all thrifts and Midwest thrifts both at 7.42 percent and
West Virginia thrifts at 7.28 percent for their most recent four quarters.
55
<PAGE>
Earnings Performance (cont.)
The Bank's net interest margin of 3.36 percent, based on average
interest-earning assets for the twelve months ended June 30, 1996, was higher
than the comparable group at 3.08 percent and similar to all thrifts at 3.35
percent. In addition to its higher yield and net interest margin, Advance's cost
of interest-bearing liabilities of 4.77 percent for the twelve months ended June
30, 1996, was lower than the comparable group at 5.06 percent, and also lower
than all thrifts at 4.92 percent and Midwest thrifts at 5.02 percent. Advance's
net interest spread of 3.13 percent for the twelve months ended June 30, 1996,
was also higher than the comparable group at 2.47 percent, all thrifts at 2.80
percent and Midwest thrifts at 2.68 percent.
The Bank's ratio of noninterest income to assets was 0.34 percent for the
twelve months ended June 30, 1996, higher than the comparable group at 0.20
percent, but lower than all thrifts at 0.44 percent and Midwest thrifts at 0.40
percent. A component of Advance's non-interest income in fiscal year 1996 was a
non-recurring gain on the sale of loans in the amount of $20,000, which was the
basis of the Bank's lower core income as detailed in Exhibit 7. The Bank has
indicated noninterest income higher than the comparable group, but its operating
expenses have also been significantly higher than the comparable group, all
thrifts and Midwest thrifts. For the twelve months ended June 30, 1996, Advance
had an operating expenses to assets ratio of 2.48 percent compared to a lower
2.14 percent for the comparable group, 2.29 percent for all thrifts and 2.20
percent for Midwest thrifts.
For the twelve months ended June 30, 1996, Advance generated higher
noninterest income and a higher net interest margin relative to its comparable
group, but the Bank's higher operating expenses offset those relative benefits.
Additionally, the Bank had a significantly higher provision for loan losses of
0.30 percent of average assets during fiscal year 1996, compared to the
comparable group's lower 0.02 percent. Consequently, the Bank's net income was
significantly lower than its comparable group for the twelve months ended June
30, 1996. Based on net earnings, the Bank had a return on average assets of 0.69
percent in fiscal year 1992, 1.09 percent in fiscal year 1993, 1.22 percent in
fiscal
56
<PAGE>
Earnings Performance (cont.)
year 1994, 0.89 percent in fiscal year 1995, and 0.48 percent in fiscal year
1996. For its most recent four quarters, the comparable group had a lower net
ROAA of 0.90 percent, while all thrifts indicated a slightly lower 0.88 percent.
The Bank's core or normalized earnings, as shown in Exhibit 7, were $404,000,
indicating a 0.47 percent core return on assets for the most recent twelve
months ended June 30, 1996. That core ROAA was also significantly lower than the
comparable group at 0.69 percent, all thrifts at 0.81 and Midwest thrifts at
0.87 percent. It should be noted that if the Bank's fiscal year 1996 provision
for loan losses had been $52,000, the average of the preceding two fiscal years,
rather than $263,000, Advance's ROAA would have been 0.63 percent for fiscal
year 1996. The higher provision, however, results in a ratio of reserves for
loan losses to assets of 0.35 percent, which is only modestly higher than the
comparable group at 0.27 percent, but remains considerably lower than the
industry average of 0.65 percent. Considering the Bank's increasing trend in
non-mortgage loan originations in recent years, as well as its level of high
risk real estate loans, we have elected not to effect a core or normalized
earnings adjustment relative to the higher 1996 provision.
Advance's earnings stream will continue to be dependent on the overall
trends in interest rates, with little reliance on its non-interest income, with
net interest income having been generally flat during the most recent four
fiscal years of 1993 through 1996. The Bank's cost of interest-bearing
liabilities will continue to adjust upward as deposits reprice at higher rates
and continue their gradual movement toward medium term instruments. This upward
pressure on savings costs is likely to continue based on current rates, although
the rate of increase may subside somewhat during the next few years. It has also
been recognized that not only is Advance's current ROAA is lower than that of
its comparable group for the most recent four quarters, the Bank has also
experienced a consistent downward trend in its ROAA, net interest margin and net
interest spread since June 30, 1994. In recognition of the foregoing earnings
related factors, a minimum downward adjustment has been made to Advance's pro
forma market value for earnings performance.
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MARKET AREA
Advance's primary market area consists of Brooke County, West Virginia,
including the cities of Wellsburg and Follansbee and the communities surrounding
its two offices. As discussed in Section II, this market area has evidenced a
decreasing population base and a corresponding decrease in households during the
past several years. The unemployment level has been volatile, and is currently
somewhat lower than the comparable group markets, West Virginia and the United
States. The unemployment rate in Advance's market area county averaged 5.0
percent in June, 1996, compared to 6.5 percent for West Virginia and 5.6 percent
for the United States. Per capita and household income levels in Brooke County
are above below state averages, but below the comparable group average. The
market area is also characterized by lower median housing values and lower
median rents than the comparable group, West Virginia and the United States. The
market area is generally rural and agricultural, with the services sector
indicating the largest share of market area employment, followed by the
manufacturing sector. The level of financial competition in the Bank's market
area is moderate and dominated by the banking industry. Being the only thrift in
the market area, Advance, nevertheless, had net increases in deposits in its
most recent three fiscal years of 1994 through 1996, as deposits, including
interest, exceeded withdrawals. In recognition of all these factors, we believe
that no adjustment is warranted for the Bank's market area.
FINANCIAL CONDITION
The financial condition of Advance is discussed in Section I and shown in
Exhibits 1, 2, 5, 15, 16 and 17, and is compared to the comparable group in
Exhibits 42, 44 and 45. The Bank's total equity ratio before conversion was 6.75
percent at June 30, 1996, which was lower than the comparable group at 11.84
percent, Midwest thrifts at 14.69 percent and all thrifts at 13.10 percent. With
a conversion at the midpoint, the Corporation's pro forma equity to assets ratio
will increase to 14.0 percent, and the Bank's pro forma equity to assets ratio
will increase to approximately 10.5 percent.
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Financial Condition (cont.)
The Bank's mix of assets indicates some areas of significant variation
from its comparable group. Advance had a higher share of net loans at 85.94
percent of total assets at June 30, 1996, compared to the comparable group at
70.07 percent and all thrifts at 67.29 percent. The Bank's share of cash and
investments was a significantly lower 9.67 percent compared to 12.94 percent for
the comparable group and 15.09 percent for all thrifts. Advance's ratio of
mortgage-backed securities to total assets was only 0.58 percent, significantly
below the comparable group at 11.97 percent and all thrifts at 13.73 percent.
The Bank's 87.93 percent share of deposits and 4.76 percent share of FHLB
advances were both below the comparable group's 74.32 percent of deposits and
12.93 percent of borrowed funds.
The Bank was absent both goodwill and repossessed real estate compared to
percentages of 0.13 and 0.65 of repossessed real estate for the comparable group
and all thrifts, respectively. The financial condition of Advance is further
affected by its level of nonperforming assets at 0.48 percent of assets at June
30, 1996, compared to a modestly lower 0.43 percent for the comparable group.
The Bank's ratio of nonperforming assets to total assets in fiscal year 1996 was
lower than its fiscal year 1995 ratio of 0.69 percent, which increased from 0.63
percent at June 30, 1994, but higher than its ratio of 0.41 percent at June 30,
1993.
The Bank had a slightly higher share of high risk real estate loans at
12.98 percent compared to 12.25 percent for the comparable group, but the Bank's
share was lower than all thrifts at 14.49 percent. Advance had $325,000 in
general valuation allowances or 73.53 percent of nonperforming assets at June
30, 1996, compared to the comparable group's higher 151.60 percent, with Midwest
thrifts at 157.22 percent and all thrifts at 91.98 percent, also higher than
Advance. The Bank's ratio is reflective of its historically average levels of
non-performing assets and classified loans. As previously discussed, the Bank's
0.35 percent ratio of allowance for loan losses to total assets, although
modestly higher than the comparable group, is lower than industry averages.
Advance has also experienced
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Financial Condition (cont.)
higher levels of interest rate risk, as reflected by its higher exposure under
conditions of rising interest rates. Overall, we believe that a minimum downward
adjustment is warranted for Advance's current financial condition.
DIVIDEND PAYMENTS
Advance has indicated its intention to pay an initial cash dividend,
although the specific amount of such dividend has not been indicated. The actual
payment of cash dividends will be dependent upon such factors as earnings
performance, capital position, growth level, and regulatory limitations. Seven
of the ten institutions in the comparable group pay cash dividends for an
average dividend yield of 3.31 percent for those seven institutions, and an
average dividend yield of 2.32 percent for all ten institutions.
Currently, many thrifts are committing to initial cash dividends in
comparison to the more common absence of such a dividend commitment in 1994 and
some 1995 conversions. As a result, we believe that no adjustment to the pro
forma market value is warranted at this time related to dividend payments.
SUBSCRIPTION INTEREST
The general interest in thrift conversion offerings was often difficult to
gauge in 1995. Based upon recent offerings, subscription and community interest
weakened significantly in early 1995 but regained some strength by the second
half of the year. In the first half of 1996, interest in new issues was mixed,
with the number of conversions decreasing from the same period in 1995. Such
interest has frequently been directly related to the financial performance and
condition of the thrift institution converting, the strength of the local
economy, general market conditions and aftermarket price trends.
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Subscription Interest (cont.)
Advance will focus its offering to depositors and residents in its market
area. The board of directors and officers anticipate purchasing approximately
$700,000 or 8.5 percent of the conversion stock based on the appraised midpoint
valuation. Advance will form an 8.0 percent ESOP, which plans to purchase stock
in the initial offering. Additionally, the Prospectus restricts to $100,000 the
amount of stock in the subscription offering that may be purchased by a single
person, or by persons and associates acting in concert.
The Bank has secured the services of Charles Webb & Company ("Webb") to
assist the Bank in the marketing and sale of the conversion stock. Based on the
size of the offering, current market conditions, local market interest and the
terms of the offering, we believe that a minimum downward adjustment is
warranted for the Bank's anticipated subscription interest.
LIQUIDITY OF THE STOCK
Advance will offer its shares through concurrent subscription and
community offerings with the assistance of Webb. If necessary, Webb will conduct
a syndicated community offering upon the completion of the subscription and
community offering. Advance will pursue two market makers for the stock. The
Bank's offering is much smaller in size to that of the comparable group,
considerably below the national average and, more significantly, approximately
80.0 percent below the West Virginia average. It is likely, therefore, that the
stock of Advance will be less liquid than thrift stocks nationally and in its
West Virginia market area. Therefore, we believe that a moderate downward
adjustment to the pro forma market value is warranted at this time relative to
the liquidity of the stock.
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MANAGEMENT
The president and chief executive officer of Advance is Stephen M.
Gagliardi. Mr. Gagliardi joined the Bank in 1978 and was elected president,
chief executive officer and director in 1983.
Mr. Gagliardi and the management of Advance have made a concerted effort
to increase deposits and market share, and to increase lending activity and to
strengthen asset quality. Advance has been able to strengthen its equity level
and increase its equity ratio over the past few years and its asset quality has
improved since 1992. The Bank's non-interest expenses historically have been and
currently are modestly higher than the comparable group and all thrifts.
Although net earnings are below the comparable group, net interest spread and
net interest margin are currently above comparable group and industry averages.
It is our opinion that a minimum upward adjustment to the pro forma market value
is warranted for management.
MARKETING OF THE ISSUE
The response to a newly issued thrift institution stock is more difficult
to predict, due to the volatility of new thrift stocks. Further, with each
conversion, there is a high level of uncertainty with regard to the stock market
particularly thrift institution stocks and interest rate trends. The impact of
recent increases in interest rates has made it more difficult for more thrift
institutions to strengthen their earnings and resulted in downward market
prices. Recent conflicts of opinion on interest rate trends and the recent rise
in interest rates have resulted in some significant stock volatility. Further,
the impact of the difference in a thrift's premium level on deposits compared to
BIF-insured institutions is another key concern, along with the one time
assessment of SAIF-insured thrifts to increase the capitalization of the SAIF
insurance fund.
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Marketing of the Issue (cont.)
The necessity to build a new issue discount into the stock price of a
converting thrift has prevailed in the thrift industry in recognition of higher
uncertainty among investors as a result of the thrift industry's dependence on
interest rate trends. We believe that a new issue discount applied to the price
to book valuation approach continues and is considered to be reasonable and
necessary in the pricing of the Corporation, and we have made a maximum downward
adjustment to the Corporation's pro forma market value in recognition of the new
issue discount.
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VI. VALUATION METHODS
Under normal stock market conditions, the most frequently used method for
determining the pro forma market value of common stock for thrift institutions
by this firm is the price to book value ratio method. The focus on the price to
book value method is due to the volatility of earnings in the thrift industry.
As earnings in the thrift industry improved in late 1993, 1994 and 1995, there
has been more emphasis placed on the price to earnings method, but the price to
book value method continues to be the primary valuation method. These two
pricing methods have both been used in determining the pro forma market value of
the Corporation.
In recognition of the volatility and variance in earnings due to
fluctuations in interest rates, the continued differences in asset and liability
repricing and the frequent disparity in value between the price to book approach
and the price to earnings approach, a third valuation method has been used, the
price to net assets method. The price to net assets method is used less often
for valuing ongoing institutions; however, this method becomes more useful in
valuing converting institutions when the equity position and earnings
performance of the institutions under consideration are different.
In addition to the pro forma market value, we have defined a valuation
range with the minimum of the range being 85.0 percent of the pro forma market
value, the maximum of the range being 115.0 percent of the pro forma market
value, and a super maximum being 115.0 percent of the maximum. The pro forma
market value or appraised value will also be referred to as the "midpoint
value".
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PRICE TO BOOK VALUE METHOD
The price to book value method focuses on a thrift institution's financial
condition, and does not give as much consideration to the institution's
performance as measured by net earnings. Therefore, this method is sometimes
considered less meaningful for institutions that do provide a consistent
earnings trend. Due to the earnings volatility of many thrift stocks, the price
to book value method is frequently used by investors who rely on an
institution's financial condition rather than earnings performance.
Consideration was given to the adjustments to the Bank's pro forma market
value discussed in Section V. A minimum upward adjustment was made for the
Bank's management. Minimum downward adjustments were made for earnings
performance, financial condition and subscription interest. A moderate downward
adjustment was made for the liquidity of Advance's stock and a maximum downward
adjustment was made for the marketing of the issue. No adjustments were made for
dividend payments or for the Bank's market area.
Exhibit 48 shows the average and median price to book value ratios for the
comparable group which were 89.80 percent and 87.59 percent, respectively. The
total comparable group indicated a moderately wide range, from a low of 72.29
percent (Harvest Home Financial Corporation) to a high of 106.03 percent (Winton
Financial Corp.). This variance cannot be attributed to any one factor such as
the institution's equity ratio or earnings performance. Excluding the low and
the high in this group, the price to book value range narrowed moderately from a
low of 81.19 percent to a high of 104.70 percent.
Taking into consideration all of the previously mentioned items in
conjunction with the adjustments made in Section V, we have determined a pro
forma price to book value ratio of 63.24 percent at the midpoint, and ranging
from a low of 58.57 percent at the minimum to a high of 71.08 percent at the
super maximum for the Corporation.
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Price to Book Value Method (cont.)
The Corporation's price to book value ratio of 63.24 is strongly
influenced by the Bank's financial condition and local market, as well as
overall and geographical levels of subscription interest in thrift stocks.
Further, the Corporation's equity to assets after conversion will be in the
range of 13.0 percent to 14.0 percent compared to 11.84 percent for the
comparable group. Based on this price to book value ratio and the Bank's equity
of $6,200,000 at June 30, 1996, the indicated pro forma market value for the
Bank using this approach is $8,200,901 at the midpoint (reference Exhibit 49).
PRICE TO EARNINGS METHOD
The focal point of this method is the determination of the earnings base
to be used and secondly, the determination of an appropriate price to earnings
multiple. The recent earnings position of Advance is displayed in Exhibit 3,
indicating after tax net earnings for the twelve months ended June 30, 1996, of
$417,000. Exhibit 7 indicates the derivation of the Bank's identical normalized
earnings of $417,000 for the twelve months ended June 30, 1996. To arrive at the
pro forma market value of the Bank by means of the price to earnings method, we
used the earnings base of $417,000.
In determining the appropriate price to earnings multiple for the Bank, we
reviewed the range of price to net earnings and price to core multiples for the
comparable group and all publicly-traded thrifts. The average price to net
earnings multiple for the comparable group was 14.56, while the median was
13.98. The average price to core earnings multiple was 16.93 and the median
multiple was 15.07. The comparable group's price to net earnings multiple was
lower than the average for all publicly-traded, SAIF-insured thrifts of 16.25,
but higher than their median of 13.71. The price to core earnings multiple for
all thrifts was also higher than the comparable group with an average at 17.46
times core earnings and a median at 14.84 times core earnings. The range in the
price to net earnings multiple for the comparable group was from a low of 7.88
(Equitable Federal Savings Bank) to a high of 21.83 (MFB Corp.). The primary
range in the price to net earnings
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Price to Earnings Method (cont.)
multiple for the comparable group, excluding the high and low ranges, was from a
low price to earnings multiple of 9.07 to a high of 21.71 times earnings for
eight of the ten institutions in the group.
Consideration was given to the adjustments to the Corporation's pro forma
market value discussed in Section V. In recognition of these adjustments, we
have determined a price to earnings multiple of 14.61 at the midpoint, based on
Advance's earnings of $417,000 for twelve months ended June 30, 1996. The price
to earnings multiple is from 12.96 times earnings at the minimum of the
valuation range to 17.72 times earnings at the supermaximum.
Based on such the Bank's earnings base of $417,000 (reference Exhibit 49),
the pro forma market value of the Corporation using the price to earnings method
is $8,198,858 at the midpoint.
PRICE TO NET ASSETS METHOD
The final valuation method is the price to net assets method. This method
is not as frequently used due to the fact that it does not focus as much on an
institution's equity position or earnings performance. Exhibit 48 indicates that
the average price to net assets ratio for the comparable group was 10.30 percent
and the median was 13.13 percent. The range in the price to net assets ratios
for the comparable group varied from a low of 5.55 percent (Equitable Federal
Savings Bank) to a high of 14.53 percent (MFB Corp.). It narrows minimally with
the elimination of the two extremes in the group to a low of 7.64 percent and a
high of 14.32 percent.
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Price to Assets Method (cont.)
Pursuant to the adjustments made previously for Advance, it is our opinion
that an appropriate price to net assets ratio for the Corporation is 8.23
percent at the midpoint, which is slightly lower than the comparable group at
10.30 and ranges from a low of 7.08 percent at the minimum to 10.61 percent at
the super maximum.
Based on the Bank's June 30, 1996, asset base of $91,852,000, the
indicated pro forma market value of the Corporation using the price to net
assets method is $8,201,340 at the midpoint (reference Exhibit 49).
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VALUATION CONCLUSION
Exhibit 55 provides a summary of the valuation premium or discount for
each of the valuation ranges when compared to the comparable group based on each
of the valuation approaches. At the midpoint value, the price to book value
ratio of 63.25 percent for the Corporation represents a discount of 29.57
percent relative to the comparable group and decreases to 20.83 percent at the
super maximum. The price to earnings multiple of 14.61 for the Corporation at
the midpoint value indicates a premium of 0.35 percent, increasing to a premium
of 21.75 percent at the super maximum. The price to assets ratio at the midpoint
represents a discount of 20.04 percent, changing to a premium of 3.03 percent at
the super maximum.
It is our opinion that as of September 6, 1996, the pro forma market value
of the Corporation is $8,200,000 at the midpoint, representing 820,000 shares at
$10.00 per share. The valuation range for this stock is from a minimum of
$6,970,000 or 697,000 shares at $10.00 per share to a maximum of $9,430,000 or
943,000 shares at $10.00 per share, with such range being defined as 15 percent
below the appraised value to 15 percent above the appraised value. The super
maximum is $10,844,500 or 1,084,450 shares at $10.00 per share (reference
Exhibits 49 to 54). The appraised value of Advance Financial Bancorp as of
September 6, 1996, is $8,200,000.
69
