PEOPLES BANCORP, INC.
134 Franklin Corner Road
Lawrenceville, New Jersey 08648
(609) 844-3106
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be Held On _____________, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of Peoples Bancorp, Inc. (the "Mid-Tier Holding Company")
will be held at _____________________________________ ___________________,
located at _____________________________________________, on _________________,
1998 at ____ __.m., New Jersey time on ____________, 1998. As of the date
hereof, the Mid-Tier Holding Company owns 100% of Trenton Savings Bank FSB (the
"Bank") and is majority-owned by Peoples Bancorp, MHC (the "Mutual Holding
Company").
A Proxy Statement and Proxy Card(s) are enclosed. The Special Meeting
is for the purpose of considering and voting upon:
A Plan of Conversion and Reorganization (the "Plan" or the "Plan of
Conversion") pursuant to which (i) Trenton Savings Bank ("the Bank")
will establish Peoples Bancorp, Inc. (the "Company") as a first-tier
Delaware chartered corporation subsidiary; (ii) the Company will
charter an interim federal association ("Interim"); (iii) the Mutual
Holding Company will merge with and into the Mid-Tier Holding Company,
shares of Mid-Tier Common Stock held by the Mutual Holding Company will
be canceled and certain depositors of the Bank will receive an interest
in a liquidation account of the Mid-Tier Holding Company in exchange
for such persons' interest in the Mutual Holding Company; (iv) the
Mid-Tier Holding Company will convert into an interim federal savings
association which will merge with and into the Bank (the "Mid-Tier
Merger") with the Bank as the resulting entity and stockholders of the
Mid-Tier Holding Company other than the Mutual Holding Company
("Minority Stockholders") will constructively receive shares of Bank
Common Stock in exchange for their Mid-Tier Common Stock and each
Eligible Account Holder and Supplemental Eligible Account Holder will
receive an interest in a Liquidation Account of the Bank in exchange
for such person's interest in the Mid-Tier Holding Company; (v)
contemporaneously with the Mid-Tier Merger, Interim will merge with and
into the Bank with the Bank as the surviving entity (the "Bank Merger")
and Minority Stockholders will exchange the shares of Bank Common Stock
that they constructively received in the Mid-Tier Merger for the
Company's common stock pursuant to the "Exchange Ratio" as defined
herein; and (vi) contemporaneously with the Bank Merger, the Company
will offer for sale shares of common stock in a subscription offering;
and
Such other business as may properly come before this Special Meeting or
any adjournment thereof. Management is not aware of any such other business.
The Board of Directors has fixed _______________, 1998 (the "Voting
Record Date") as the voting record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting. Only those
stockholders of record as of the close of business on that date will be entitled
to vote at the Special Meeting or at any such adjournment thereof. The following
Proxy Statement is a summary of information about the and the proposals to be
voted on at the Special Meeting. A more detailed description of the Mid-Tier
Holding Company, Mutual Holding Company, the Company, the Bank and the proposal
to be voted upon at the Special Meeting is included in the Prospectus that you
are receiving herewith and which is incorporated into the Proxy Statement by
reference. Upon written request addressed to the Secretary of the Bank at the
address given above, members may obtain an additional copy of the Prospectus,
and/or a copy of the Plan of Conversion and exhibits thereto,
<PAGE>
including the Certificate of Incorporation and the Bylaws of the Company. In
order to assure timely receipt of the additional copy of the Prospectus and/or
the Plan, the written request should be received by the Bank by _______________,
1998. In addition, all such documents may be obtained at any office of the Bank.
By Order of the Board of Directors
Robert C. Hollenbeck
Corporate Secretary
________________, 1998
Lawrenceville, New Jersey
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU SIGN, DATE AND MARK THE
ENCLOSED PROXY CARD IN FAVOR OF THE ADOPTION OF THE PLAN OF CONVERSION AND
RETURN IT PROMPTLY IN THE ENCLOSED SELF-ADDRESSED STAMPED ENVELOPE. PROXY CARDS
MUST BE RECEIVED PRIOR TO THE COMMENCEMENT OF THE SPECIAL MEETING. RETURNING
PROXY CARDS WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL
MEETING.
YOUR VOTE IS VERY IMPORTANT. A FAILURE TO VOTE WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE PLAN.
<PAGE>
PROXY STATEMENT
PEOPLES BANCORP, INC.
134 Franklin Corner Road
Lawrenceville, New Jersey 08648
(609) 844-3106
Special Meeting of Stockholders
To be Held on _____________, 1998
INTRODUCTION
This Proxy Statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of Peoples Bancorp, Inc. (the
"Mid-Tier Holding Company") for use at its Special Meeting of Stockholders (the
"Special Meeting") to be held at ___________________________ located at
_________________________ New Jersey, on _________________, 1998, at ____ __.m.,
New Jersey time, and at any adjournments thereof, for the purposes set forth in
the Notice of Special Meeting of Stockholders. The accompanying Notice of
Special Meeting and this Proxy Statement is first being mailed to stockholders
on or about February ____, 1998.
REVOCATION OF PROXIES
Stockholders who execute proxies in the form solicited hereby retain
the right to revoke them in the manner described below. Unless so revoked, the
shares represented by such proxies will be voted at the Meeting and all
adjournments thereof. Proxies solicited on behalf of the Board of Directors of
the Mid-Tier Holding Company will be voted in accordance with the directions
given thereon. Please sign and return your Proxy to the Mid-Tier Holding Company
in order for your vote to be counted. Proxies which are signed, but contain no
instructions for voting, will be voted "FOR" the proposal set forth in this
Proxy Statement for consideration at the Special Meeting.
Proxies may be revoked by sending written notice of revocation to the
Secretary of the Mid-Tier Holding Company, Robert C. Hollenbeck, at the address
of the Mid-Tier Holding Company shown above, or by filing a duly executed proxy
bearing a later date. The presence at the Meeting of any stockholder who has
given a proxy shall not revoke such proxy unless the stockholder delivers his or
her ballot in person at the Meeting or delivers a written revocation to the
Secretary of the Mid-Tier Holding Company prior to the voting of such proxy.
Holders of record of the Mid-Tier Holding Company common stock at the
close of business on _____________, 1998 (the "Voting Record Date") are entitled
to one vote for each share held . As of the Voting Record Date, there were
__________ shares of Mid-Tier Common Stock issued and outstanding, 5,796,000 of
which were held by Peoples Bancorp, M.H.C. (the "Mutual Holding Company") and
___________ of which were held by stockholders other than the Mutual Holding
Company ("Minority Stockholders"). The presence in person or by proxy of at
least a majority of the issued and outstanding shares of Common Stock entitled
to vote is necessary to constitute a quorum at the Special Meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Pursuant to Office of Thrift Supervision ("OTS") regulations and the
Plan of Conversion, consummation of the Conversion is conditioned upon the
approval of the Plan by the OTS, as well as certain other conditions including;
(1) the approval of the holders of at least a majority of the total number of
votes eligible to be cast by Minority Stockholders at a special meeting of
Members called for the purpose of considering the Plan (the "Members' Meeting"),
and (2) the approval of the holders of at least two-thirds of the shares of the
outstanding Mid-Tier Common Stock. Accordingly, broker non-votes will have the
same effect as voting against the Plan of Conversion.
The Mid-Tier Holding Company believes that the Mutual Holding Company
will vote its shares of Common Stock, which amount to approximately 64.__% of
the outstanding shares, in favor of the Plan of Conversion.
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PROPOSAL - APPROVAL OF THE PLAN OF CONVERSION
All persons receiving this proxy are also being given a prospectus (the
"Prospectus") that describes the Conversion. The Prospectus, in its entirety, is
incorporated herein and made a part hereof. Although the Prospectus is
incorporated herein, this proxy statement does not constitute an offer or a
solicitation of an offer to purchase the common stock offered thereby. The
Mid-Tier Holding Company urges you to carefully read the Prospectus prior to
voting on the proposal to be presented at the Special Meeting.
DISSENTERS' AND APPRAISAL RIGHTS
Under OTS regulations, Minority Stockholders will not have dissenters'
rights or appraisal rights in connection with the exchange of their Mid-Tier
Common Stock for shares of common stock of the Company.
STOCKHOLDERS PROPOSALS
Any proposal which a stockholder wished to have included in the proxy
solicitation materials to be used in connection with the next annual meeting of
stockholders of the Mid-Tier Holding Company which is expected to be held in
April 1998, if the Conversion is not consummated, must have been received at the
main office of the Mid-Tier Holding Company no later than November 24, 1997.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than the matters described above in the Proxy Statement. However,
if any matters should properly come before the Meeting, it is intended that
holders of the proxies will act in accordance with their best judgment.
The Plan of Conversion sets forth the terms, conditions and provisions
of the proposed Conversion. The proposed Certificate of Incorporation and Bylaws
of the Company are exhibits to the Plan of Conversion. The Order Form is the
means by which an order for the subscription and purchase of shares is placed.
If you would like to receive an additional copy of the Prospectus, or a copy of
the Plan of Conversion and the Certificate of Incorporation and Bylaws of the
Company, you must request such materials in writing, addressed to the Mid-Tier
Holding Company's secretary at the address given above. Such requests must be
received by the Mid-Tier Holding Company no later than ________________, 1998.
Requesting such materials does not obligate you to purchase shares. If the
Mid-Tier Holding Company does not receive your request by ________________,
1998, you will not be entitled to have such materials mailed to you.
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by officers, directors or regular employees of the
Mid-Tier Holding Company and/or the Bank, in person, by telephone or through
other forms of communication and, if necessary, the Special Meeting may be
adjourned to a later date. Such persons will be reimbursed by the Mid-Tier
Holding Company and/or the Bank for their reasonable out-of-pocket expenses,
including, but not limited to, de minimis telephone and postage expenses
incurred in connection with such solicitation. The Mid-Tier Holding Company
and/or the Bank have not retained a proxy solicitation firm to provide advisory
services in connection with the solicitation of proxies, although Friedman,
Billings, Ramsey & Co., Inc. ("FBR"), the broker-dealers retained to assist in
the marketing of Peoples Bancorp, Inc.'s Common Stock, have also agreed to
assist in the proxy solicitations. FBR will receive compensation for their
services as described in the section of the Prospectus titled "The
Conversion--Plan of Distribution and Selling Commissions." The Bank will bear
all costs of this solicitation.
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<PAGE>
YOUR VOTE IS IMPORTANT! THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE PLAN OF CONVERSION.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUBSCRIPTION SHARES. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
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<PAGE>
REVOCABLE PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
PEOPLES BANCORP, INC.
FOR A SPECIAL MEETING OF MEMBERS
TO BE HELD ON _________________, 1998
The undersigned members of People Bancorp, Inc. (the "Mid-Tier Holding
Company), hereby appoint the full Board of Directors, with full powers of
substitution, as attorneys-in-fact and agents for and in the name of the
undersigned, to vote such votes as the undersigned may be entitled to vote at
the Special Meeting of Members of Peoples Bancorp, Inc. to be held at
__________________________________________ located at
___________________________________________, on _____________, 1998, at ____
_.m., New Jersey time, and at any and all adjournments thereof. They are
authorized to cast all votes to which the undersigned is entitled as follows:
FOR /_/ AGAINST /_/
A Plan of Conversion and Reorganization (the "Plan" or the "Plan of Conversion")
pursuant to which (i) Trenton Savings Bank ("the Bank") will establish Peoples
Bancorp, Inc. (the "Company") as a first-tier Delaware chartered corporation
subsidiary; (ii) the Company will charter an interim federal association
("Interim"); (iii) the Mutual Holding Company will merge with and into the
Mid-Tier Holding Company, shares of Mid-Tier Common Stock held by the Mutual
Holding Company will be canceled and certain depositors of the Bank will receive
an interest in a liquidation account of the Mid-Tier Holding Company in exchange
for such persons' interest in the Mutual Holding Company; (iv) the Mid-Tier
Holding Company will convert into an interim federal savings association merge
with and into the Bank (the "Mid-Tier Merger") with the Bank as the resulting
entity and stockholders of the Mid-Tier Holding Company other than the Mutual
Holding Company ("Minority Stockholders") will constructively receive shares of
Bank Common Stock in exchange for their Mid-Tier Common Stock and each Eligible
Account Holder and Supplemental Eligible Account Holder will receive an interest
in a Liquidation Account of the Bank in exchange for such person's interest in
the Mid-Tier Holding Company; (v) contemporaneously with the Mid-Tier Merger,
Interim will merge with and into the Bank with the Bank as the surviving entity
(the "Bank Merger") and Minority Stockholders will exchange the shares of Bank
Common Stock that they constructively received in the Mid-Tier Merger for the
Company's common stock pursuant to the "Exchange Ratio" as defined herein; and
(vi) contemporaneously with the Bank Merger, the Company will offer for sale
shares of common stock in a subscription offering.
1
<PAGE>
Such other business as may properly come before the Special Meeting of
any adjournment thereof.
NOTE: The Board of Directors is not aware of any other matter that may
come before the Special Meeting of Members.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED BY THE BOARD OF DIRECTORS IN
ITS BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER
BUSINESS TO BE PRESENTED AT THE MEETING.
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<PAGE>
THIS PROXY WILL BE VOTED FOR THE PROPOSITIONS
STATED IF NO CHOICE IS MADE HEREON
Votes will be cast in accordance with the Proxy. Should the undersigned
be present and elect to vote at the Special Meeting or at any adjournment
thereof and after notification to the Secretary of Peoples Bancorp, Inc. at said
Special Meeting the member's decision to terminate this Proxy, then the power of
said attorney-in-fact or agents shall be deemed terminated and of no further
force and effect.
The undersigned acknowledges receipt of a Notice of Meeting of Members
and a Proxy Statement dated _____________, 1998, prior to the execution of this
Proxy.
- ------------------------------------
Date
- ------------------------------------
Signature
NOTE: Only one signature is required
in the case of a joint account.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY
PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE>
PROSPECTUS
Peoples Bancorp, Inc.
(Proposed Holding Company for Trenton Savings Bank FSB)
36,236,500 Shares of Common Stock
Peoples Bancorp, Inc., a Delaware corporation (the "Company"), is
offering up to 31,510,000 shares (subject to adjustment to up to 36,236,500
shares as described herein) of its common stock, par value $.01 per share (the
"Common Stock"), in connection with the conversion of Peoples Bancorp, M.H.C.
(the "Mutual Holding Company"), from a federally chartered mutual holding
company to a Delaware stock corporation pursuant to a Plan of Conversion and
Reorganization (the "Plan of Conversion"). As of December 1, 1997, the Mutual
Holding Company held no material assets except for 5,796,000 shares, or
approximately 64.1%, of the common stock ("Mid-Tier Common Stock") of Peoples
Bancorp, Inc. (the "Mid-Tier Holding Company"), a federal savings and loan
holding company, which owns 100% of the common stock of Trenton Savings Bank FSB
(the "Bank"), a federal stock savings bank. The remaining 3,250,444 shares, or
approximately 35.9%, of the Mid-Tier Common Stock (the "Minority Shares") were
publicly owned by stockholders including the Bank's employees, directors, and
stock benefit plans (together, the "Minority Stockholders"). After the
Conversion (as defined herein), the Mutual Holding Company and the Mid-Tier
Holding Company will cease to exist, and the Company will be the sole
stockholder of the Bank.
(continued on next page)
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK CENTER AT (609) ________
--------------------------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE ______.
--------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY
OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Estimated Underwriting Estimated
Commissions and Other Net Cash
Subscription Price (1) Fees and Expenses (2) Proceeds (3)
---------------------- --------------------- ------------
<S> <C> <C> <C>
Minimum Per Share........................ $10.00 $.13 $9.87
Midpoint Per Share....................... $10.00 $.11 $9.89
Maximum Per Share........................ $10.00 $.10 $9.90
Maximum Per Share (as adjusted).......... $10.00 $.08 $9.92
Minimum Total............................ $153,004,080 $1,935,000 $151,069,080
Midpoint Total........................... $180,006,910 $1,935,000 $178,071,910
Maximum Total............................ $207,006,480 $1,935,000 $205,071,480
Maximum Total, as adjusted (4)........... $238,058,270 $1,935,000 $236,123,270
</TABLE>
================================================================================
(1) Based on (i) the independent appraisal prepared by FinPro, Inc. ("FinPro")
dated December 17, 1997, which states that the estimated pro forma market
value of the Common Stock ranged from $232,900,000 to $315,100,000 (subject
to adjustment to $362,365,000), and (ii) the Adjusted Majority Ownership
Percentage (as defined herein), pursuant to which 65.7% of the to-be
outstanding shares of Common Stock will be offered as Subscription Shares
in the Offering. See "The Conversion--Share Exchange Ratio," and "--Stock
Pricing and Number of Shares to be Issued."
(2) Consists of the estimated costs of the Conversion, including estimated
fixed expenses of $935,000 and marketing fees to be paid to Friedman,
Billings, Ramsey & Co., Inc. Actual expenses may vary from these estimates.
See "Pro Forma Data" for the assumptions used in arriving at these
estimates.
(3) Includes proceeds from the sale of shares of Common Stock in the Offering
to the Bank's employee stock ownership plan and trust (the "ESOP"). The
ESOP intends to purchase 4% of the shares sold in the Offering. Funds to
purchase such shares will be loaned to the ESOP by the Company, which may
fund such loan with offering proceeds. The Bank intends to repay the ESOP
loan with funds from future operations. See "The Conversion--Plan of
Distribution and Selling Commissions" and "Management of the Bank--Benefit
Plans."
(4) As adjusted to give effect to the sale of up to an additional 15% of the
shares that may be offered without a resolicitation of subscribers or any
right of cancellation. See "The Conversion--Stock Pricing and Number of
Shares to be Issued."
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is February ____, 1998
<PAGE>
Of the shares of Common Stock offered hereby, (i) up to 20,700,648
shares (subject to adjustment to up to 23,805,827 shares) of Common Stock (the
"Subscription Shares") are being offered for a subscription price of $10.00 per
share (the "Subscription Price") in a subscription and community offering as
described below, and (ii) up to 10,809,352 shares (subject to adjustment to up
to 12,430,675 shares) of Common Stock (the "Exchange Shares") will be issued to
Minority Stockholders pursuant to an Agreement of Merger, whereby Minority
Shares shall automatically, without further action by the holder thereof, be
converted into and become a right to receive shares of Common Stock (the "Share
Exchange"). See "The Conversion--Share Exchange Ratio." The simultaneous
conversion of the Mutual Holding Company to stock form pursuant to the Plan of
Conversion, the exchange of all of the Minority Shares for Common Stock, and the
offer and sale of Subscription Shares pursuant to the Plan of Conversion are
herein referred to collectively as the "Conversion."
Non-transferable rights to subscribe for Common Stock in a subscription
offering (the "Subscription Offering") have been granted, in order of priority,
to the following: (i) depositors of the Bank with account balances of $50 or
more as of August 31, 1996 (the "Eligibility Record Date," and such account
holders "Eligible Account Holders"); (ii) the Bank's employee stock ownership
plan and related trust (the "ESOP") in an amount up to 4% of the shares sold in
the Offering and the Bank's 401(k) Plan in an amount up to 200,000 of the shares
sold in the Offering; (iii) depositors with aggregate account balances of $50 or
more as of December 31, 1997 (the "Supplemental Eligibility Record Date") who
are not Eligible Account Holders ("Supplemental Eligible Account Holders"); and
(iv) depositors of the Bank as of February 6, 1998 (the "Voting Record Date")
who are not Eligible Account Holders or Supplemental Eligible Account Holders
("Other Members"). Subscription rights are nontransferable; persons found to be
transferring subscription rights will be subject to the forfeiture of such
rights and possible further sanctions and penalties imposed by the OTS. Subject
to the prior rights of holders of subscription rights, the Company is offering
the shares of Common Stock not subscribed for in the Subscription Offering for
sale in a concurrent community offering (the "Community Offering") to certain
members of the general public with preference given to Minority Stockholders and
then to natural persons residing in the New Jersey counties of Burlington,
Mercer and Ocean (the "Community"). The Company retains the right, in its
discretion, to accept or reject any order in the Community Offering. The
Subscription Offering and Community Offering are referred to collectively as the
"Offering." Unless otherwise specifically provided, the term "Offering" does not
include the shares of Common Stock that will be issued in the Share Exchange.
The minimum number of shares that may be purchased is 25 shares. Except
for the ESOP and the 401(k) Plan, no Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member may in their capacities as such purchase
in the Subscription Offering more than 100,000 Subscription Shares; no person,
together with associates of and persons acting in concert with such person, may
purchase in the Offering more than 100,000 Subscription Shares; and no person
together with associates of and persons acting in concert with such person may
purchase in the aggregate more than the number of Subscription Shares that when
combined with Exchange Shares received by such person together with associates
of and persons acting in concert with such person exceeds 5.0% of the shares
sold in the Offering, provided, however, that the maximum purchase limitation
may be increased or decreased at the sole discretion of the Company and the
Bank. See "The Conversion--Subscription Offering and Subscription Rights,"
"--Community Offering" and "--Limitations on Common Stock Purchases."
The Subscription Offering and Community Offering will terminate at
______ p.m. local time, on March ____, 1998 (the "Expiration Date") unless
extended by the Bank and the Company, with the approval of the OTS, if
necessary. The Bank and the Company may determine to extend the Community
Offering for any reason, whether or not subscriptions have been received for
shares at the minimum, midpoint, or maximum of the Offering Range, and are not
required to give subscribers notice of any such extension. The Community
Offering must be completed within 45 days after the expiration of the
Subscription Offering unless extended by the Bank and the Company with the
approval of the OTS, if necessary. Orders submitted are irrevocable until the
completion or termination of the Conversion; provided that all subscribers will
have their funds returned promptly, with interest, and all withdrawal
authorizations will be canceled if the Conversion is not completed within 45
days after the expiration of the Subscription Offering, unless such period has
been extended with the consent of the OTS, if necessary. See "The
Conversion--Subscription Offering and Subscription Rights" and "--Procedure for
Purchasing Shares in Subscription and Community Offerings."
The Mid-Tier Common Stock is currently traded on the Nasdaq National
Market. The Company has received conditional approval to have its Common Stock
listed on the Nasdaq National Market under the Mid-Tier Holding Company's
previous symbol "TSBS." Friedman, Billings, Ramsey & Co., Inc. ("FBR") has
advised the Company
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<PAGE>
that upon completion of the Conversion, it intends to act as a market maker in
the Common Stock. See "Market for Common Stock."
4
<PAGE>
[INSERT MAP]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR
ANY OTHER GOVERNMENT AGENCY.
5
<PAGE>
SUMMARY
The following summary does not purport to be complete, and is qualified
in its entirety by the more detailed information including the "Recent
Developments" section and Consolidated Financial Statements and Notes thereto of
the Bank appearing elsewhere in this Prospectus.
The Company
The Company was organized in December 1997 by the Bank for the purpose
of owning all of the capital stock of the Bank upon completion of the
Conversion. Immediately following the Conversion, the only significant assets of
the Company will be the capital stock of the Bank and that percentage of the
Offering proceeds retained by the Company and the loan to fund the proposed
ESOP. The Company will succeed to the Mid-Tier Holding Company's name: "Peoples
Bancorp, Inc." See "The Company" and "Regulation and Supervision--Holding
Company Regulation."
The Mutual Holding Company
The Mutual Holding Company is a federal mutual holding company that was
organized on August 3, 1995 in connection with the mutual holding company
reorganization of the Bank's mutual savings bank predecessor. The Mutual Holding
Company has no material assets other than Mid-Tier Common Stock. Accordingly,
all financial and other information contained in this Prospectus relates to the
business, financial condition, and results of operations of the Mid-Tier Holding
Company and/or its wholly-owned subsidiary, the Bank. Upon consummation of the
Conversion, the Mutual Holding Company will convert from mutual to stock form
and simultaneously merge with and into the Mid-Tier Holding Company. See "The
Conversion"
The Mid-Tier Holding Company
The Mid-Tier Holding Company was formed to become the stock holding
company of the Bank in the two-tier reorganization (the "Two-Tier
Reorganization") of the Bank and the Mutual Holding Company, which was completed
in July 1997. In the Two-Tier Reorganization, all of the outstanding shares of
the Bank's common stock ("Bank Common Stock"), including shares held by the
Mutual Holding Company and Minority Stockholders, were converted into shares of
Mid-Tier Common Stock, and the Bank became the wholly-owned subsidiary of the
Mid-Tier Holding Company. As of September 30, 1997, the Mid-Tier Holding
Company's only material asset consisted of 100% of the outstanding shares of
common stock of the Bank.
The Bank
The Bank conducts its business from a corporate center located in
Lawrenceville, New Jersey, 14 branch offices located in Mercer, Burlington and
Ocean Counties, New Jersey, and a trust services subsidiary with an office
located in Ocean County, New Jersey. On January 1, 1995, the Bank completed a
charter change from a New Jersey chartered mutual savings bank to a federally
chartered mutual savings bank, permitting expansion of branch offices into
adjacent market areas in Pennsylvania. On August 3, 1995, the Bank's mutual
predecessor reorganized from a federally chartered mutual savings bank into the
Mutual Holding Company and concurrently formed the Bank, which succeeded to the
name and operations of the Bank's mutual predecessor (the "Reorganization"). At
the time of the Reorganization, the Bank conducted a stock offering (the
"Minority Stock Offering") in which it raised approximately $30.0 million of net
proceeds
The Bank has traditionally operated as a community-oriented savings
institution providing mortgage loans and other traditional financial services to
its local community. The Bank is primarily engaged in attracting deposits from
the general public through its offices and using those funds to originate loans
secured by one- to four-family residences primarily located in Mercer and
Burlington Counties where the Bank's offices are located, as well as in
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<PAGE>
neighboring Bucks County, Pennsylvania. Loans secured by one- to four-family
residences amounted to $242.4 million, or 60.4%, of the Bank's total loan
portfolio at September 30, 1997. In recent years the Bank has substantially
increased its portfolio of mortgage loans secured by multi-family and commercial
real estate, commercial business loans, consumer loans and home equity and
property improvement loans, which, in the aggregate, amounted to $158.7 million,
or 39.6%, of the total loan portfolio at September 30, 1997. The Bank also has a
securities portfolio primarily consisting of U.S. Treasury and federal
government agency obligations, corporate and municipal bonds and mortgage-backed
securities issued by federal agencies, which portfolio amounted to $198.4
million, or 31.1%, of the Bank's assets at September 30, 1997.
The Bank's executive offices are located at 134 Franklin Corner Road,
Lawrenceville, New Jersey, and its telephone number at that location is (609)
844-3100.
The Conversion
General. On September 24, 1997, the Board of Directors of the Mutual
Holding Company unanimously adopted the Plan of Conversion and Reorganization
(the "Plan of Conversion"), pursuant to which the Mutual Holding Company is
converting from a federally chartered mutual holding company to a Delaware
chartered stock corporation. As part of the Conversion each of the issued and
outstanding Minority Shares shall automatically, without further action by the
holder thereof, be converted into and become a right to receive a number of
shares of Common Stock determined pursuant to the Exchange Ratio. See "The
Conversion--Share Exchange Ratio".
The following diagrams outline (i) the current organization structure
of the Mutual Holding Company, the Mid-Tier Holding Company, and the Bank and
(ii) the organizational structure of the Company and the Bank following the
Conversion.
Current organizational structure:
Mutual Holding Company Minority Stockholders
- ---------------------- ---------------------
64.1% 35.9%
Mid-Tier
Holding Company
---------------
100%
Bank
7
<PAGE>
Organizational structure following the conversion:
Public Stockholders
-------------------
100%
Company
-------
100%
Bank
Reasons for the Conversion. The Board of Directors unanimously
determined to conduct the Conversion because it believed that the market for
equity securities in financial services companies was at an unprecedented level
and that the Bank (together with the Company, the "Converted Institution") could
raise substantial funds from such a transaction. The Board of Directors believed
that maximizing such proceeds is in the best interests of the Converted
Institution because such proceeds can be used to increase the net income of the
Converted Institution though investment and eventual leveraging of the proceeds,
and support the possible expansion of the Bank's existing franchise through
internal growth or the acquisition of branch offices or other financial
institutions. Management believed that acquisition opportunities would increase
as a result of the Conversion because the Converted Institution would have
substantially more capital following the Conversion. The Bank has acquired two
financial institutions since September 30, 1996, and intends to actively explore
additional acquisitions, although neither the Company nor the Bank has any
specific plans, arrangements or understandings regarding any additional
expansions or acquisitions at this time. In addition, the Board considered that
there was no assurance that the pricing for financial services stocks would
continue at such favorable levels, and that if the market were to become less
favorable, the amount of capital that could be raised in the Conversion might be
substantially reduced. See "Risk Factors--Potential Low Return on Equity" and "
Uncertainty as to Future Growth Opportunities." See "The Conversion--Purposes of
Conversion."
Approvals Required. The Plan of Conversion and the transactions
incident to the Conversion must be approved by the affirmative vote of: (i) a
majority of the total eligible votes of the members of the Mutual Holding
Company at the Special Meeting of Members to be held on March ___, 1998 (the
"Special Meeting of Members"); (ii) the holders of at least two-thirds of the
outstanding common stock of the Mid-Tier Holding Company; and (iii) the holders
of a majority of the Minority Shares cast at a special meeting of stockholders
of the Mid-Tier Holding Company to be held on March ___, 1998 (the "Special
Meeting of Stockholders"). Consummation of the Conversion is also subject to the
approval of the OTS.
Effective Date. The Effective Date is the date upon which the
Conversion is consummated, which is expected to be during the fiscal quarter
ended June 30, 1998.
Share Exchange Ratio. OTS regulations and policy provide that in a
conversion of a mutual holding company to stock form, stockholders other than
the mutual holding company will be entitled to exchange their shares of
subsidiary savings bank (or mid-tier holding company) common stock for common
stock of the converted holding company, provided that the bank and the mutual
holding company demonstrate to the satisfaction of the OTS that the basis for
the exchange is fair and reasonable. The Boards of Directors of the Bank and the
Company have determined that each Minority Share will on the Effective Date be
automatically converted into and become the right to receive a number of
Exchange Shares determined pursuant to an exchange ratio (the "Exchange Ratio")
which was established as the ratio that ensures that after the Conversion,
subject to the Dividend Waiver Adjustment described in "The Conversion Share
Exchange Ratio" and a slight adjustment to reflect the receipt of cash in lieu
of fractional shares
8
<PAGE>
(both of which will slightly decrease the percentage of shares to be issued to
Minority Stockholders), the percentage of the to-be outstanding shares of Common
Stock issued to Minority Stockholders in exchange for their Minority Shares will
be equal to the percentage of the Mid-Tier Common Stock held by Minority
Stockholders immediately prior to the Conversion. The total number of shares
held by Minority Stockholders after the Conversion would also be affected by any
purchases by such persons in the Offering.
Based on the 35.9% of the outstanding shares of the Mid-Tier Common
Stock held by Minority Stockholders as of December 1, 1997, the $4.9 million of
dividends waived and projected to be waived by the Mutual Holding Company
through the Effective Date, the $21,000 of assets other than Mid-Tier Common
Stock held by the Mutual Holding Company as of December 1, 1997, and the
Independent Valuation, the following table sets forth, at the minimum, midpoint,
maximum, and adjusted maximum of the Offering Range, the following: (i) the
total number of Subscription Shares and Exchange Shares to be issued in the
Conversion, (ii) the percentage of Common Stock outstanding after the Conversion
that will be sold in the Offering and issued in the Share Exchange, and (iii)
the Exchange Ratio.
Subscription Shares Exchange Shares Total Shares
to be Issued to be Issued of Common
------------------- ----------------- Stock to be Exchange
Amount Percent Amount Percent Outstanding Ratio
------ ------- ------ ------- ----------- -----
Minimum.......... 15,300,408 65.7% 7,989,592 34.3% 23,290,000 2.4580
Midpoint......... 18,000,691 65.7% 9,399,309 34.3% 27,400,000 2.8917
Maximum.......... 20,700,648 65.7% 10,809,352 34.3% 31,510,000 3.3255
Adjusted maximum. 23,805,827 65.7% 12,430,673 34.3% 36,236,500 3.8243
The final Exchange Ratio will be calculated at the conclusion of the
Conversion and will be affected by any additional waivers of dividends by the
Mutual Holding Company, any change in the Mutual Holding Company's assets other
than Mid-Tier Common Stock, and any options exercised subsequent to December 1,
1997.
Effect on Stockholders' Equity per Share of the Shares Exchanged. The
Conversion will increase the stockholders' equity of Minority Stockholders. At
September 30, 1997, the stockholders' equity per share was $11.97 for each share
of Mid-Tier Common Stock outstanding, including shares held by the Mutual
Holding Company. Based on the pro forma information set forth in "Pro Forma
Data," assuming the sale of 18,000,691 shares of Common Stock at the midpoint of
the Offering Range, the pro forma stockholders' equity per share of Common Stock
was $9.93, and the aggregate pro forma stockholders' equity for the number of
Exchange Shares to be received for each Minority Share was $28.71. The pro forma
stockholders' equity for the aggregate number of Exchange Shares to be received
for each Minority Share was $26.10, $31.36 and $34.38 at the minimum, maximum,
and adjusted maximum of the Offering Range.
Effect on Earnings per Share of the Shares Exchanged. The Conversion
will also affect Minority Stockholders' pro forma earnings per share. For the
nine months ended September 30, 1997, and the fiscal year ended December 31,
1996, the earnings per share were $.66 and $.94, respectively, for each share of
Mid-Tier Common Stock outstanding, including shares held by the Mutual Holding
Company. Based on the pro forma information set forth in "Pro Forma Data,"
assuming the sale of 18,000,691 shares of Common Stock at the midpoint of the
Offering Range, the pro forma earnings per share of Common Stock was $.34 and
$.49, respectively, for such periods, and the aggregate pro forma earnings for
the number of Exchange Shares to be received for each Minority Share was $.98
and $1.42, respectively. For the nine months ended September 30, 1997, the
aggregate pro forma earnings for the number of Exchange Shares to be received
for each Minority Share was $.93, $1.03 and $1.11 at the minimum, maximum, and
adjusted maximum of the Offering Range. For the fiscal year ended December 31,
1996, the aggregate pro forma earnings for the number of Exchange Shares to be
received for each Minority Share was $1.35, $1.50 and $1.61 at the minimum,
maximum, and adjusted maximum of the Offering Range.
9
<PAGE>
Effect on Dividends per Share. The Company's Board of Directors
anticipates declaring and paying quarterly cash dividends of $.025, or $.10 per
share of Common Stock on an annual basis, or an aggregate annual dividend of
$.246, $.289, $.333 and $.382 for the number of Exchange Shares received for
each Minority Share, at the minimum, midpoint, maximum and adjusted maximum of
the Offering Range, respectively. The Bank, or the Mid-Tier Holding Company, has
paid quarterly cash dividends of $.0875 per Minority Share, or $.35 per Minority
Share on an annual basis, for each of the full fiscal quarters since the
Minority Stock Offering in August 1995. Accordingly, if a Minority Stockholder
does not purchase shares in the Offering, his aggregate dividends will initially
increase if shares are sold at the adjusted maximum of the Offering Range, and
will decrease if shares are sold at the minimum, midpoint, and maximum of the
Offering Range. See "Market for Common Stock." The Mid-Tier Holding Company
intends to continue to pay a quarterly cash dividend of $.0875 per share through
the fiscal quarter ended March 31, 1998. Dividends, when and if paid, will be
subject to determination and declaration by the Board of Directors in its
discretion, which will take into account the Company's consolidated financial
condition and results of operations, tax considerations, industry standards,
economic conditions, regulatory restrictions on dividend payments by the Bank to
the Company, general business practices and other factors. See "Dividend
Policy."
Effect on the Market and Appraised Value of the Shares Exchanged. The
aggregate Subscription Price of the shares of Common Stock received in exchange
for each Minority Share is $24.58, $28.92, $33.26, and $38.24 at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range. The last trade of
Mid-Tier Stock on August 7, 1997, the day preceding the announcement of the
Conversion, was $22 per share, and the price at which Mid-Tier Common Stock last
traded on February ____, 1998, was $________ per share.
Dissenters' and Appraisal Rights. Under OTS regulations, Minority
Stockholders will not have dissenters' rights or appraisal rights in connection
with the exchange of Minority Shares for shares of Common Stock of the Company.
Tax Consequences of Conversion. The Bank will receive an opinion of
counsel with regard to federal income taxation and written advice from its tax
advisor with regard to New Jersey taxation, which will indicate that the
adoption and implementation of the Plan of Conversion will not be taxable for
federal or New Jersey income tax purposes to the Bank, the Mutual Holding
Company, the Mid-Tier Holding Company, the Minority Stockholders, the Interim
Savings Bank, members of the Mutual Holding Company or eligible account holders
or the Company. Consummation of the Conversion is conditioned upon prior receipt
by the Bank of such opinions. See "The Conversion--Tax Aspects."
Exchange of Mid-Tier Holding Company Stock Certificates. Until the
Effective Date, the Minority Shares will continue to be available for trading on
the Nasdaq National Market. The exchange and conversion of Minority Shares for
shares of the Common Stock will occur automatically on the Effective Date. After
the Effective Date, former holders of the Mid-Tier Common Stock will have no
further equity interest in the Bank (other than as stockholders of the Company)
and there will be no further transfers of the Mid-Tier Common Stock on its stock
transfer records. For persons holding Minority Shares in street name, the
conversion of Minority Shares into shares of Common Stock will occur without any
action on the part of such stockholder. For persons holding certificated shares,
as soon as practicable after the Effective Date, the Company, or a transfer
agent, bank or trust company designated by the Company, in the capacity of
exchange agent (the "Exchange Agent"), will send a transmittal form to each
Minority Stockholder of record as of the Effective Date. The transmittal forms
are expected to be mailed within five business days after the Effective Date and
will contain instructions with respect to the surrender of certificates
representing the Mid-Tier Common Stock or Certificates formerly representing
shares of Bank Common Stock that were not replaced with Certificates
representing Mid-Tier Common Stock into which such shares were converted in the
Two-Tier Reorganization ("Converted Bank Common Stock Certificates"). It is
expected that certificates for shares of the Company's Common Stock will be
distributed within five business days after the receipt of properly executed
transmittal forms and other required documents. See "The Conversion--Exchange of
Certificates." MID-TIER HOLDING COMPANY STOCKHOLDERS SHOULD NOT FORWARD STOCK
CERTIFICATES TO THE MID-TIER HOLDING COMPANY, THE BANK OR THE EXCHANGE AGENT
UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS.
10
<PAGE>
The Subscription and Community Offerings
Up to 20,700,648 Subscription Shares (subject to adjustment to up to
23,805,827 shares) will be offered for a subscription price of $10.00 per share
(the "Subscription Price") in the Subscription Offering and, to the extent
shares remain available for sale, in the Community Offering which is being
conducted concurrently with, and/or following the conclusion of the Subscription
Offering (together, the "Offering"). Common Stock offered in the Subscription
Offering shall be offered in the following order of priority to: (i) Eligible
Account Holders; (ii) the Bank's ESOP in an amount up to 4% of the shares sold
in the Offering and the Bank's 401(k) Plan in an amount up to 200,000 of the
shares sold in the Offering; (iii) Supplemental Eligible Account Holders; and
(iv) Other Members.
Common Stock not subscribed for in the Subscription Offering may be
offered in the Community Offering to certain members of the general public, with
preference given, , to Minority Stockholders and then in the Bank's discretion
to natural persons residing in the Community. The Company and the Bank reserve
the absolute right to reject or accept any orders in the Community Offering, in
whole or in part, either at the time of receipt of an order or as soon as
practicable following the Expiration Date. The Bank and the Company have hired
FBR as consultant and advisor in the Conversion and to assist in soliciting
subscriptions in the Offering. See "The Conversion--Subscription Offering and
Subscription Rights" and "--Community Offering."
The Offering will terminate at ______ p.m. local time, on March ___,
1998 (the "Expiration Date") unless the Community Offering is extended by the
Bank and the Company, with the approval of the OTS, if necessary. The Bank and
the Company may determine to extend the Community Offering for any reason,
whether or not subscriptions have been received for the minimum, midpoint, or
maximum of the number of shares offered in the Offering, and the Bank and the
Company are not required to give subscribers notice of any such extension. The
Community Offering must be completed within 45 days after the expiration of the
Subscription Offering unless extended by the Bank and the Company with the
approval of the OTS, if necessary.
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date, Prospectuses may not be mailed later than five
days prior to such date or be hand delivered later than two days prior to such
date. Order forms that include certain certifications ("Order Forms") may only
be distributed with a Prospectus. Execution of an Order Form will confirm
receipt or delivery of the Prospectus. The Bank will accept for processing only
properly completed Order Forms. The Bank will not be required to accept orders
submitted on photocopied or facsimilied Order Forms. Payment by check, bank
draft, certified or teller's check, money order, or debit authorization to an
existing passbook or certificate of deposit account at the Bank must accompany
each stock order form. See "The Conversion--Procedure for Purchasing Shares."
To ensure that each prospective purchaser is properly identified as to
his stock purchase priority, depositors as of the Eligibility Record Date and
Supplemental Eligibility Record Date must list all accounts on the stock order
form giving all names in each account and the account number, and shareholders
of the Mid-Tier Holding Company must list the number of shares of Mid-Tier
Common Stock held as of February _____, 1997. Failure to list all accounts or
share holdings may result in a subscriber's loss of subscription rights, receipt
of lower priority subscription rights or loss of preference in the Community
Offering. The priority of any order submitted by two or more persons will be
based on the priority of the person with the lowest priority subscription
rights.
Restrictions on Transfer of Subscription Rights and Shares
No person may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan of Conversion or the shares of Common Stock to be issued upon
their exercise. Each person exercising subscription rights will be required to
certify that a purchase of Common Stock is solely for the purchaser's own
account and that there is no agreement or understanding regarding the sale or
11
<PAGE>
transfer of such shares. See "The Conversion--Restrictions on Transfer of
Subscription Rights and Shares." The Company and the Bank will pursue any and
all legal and equitable remedies in the event they become aware of the transfer
of subscription rights and will not honor orders known by them to involve the
transfer of such rights.
Purchase Limitations
The minimum number of shares that may be purchased is 25 shares. Except
for the ESOP and the 401(k) Plan, no Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member may in their capacities as such purchase
in the Subscription Offering more than 100,000 Subscription Shares; no person,
together with associates of and persons acting in concert with such person, may
purchase in the Offering more than 100,000 Subscription Shares; and no person
together with associates of and persons acting in concert with such person may
purchase in the aggregate more than the number of Subscription Shares that when
combined with Exchange Shares received by such person together with associates
of and persons acting in concert with such person exceeds 1.5% of the shares of
Common Stock issued in the Conversion, provided, however, that at any time
during the Offering and without further approval by the members of the Mutual
Holding Company or stockholders of the Mid-Tier Holding Company and without
further notice to subscribers, the Company and the Bank, in their sole
discretion, may increase the maximum purchase limitation to up to 5% of the
aggregate number of shares of Common Stock issued in the Conversion. Under
certain circumstances, subscribers for the maximum number of shares will, and
certain large subscribers may, be resolicited to increase their subscriptions in
the event of any such increase. The Company and the Bank may determine to
increase the maximum purchase limitation in their sole discretion whether or not
subscriptions have been received for shares at the minimum, midpoint or maximum
of the Offering Range, subject to any necessary regulatory approval, for any
reason, including to sell the minimum number of shares offered, and to raise
more capital. See "The Conversion--Limitations on Common Stock Purchases." In
the event of an oversubscription, shares will be allocated as described in "The
Conversion--Subscription Offering and Subscription Rights" and "--Community
Offering," and in accordance with the Plan of Conversion. In the event of a 15%
increase in the total number of shares to be offered, the additional shares will
be distributed and allocated as described herein without the resolicitation of
subscribers as described in "The Conversion--Subscription Offering and
Subscription Rights" and "--Limitation on Common Stock Purchases."
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion and Federal regulations require that the
aggregate purchase price of the Common Stock in the Offering must be based on
the appraised aggregate pro forma market value of the Common Stock, as
determined by an independent valuation. The Bank and the Company have retained
FinPro, Inc. ("FinPro") to make such valuation (the "Independent Valuation").
The Independent Valuation was prepared based on the assumption that the
aggregate amount of Common Stock sold in the Offering would be equal to the
estimated pro forma market value of the Company multiplied by the Adjusted
Majority Ownership Percentage (as defined in " The Conversion--Share Exchange
Ratio"). The Independent Valuation states that as of December 17, 1997, the
estimated pro forma market value of the Company ranged from a minimum of
$232,900,000 to a maximum of $315,100,000 with a midpoint of $274,000,000 (the
"Valuation Range"). The aggregate offering price of the Subscription Shares
offered in the Offering will be equal to the Valuation Range multiplied by the
Adjusted Majority Ownership Percentage (as defined in "the Conversion--Share
Exchange Ratio"). The number of Subscription Shares offered in the Offering will
be equal to the aggregate offering price of the Subscription Shares divided by
the Subscription Price. The number of Subscription Shares offered in the
Offering and/or the aggregate of the offering price of the Subscription Shares
are referred to herein as the "Offering Range." Based on the Valuation Range,
the Adjusted Majority Ownership Percentage and the Subscription Price, the
minimum of the Offering Range will be 15,300,408 Subscription Shares, the
midpoint of the Offering Range will be 18,000,691 Subscription Shares, and the
maximum of the Offering Range will be 20,700,648 Subscription Shares.
The Board of Directors reviewed the Independent Valuation and, in
particular, considered (i) the Mid-Tier Holding Company's financial condition
and results of operations, (ii) financial comparisons of the Mid-Tier Holding
Company in relation to holding company's of financial institutions of similar
size and asset quality, (iii) stock market conditions generally and in
particular for financial institutions, and (iv) the historical trading price of
the Minority
12
<PAGE>
Shares, all of which are set forth in the Independent Valuation. The Board also
reviewed the methodology and the assumptions used by FinPro in preparing its
appraisal. The Independent Valuation of the Common Stock is not intended and
should not be construed as a recommendation of any kind as to the advisability
of purchasing the Common Stock in the Offering, nor can any assurance be given
that those who purchase or receive Common Stock in the Conversion will be able
to sell such shares after the Conversion at or above the Subscription Price.
Further, the pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation. See
"Pro Forma Data" and "The Conversion--Stock Pricing and Number of Shares to be
Issued."
There is no obligation or understanding on the part of management or
the Board of Directors to take and/or pay for any shares in order to complete
the Conversion. Following commencement of the Subscription Offering, the maximum
of the Valuation Range may be increased by up to 15% to up to $362,365,000,
which will result in a corresponding increase of up to 15% in the maximum of the
Offering Range to $238,058,270, or 23,805,827 shares, to reflect changes in the
market and financial conditions, without the resolicitation of subscribers. The
minimum of the Valuation Range and the minimum of the Offering Range may not be
decreased without a resolicitation of subscribers. See "--Limitations on Common
Stock Purchases" as to the method of distribution and allocation of additional
shares that may be issued in the event of an increase in the Offering Range to
fill unfilled orders in the Subscription and Community Offerings. See "The
Conversion--Stock Pricing" and --Number of Shares to be Issued."
Use of Proceeds
Net proceeds from the sale of the Common Stock are estimated to be
between $151.1 million and $205.1 million, based on the assumptions set forth in
"Pro Forma Data." Actual net cash proceeds cannot be determined until the
Conversion is completed, and will depend on the number of shares sold in the
Offering and the expenses of the Conversion. See "Pro Forma Data." The Company
will contribute at least 50% of the estimated adjusted net Offering proceeds to
the Bank.
The Company will be unable to utilize any of the net proceeds of the
Offering until the Effective Date. The Company and the Bank intend to initially
use funds from the Offering for general business purposes including investment
in one- to four-family residential mortgage loans and other loans, and
investment in short-term and intermediate-term securities and mortgage-backed
securities. In addition, the Bank and the Company intend in the future to
utilize net proceeds to expand current operations through internal growth or
acquisitions, or for diversification into other banking-related businesses and
for other business and investment purposes. The Bank has acquired two financial
institutions since September 30, 1996, and the Company and the Bank actively
intend to explore additional acquisitions, although neither the Company nor the
Bank has any specific plans, arrangements or understandings regarding any
additional expansions or acquisitions at this time. Net proceeds retained by the
Company may be used for general business activities including, subject to
applicable limitations, the possible payment of dividends and repurchases of
Common Stock. See "Use of Proceeds."
Dividends
The Company intends to pay a quarterly cash dividend of $.025 per share
of Common Stock, or $.10 per share of Common Stock on an annual basis. The first
dividend is expected to be declared for the fiscal quarter ended June 30, 1998.
Dividends, when and if paid, will be subject to determination and declaration by
the Board of Directors in its discretion, which will take into account the
Company's consolidated financial condition and results of operations, tax
considerations, industry standards, economic conditions, regulatory restrictions
on dividend payments by the Bank to the Company, general business practices and
other factors. See "Dividend Policy."
13
<PAGE>
Market for Common Stock
There is an established market for the Mid-Tier Common Stock which is
currently listed on the Nasdaq National Market under the symbol "TSBS," and the
Mid-Tier Holding Company had 12 market makers as of September 30, 1997. As a
newly formed company, however, the Company has never issued capital stock and
consequently there is no established market for its Common Stock. It is expected
that the Company's Common Stock may be more liquid than the Minority Shares
because there will be significantly more outstanding shares owned by the public.
However, there can be no assurance that an active and liquid trading market for
the Common Stock will develop, or if developed, will be maintained. The Minority
Shares will automatically on the Effective Date, without further action by the
holder thereof, be converted into and become a right to receive shares of Common
Stock based on the Exchange Ratio.
The Company has received conditional approval to have its Common Stock
listed on the Nasdaq National Market under the Mid-Tier Holding Company's
previous symbol "TSBS." FBR has advised the Company that upon completion of the
Conversion, it intends to act as a market maker in the Common Stock.
Benefit Plans
The Bank's ESOP is expected to purchase up to 4% of the shares sold in
the Offering, or 720,028 shares assuming the sale of 18,000,691 shares, after
satisfaction of purchase orders of Eligible Account Holders. The shares
purchased by the ESOP will be allocated to the accounts of employees (except for
Messrs. Breithaupt , Bellarmino, and three other employees of the Bank's
subsidiaries who will not participate in the ESOP) without payment by such
persons of additional cash consideration. Subject to participant direction of
the plan's investment, the Bank's 401(k) Plan may purchase up to 200,000 of the
shares sold in the Offering, after satisfaction of purchase orders of Eligible
Account Holders. In addition, subject to stockholder approval, the Bank or the
Company intends to adopt (i) a recognition and retention plan (the "1998
Recognition Plan") pursuant to which the Bank or the Company intends to award to
employees and directors of the Bank a number of shares of Common Stock equal to
up to 4% of the number of shares sold in the Offering, and (ii) a stock option
plan (the "1998 Stock Option Plan") pursuant to which the Company intends to
award options to purchase a number of shares of Common Stock equal to up to 10%
of the number of shares sold in the Offering at an exercise price equal to the
fair market value of the Common Stock at the time of the award. Shares awarded
pursuant to the 1998 Recognition Plan or the 1998 Stock Option Plan may be
authorized but unissued shares, or shares of Common Stock acquired by the Bank,
the Company, or such plans in the open market. The exercise of such options may,
and such awards of Recognition Plan shares and ESOP shares from authorized but
unissued shares of the Company would, dilute the interests of stockholders by
approximately 8,4%. The Company intends to submit the 1998 Recognition Plan and
1998 Stock Option Plan to stockholders for approval. In addition, the Bank or
the Company intend to adopt employment contracts for additional senior officers.
See "Management of the Bank--Benefit Plans."
Risk Factors
Attention should be given to the matters discussed under "Risk Factors"
which include, among others, discussions of low returns on equity that may
follow the Conversion, uncertainty as to future growth opportunities and ability
to successfully deploy Offering proceeds, the Independent Valuation and its
impact on the trading price of the Common Stock, absence of future securities
gains, the possible increase in the Offering Range and number of shares issued
in the Offering, the potential impact of changes in interest rates, risks
related to an increased portfolio of higher yielding loans, certain
anti-takeover considerations, the possible dilutive effect of the issuance of
additional shares, expected higher compensation expenses in future periods,
regulatory oversight and legislation, and capability of the Bank's data
processing systems to accommodate the year 2000.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF THE BANK AND SUBSIDIARIES
The following tables set forth selected consolidated historical
financial and other data of the Mid-Tier Holding Company (including its
subsidiaries) for the periods and at the dates indicated. The information is
derived in part from and should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Mid-Tier Holding Company contained
elsewhere herein. The Selected Consolidated Financial Condition and Operating
Data at and for the nine month periods ended September 30, 1997 and 1996 are
derived from unaudited consolidated financial statements and, in the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the results for the unaudited periods have been made.
The results of operations data presented below for the nine months ended
September 30, 1997, are not necessarily indicative of the results that may be
expected for any future period.
<TABLE>
<CAPTION>
At At December 31,
September 30, ----------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- -------- -------- -------- -------- ---------
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C> <C>
Total assets............................ $638,942 $601,016 $514,218 $441,019 $435,746 $409,227
Cash and cash equivalents............... 13,209 20,938 16,253 12,665 15,763 11,983
Securities available for sale........... 127,651 87,648 83,776 64,961 -- --
Securities held to maturity:
Debt securities....................... 31,158 37,935 36,945 27,017 121,814 161,923
Mortgage-backed securities............ 39,603 48,618 54,316 35,087 33,169 23,800
Federal Home Loan Bank stock.......... 3,386 3,089 2,864 2,495 -- --
Loans, net.............................. 397,866 380,288 306,093 289,504 255,656 201,889
Deposits................................ 493,334 491,246 410,770 377,559 383,840 366,069
Stockholders' equity.................... 108,239 103,352 97,542 58,769 49,123 40,624
Intangible assets....................... 10,834 9,164 2,325 -- -- --
Borrowings.............................. 30,000 -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- ------
(In Thousands)
Selected Operating Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income.................... $32,616 $26,662 $36,903 $33,518 $29,468 $30,754 $31,440
Total interest expense................... 16,223 12,865 17,941 17,010 12,851 13,253 16,179
------- ------- ------- ------- ------- ------- -------
Net interest income.................... 16,393 13,797 18,962 16,508 16,617 17,501 15,261
Provision for loan losses................ 1,488 -- -- 150 180 880 520
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses...................... 14,905 13,797 18,962 16,358 16,437 16,621 14,741
Other income............................. 4,169 2,711 3,818 4,946 3,150 3,819 1,172
Operating expenses....................... 9,844 6,434 9,669 7,792 7,475 6,536 6,010
------- ------- ------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of accounting change 9,230 10,074 13,111 13,512 12,112 13,904 9,903
Income taxes............................. 3,332 3,626 4,720 4,864 4,437 4,876 3,369
------- ------- ------- ------- ------- ------- -------
Income before cumulative effect of
accounting change...................... 5,898 6,448 8,391 8,648 7,675 9,028 6,534
Cumulative effect of accounting change -- -- -- -- -- (529) --
------- ------- ------- ------- ------- -------- -------
Net income......................... $ 5,898 $ 6,448 $8,391 $ 8,648 $ 7,675 $ 8,499 $ 6,534
======= ======= ======= ======= ======= ======= =======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
At or for the
Nine Months Ended
September 30, (5) At or for the Years Ended December 31,
------------------ --------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------ ------ ------ ------ -----
Selected Operating Ratios and Other Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets............. 1.25% 1.66% 1.56% 1.73% 1.72% 2.00% 1.64%
Return on average equity............. 7.57% 8.61% 8.34% 11.33% 13.45% 18.75% 17.52%
Interest rate spread (1)............. 3.06% 2.96% 2.98% 2.96% 3.49% 3.94% 3.62%
Net interest margin (1).............. 3.65% 3.69% 3.66% 3.47% 3.87% 4.26% 3.97%
Net interest income after provision
for loan losses to total operating
expense............................ 151.41% 214.44% 196.11% 209.93% 219.89% 254.30% 245.27%
Operating expenses to average total
assets............................. 2.09% 1.66% 1.80% 1.56% 1.67% 1.54% 1.51%
Efficiency ratio (2)................. 52.54% 42.34% 46.53% 43.84% 42.95% 45.15% 43.07%
Asset Quality Ratios:
Nonperforming loans to net loans at
end of period...................... 1.43% 0.47% 1.03% 0.71% 0.87% 0.71% 0.82%
Nonperforming assets to total assets
at end of period................... 0.91% 0.33% 0.69% 0.43% 0.59% 0.42% 0.40%
Allowance for loan losses to
nonperforming loans at end of period 56.25% 109.15% 74.19% 80.91% 65.24% 80.65% 38.35%
Average interest-earning assets to
average interest-bearing liabilities 116.06% 120.96% 119.80% 114.32% 112.72% 109.92% 108.36%
Capital and Equity Ratios:
Average equity to average assets 16.52% 19.26% 18.67% 15.27% 12.78% 10.67% 9.38%
Equity to assets at end of period 16.94% 19.38% 17.20% 18.97% 13.33% 11.27% 9.93%
Per Share Data:
Book value per share................. $ 11.97 $ 11.24 $ 11.44 $ 10.94 N/A N/A N/A
Earnings per share
Basic (6)......................... $ 0.66 $ 0.72 $ 0.94 N/A N/A N/A N/A
Diluted (6)....................... $ 0.66 $ 0.72 $ 0.94 N/A N/A N/A N/A
Other Data:
Full service offices................. 14 11 14 10 9 9 9
</TABLE>
- ----------
(1) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average costs of
average interest-bearing liabilities, and net interest margin represents
net interest income as a percentage of average interest-earning assets.
(2) The efficiency ratio is calculated by dividing non-interest expense, net of
nonrecurring items and amortization of intangible assets into net interest
income before provision for loan losses plus non-interest income, net of
non-recurring items.
(3) The Minority Stock Offering, which raised net proceeds of $30.0 million,
was completed on August 3, 1995.
(4) During the nine month periods ended September 30, 1997 and 1996, and the
fiscal years ended December 31, 1996, 1995 and 1994, the Bank recorded net
securities gains of $2.9 million, $2.2 million, $2.8 million, $4.1 million
and $2.4 million, respectively. The Bank's portfolio of equity securities
was completely divested as of September 30, 1997 and management believes
that the Company's earnings after the Conversion will not be enhanced by
net securities gains in the amounts recently experienced by the Bank. See
"Risk Factors--Absence of Securities Gains."
(5) Annualized where appropriate.
(6) In 1997, the Bank adopted SFAS No. 128. Per share amounts for prior periods
have been restated. The adoption of SFAS 128 did not have a material effect
on the Bank's reported earnings per share. See "Impact of New Accounting
Standards."
16
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth selected consolidated financial
condition data for the Bank at December 31, 1997 and 1996, and September 30,
1997, and selected consolidated operating data for the Bank for the three months
and years ended December 31, 1997 and 1996. The Selected Consolidated Financial
Condition Data and the Selected Consolidated Operating Data at and for the three
months and twelve months ended December 31, 1997 and 1996, are derived from the
unaudited consolidated financial statements of the Bank, which in the opinion of
management, reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation. This information should be read in
conjunction with the Consolidated Financial Statements of the Bank presented
elsewhere in this Prospectus.
At At At
December 31, September 30, December 31,
1997 1997 1996
---------- ---------- -------
(In Thousands)
Selected Financial Condition Data:
Total assets......................... $ 640,419 $ 638,942 $ 601,016
Cash and cash equivalents............ 15,546 13,209 20,938
Securities available for sale........ 137,218 127,651 87,648
Securities held to maturity:
Investment securities.............. 25,857 31,158 37,935
Mortgage-backed securities......... 35,098 39,603 48,618
Federal Home Loan Bank stock....... 3,386 3,386 3,089
Loans, net........................... 396,448 397,866 380,288
Real estate owned, net............... 284 123 253
Deposits............................. 493,400 493,334 491,246
Stockholders' equity................. 110,038 108,239 103,352
For the Three Months For the Years
Ended December 31, Ended December 31,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(In Thousands)
Selected Operating Data:
Total interest income.......... $ 11,241 $ 10,241 $ 43,857 $ 36,903
Total interest expense......... 5,608 5,076 21,831 17,941
--------- --------- --------- --------
Net interest income.......... 5,633 5,165 22,026 18,962
Provision for loan losses...... 186 -- 1,674 --
--------- --------- --------- --------
Net interest income after
provision for loan losses.. 5,447 5,165 20,352 18,962
Other income................... 735 1,107 4,904 3,818
Operating expenses............. 3,623 3,235 13,467 9,669
--------- --------- --------- --------
Income before income taxes..... 2,559 3,037 11,789 13,111
Income taxes................... 995 1,094 4,327 4,720
--------- --------- --------- --------
Net income................... $ 1,564 $ 1,943 $ 7,462 $ 8,391
========= ========= ========= ========
17
<PAGE>
<TABLE>
<CAPTION>
At or At or
For the Three Months For the Years
Ended December 31, Ended December 31,
------------------- -------------------
1997 1996 1997 1996
------- ------ ------ ------
(In Thousands)
Selected Operating Ratios and Other Data:
Performance Ratios:
<S> <C> <C> <C> <C>
Return on average assets.................... 0.98% 1.30% 1.18% 1.56%
Return on average equity.................... 5.72% 7.56% 6.99% 8.34%
Interest rate spread (1).................... 3.15% 3.08% 3.09% 2.98%
Net interest margin (1)..................... 3.71% 3.64% 3.66% 3.66%
Net interest income after provision for
loan losses to total operating expense.... 150.35% 159.66% 151.12% 196.11%
Operating expenses to average total assets.. 2.26% 2.16% 2.16% 1.80%
Asset Quality Ratios:
Nonperforming loans to net loans at
end of period............................. 1.41% 1.03% 1.41% 1.03%
Nonperforming assets to total assets
at end of period.......................... .92% 0.69% .92% 0.69%
Allowance for loan losses to
nonperforming loans at end of period...... 60.92% 74.19% 60.92% 74.19%
Average interest-earning assets to
average interest-bearing liabilities...... 115.62% 115.63% 115.23% 119.80%
Capital and Equity Ratios:
Average equity to average assets............ 16.89% 17.13% 17.06% 18.67%
Equity to assets at end of period........... 17.18% 17.20% 17.18% 17.20%
Per Share Data:
Book value per share........................ $ 12.16 $ 11.44 $ 12.16 $11.44
Earnings per share:
Basic.................................... 0.83 $ 0.22 0.17 $ 0.94
Diluted.................................. 0.83 0.22 0.17 0.94
Other Data:
Full service offices........................ 14 14 14 14
</TABLE>
- --------
(1) Interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted
average costs of average interest-bearing liabilities, and net interest
margin represents net interest income as a percentage of average
interest-earning assets.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Condition
Stockholders' equity increased by $6.7 million, or 6.5%, to $110.0
million at December 31, 1997 from $103.4 million at December 31, 1996. The
increase in stockholders' equity was due to net income of $7.5 million for the
year ended December 31, 1997 which offset a net after tax decrease of $700,000
in the market value of the Bank's portfolio of available for sale investments.
The decrease was primarily attributed to the Bank's sale of equity securities to
comply with OTS regulations that require the Bank to divest its portfolio of
equity securities. The Bank completed the divestiture in the third quarter of
1997. At December 31, 1997 the Bancorp's tangible, core and risk based capital
ratios were 15.76%, 15.76%, and 26.48%, respectively.
Total assets increased $39.4 million, or 6.6%, to $640.4 million at
December 31, 1997 from $601.0 million at December 31, 1996. Deposits increased
by $2.2 million, or .44%, to $493.4 million at December 31, 1997 from $491.2
million at December 31, 1996. Cash and cash equivalents decreased by $5.4
million, or 25.8%, to $15.6 million at December 31, 1997 from $20.9 million at
December 31, 1996. Securities available for sale increased $49.6 million, or
56.6%, to $137.2 million at December 31, 1997 from $87.6 million at December 31,
1996. On January 4, 1997, the Bank instituted an investment leverage program by
borrowing $30 million for reinvestment in federal agency securities which were
designated as available for sale. Securities held to maturity decreased $25.5
million or 29.4% to $61.1 million at December 31, 1997 from $86.7 million at
December 31, 1996. Net loans increased $16.2 million, or 4.2%, to $396.4 million
at December 31, 1997 from $380.3 million at December 31, 1996. The loan
portfolios increased as the result of the reinvestment of mortgage-backed
securities principal payment and the investment of deposit flows. The Bank's
investment in Federal Home Loan Bank ("FHLB") stock increased $297,000, or 9.6%,
to $3.4 million at December 31, 1997 from $3.1 million at December 31, 1996, as
the Bank's larger mortgage loan portfolio permitted additional investment in
FHLB stock.
Comparison of Results of Operations
The return on average assets and return on average equity were 1.18%
and 6.99% respectively for the year ended December 31, 1997 compared to 1.56%
and 8.34% respectively for the year ended December 31, 1996.
Net income, including security gains of $2.9 million, was $7.5 million
for the year 1997 compared to $8.4 million for the year 1996, including net
securities gains of $2.8 million.
Net Interest and Dividend Income. Total interest income increased $1.0
million, or 9.8%, to $11.2 million for the three months ended December 31, 1997
from $10.2 million for the three months ended December 31, 1996, as the Bank
increased its interest income from loans, and securities which increases were
partially offset by a decrease in interest income from federal funds sold. The
increase in interest income resulted primarily from a $40.6 million, or 7.2%,
increase in average interest-earning assets to $607.6 million from $567.0
million combined with a 18 basis point increase in yield on the Bank's average
interest-earning assets to 7.40% from 7.22%. The increase in average
interest-earning assets resulted primarily from the $30 million leverage
program, and loan growth.
Interest income from mortgage loans increased by $83,000, or 1.7%, to
$5.1 million for the three months ended December 31, 1997, from $5.0 million for
the three months ended December 31, 1996. This increase was due to a $3.4
million, or 1.3% increase in average mortgage loans to $273.1 million from
$269.7 million, combined with an increase in the yield on average mortgage loans
to 7.43% from 7.40%. Interest income from consumer loans increased by $119,000,
or 11.3%, to $1.2 million from $1.0 million as a result of a $4.5 million
increase in average consumer loans to $55.8 million from $51.3 million, combined
with a 19 basis point increase in the yield on average consumer loans. Interest
income from commercial business loans increased by $358,000 or 26.1%, to $1.7
million for the three months ended December 31, 1997 from $1.4 million for the
three months ended December 31, 1996. This increase was due to a $15.1 million,
or a 25.8% increase in average commercial business loans to $73.5 million from
$58.4 million combined with a 2 basis point increase in the yield on average
commercial business loans to 9.42%
19
<PAGE>
from 9.40%. The increase in average commercial business loan balances was due to
increased commercial business loan activity. The Bank intends to focus its
efforts in increasing its portfolio of commercial business loans in the future.
Interest income from debt securities available for sale increased by $700,000,
or 53.2%, to $1.9 million from $1.2 million, this increase was due to a $38.5
million, or 47.2%, increase in average debt securities available for sale to
$120.2 million from $81.7 million, combined with a 24 basis point increase in
the yield on average debt securities available for sale to 6.28% from 6.04%. The
increase in average debt securities available for sale was attributable to the
investment of funds for the $30 million leverage program. Interest income from
mortgage-backed securities held to maturity declined $156,000, or 21.2%, for the
three months ended December 31, 1997, from $737,000, for the three months ended
December 31, 996. The decrease in income was primarily attributed to a $10.3
million decrease in the average balance of mortgage-backed securities to $36.9
million from $47.1 million which offset a 5 basis point increase in the yield on
average mortgage-backed securities to 6.30% from 6.25%. Interest income from
mortgage-backed securities available for sale was $277,000 resulting in a yield
of 7.40% on average mortgage-backed securities of $15.0 million for the three
months ended December 31, 1997. There were no holdings of mortgage-backed
securities available for sale during the three months ended December 31, 1996.
The decrease in average equity securities available for sale resulted
from the bank's liquidation of this portfolio, as required by OTS regulation in
connection with the Bank's conversion to a federally-chartered savings bank. The
liquidation of the portfolio eliminated income for the investment category for
the three months ended December 31, 1997, compared to $29,000 for the three
months ended December 31, 1996.
Interest income from debt securities held to maturity and FHLB stock
decreased by $72,000, or 12.6%, to $500,000 for the three months ended December
31, 1997 from $572,000 for the three months ended December 31, 1996 due to a
$7.1 million, or 18.3% decrease in the average balance of debt securities held
to maturity to $31.6 million for the three months ended December 31, 1997 from
$38.7 million for the three months ended December 31, 1996. The decrease in
income was offset by a 41 basis point increase in yield to 6.33% from 5.92%.
Interest income from federal funds sold decreased $236,000 to $22,000 from
$258,000 due to a $17.5 million decrease in average federal funds sold to $1.7
million from $19.2 million, combined with a 14 basis point decrease in the yield
on average federal funds sold to 5.23% from 5.37%. The decrease in amount of
federal funds sold reflects the investment of available cash flow in higher
yielding investments and the Bank's utilization of a leverage strategy.
The increase in the Bank's average balance of mortgage, commercial
loans, consumer loans, and debt securities available for sale, resulted from the
bank's leverage program, and internal loan growth. The changes in yields on
mortgage loans, consumer loans, commercial loans, investment securities and
federal funds sold resulted primarily from the purchase of interest-earning
assets at 1997 market yields.
Total interest income increased by $7.0 million, or 18.8%, to $43.9
million for the year ended December 31, 1997 from $36.9 million for the year
ended December 31, 1996, as the Bank increased its interest income from all loan
categories, and debt and mortgage-backed securities available for sale, which
increases were partially offset by decreases in interest income from equity
securities available for sale, federal funds sold, investment securities and
FHLB stock, and mortgage-backed securities. The increase in interest income
resulted primarily from a $84.6 million, or 16.3%, increase in average
interest-earning assets to $602.0 million from $517.5 million and a 15 basis
point increase in yield on the Bank's average interest-earning assets to 7.28%
from 7.13%. The increase in average interest-earning assets resulted from the
bank's acquisition of BCB, the $30 million leverage program, and deposit
inflows.
Interest income from mortgage loans increased by $395,000, or 2.0%, to
$19.9 million for the year ended December 31, 1997, from $19.5 million for the
year ended December 31, 1996. This increase was due to a $4.7 million, or 1.8%,
increase in average mortgage loans to $269.6 million from $265.0 million,
combined with an increase in the yield on average mortgage loans to 7.38% from
7.35%. Interest income from consumer loans increased by $768,000, or 20.6%, to
$4.5 million from $3.7 million as a result of a $8.8 million increase in average
consumer loans to $56.7 million from $47.8 million, combined with a 14 basis
point increase in the yield on average consumer loans. Interest income from
commercial business loans increased by $3.7 million or 161.8%, to $6.0 million
for the year ended December 31, 1997 from $2.3 million for the year ended
December 31, 1996. This
20
<PAGE>
increase was due to a $40.5 million, or a 162.4% increase in average commercial
business loans to 9.14% from 9.16%. The increase in average commercial business
loan balances was due to the acquisition of Burlington County Bank ("BCB") and
increased commercial business loan activity. The Bank intends to focus its
efforts in increasing its portfolio of commercial business loans in the future.
Interest income from debt securities available for sale increased by $2.7
million, or 58.9% to $7.3 million from $4.6 million due to a 14 point increase
in the yield on average debt securities available to sale to 6.29%, from 6.15%,
and a $412 million, or 55.1% increase in average debt securities available for
sale to $116.0 million from $74.8 million. The increase in average debt
securities available for sale was primarily attributable to the investment of
funds for the $30 million leverage program. Interest income from mortgage-backed
securities available for sale was $404,000 for the year ended December 31, 1997
with an average balance of $6.3 million. There were no mortgage-backed
securities available for sale in 1996. Interest income from the mortgage-backed
securities held to maturity declined $423,000 or 13.1%, to $2.8 million for the
year ended December 31, 1997, from $3.2 million, for the year ended December 31,
1996. The decrease in income was primarily attributable to $6.1 million decrease
in the average balance of mortgage-backed securities held to maturity to $41.9
million from $48.0 million combined with a decrease in the yield on average
mortgage-backed securities held to maturity to 6.71% from 6.74%.
Income from equity securities available for sale decreased by $100,000,
or 62.1%, to $61,000 from $161,000 due to the previously discussed liquidation
of the stock portfolio.
Interest income from debt securities held to maturity and FHLB stock
decreased by $153,000, or 5.8%, to $2.5 million for the year ended December 31,
1997 from $2.6 million for the year ended December 31, 1996 due to a $3.3
million, or 8.0% decrease in the average balance of debt securities to $37.6
million for the year ended December 31, 1997 from $40.9 million for the year
ended December 31, 1996. The decrease in income was offset by a 15 basis point
increase in yield to 6.58% from 6.43%. Interest income from federal funds sold
decreased $349,000 to $428,000 from $777,000 due to a $6.5 million decrease in
average federal funds sold to $8.1 million from $14.7 million, combined with a 2
basis point decrease in the yield on average federal funds sold to 5.28% from
5.30%. The decrease in amount of federal funds sold reflects the investment of
available cash flow in higher yielding investments and the Bank's utilization of
a leverage strategy.
The increase in the Bank's average balance of mortgage, commercial
loans, consumer loans, and debt securities available for sale, resulted from the
bank's leverage program, the acquisition of BCB and internal loan growth. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Business Strategy." The changes in yields on mortgage loans,
consumer loans, commercial loans, investment securities and federal funds sold
resulted primarily from the purchase of interest-earning assets at 1997 market
yields.
Total Interest Expense. Total interest expense increased by $.5
million, or 10.5%, to $5.6 million for the three months ended December 31, 1997,
from $5.1 million for the three months ended December 31, 1996. The increase was
due to a $36.9 million, or 7.5%, increase in average interest-bearing
liabilities to $527.3 million from $490.4 million and a 11 basis point increase
in the average cost of the bank's interest-bearing liabilities to 4.25% from
4.14%. The increase in the average rate paid for funds was partially attributed
to the higher cost of monies for the bank's leverage program. The interest rates
on certificates of deposit increased 10 basis points to 5.41% for the quarter
ended December 31, 1997, from 5.31% for the quarter ended December 31, 1996. The
increase in rates was attributed to the effect of paying higher market rates for
certificates of deposit. The interest rates on interest bearing savings deposits
decreased 8 basis points to 2.27% for the three months ended December 31, 1997
compared to 2.35% for the three months ended December 31, 1996.
As a result of the foregoing, the Bank's net interest income was $5.6
million for the three months ended December 31, 1997 compared to $5.2 million
for the three months ended December 31, 1996. The Bank's interest rate spread
was 3.15% for the three months ended December 31, 1997 compared to 3.08% for the
three months ended December 31, 1996, as the yield on the Bank's
interest-earning assets increased more rapidly than the Bank's cost of
interest-bearing liabilities. The Bank's net interest margin was 3.71% for three
months ended 1997 compared to 3.64% for the three months ended December 31,
1996.
21
<PAGE>
Total interest expense increased by $3.9 million, or 21.7%, to $21.8
million for the year ended December 31, 1997, from $17.9 million for the year
ended December 31, 1996. The increase was due to $88.8 million, or 20.6%
increase in average interest-bearing liabilities to $520.7 million from $431.9
million, and a 4 basis point increase in the average cost of the Bank's
interest-bearing liabilities to 4.19% from 4.15%. The increase in average
interest-bearing liabilities resulted from the $30 million borrowing in January
1997 for the bank's leverage investment program combined with a 18 basis point
increase in the cost of average certificates of deposit from 5.18% for the year
ending December 31, 1996 to 5.36% for the year ending December 31, 1997 and a 28
basis point decrease in the cost of average core deposits from 2.43% for the
year ending December 31, 1996 to 2.15% for the year ending December 31, 1997.
The increase in interest-bearing liabilities was largely the result of the
acquisition of BCB and the leverage program. The increase in rates paid on
certificates of deposit was attributed to the effect of paying higher market
rates on these deposits. The increase in the average rate paid for funds was
also attributed to the higher cost of monies for the bank's leverage program.
As a result of the foregoing, the Bank's net interest income was $22.0
million for the year ended December 31, 1997 compared to $19.0 million for the
year ended December 31, 1996. The Bank's interest rate spread was 3.09% for the
year ended December 31, 1997 compared to 2.98% for the year ended December 31,
1996, as the yield on the Bank's interest-earning assets increased more rapidly
than the Bank's cost of interest-bearing liabilities. The Bank's net interest
margin was 3.66% for both years.
Provision for Loan Losses. The provision for loan losses was $186,000
and $1.7 million, respectively for the three months and year ended December 31,
1997. There was no provision for loan losses during the comparable 1996 periods.
The provision for 1997 was primarily attributable to a niche line of business
that was acquired through the acquisition of BCB, modest loan growth and an
increase in non-performing small commercial loans. Management has made the
decision to exit the automobile dealer floorplan financing business and has made
provisions for the deterioration of the portfolio. Management has taken steps to
expeditiously address the credit risk in these loans and any potential losses
associated with exiting this line of business. As of December 31, 1997, the
Bank's total non-performing loans and foreclosed assets amounted to $5.9
million, or .92% of total assets compared to $4.2 million, or .69% of total
assets at December 31, 1996.
Management believes that the allowance for loan losses is adequate
based on historical experience, the volume and type of lending conducted by the
Bank, the amount of non-performing loans, general economic conditions and other
factors relating to the Bank's loan portfolio. At December 31, 1997, the Bank
had $2.1 million of loans criticized as special mention, $6.6 million classified
as substandard, $571,000 as doubtful and $0 classified as loss. However, there
can be no assurances that actual losses will not exceed estimated amounts.
Other Income
For the three months ended December 31, 1997, there were no gains on
security sales compared to $.7 million of gains on sales of securities for the
three months ended December 31, 1996. Service fees and other income increased
$278,000 or 60.8% for the three months ended December 31, 1997 to $735,000 from
$457,000 for the three months ended December 31, 1996.
For the year ended December 31, 1997, the net gain on security sales
increased $84,000, or 3.0%, to $2.9 million, compared to a net gain of $2.8
million for the year ended December 31,1996. Service fees and other income
increased $1.0 million or 107.2% for the year ended December 31, 1997 to $2.0
million from $1.0 million for the year ended December 31, 1996. The increase in
fees is primarily attributable to the acquisition of BCB deposits which have
higher fee generating characteristics and the activities of the Bank's two
subsidiaries, TS Business Financial and Manchester Trust Bank.
Operating Expense
Total operating expenses increased by $400,000, or 12%, to $3.6 million
for the three months ended December 31, 1997 as compared to $3.2 million for the
three months ended December 31, 1996. During the same
22
<PAGE>
period the amortization of intangible assets increased $38,000 from $185,000 to
$223,000, reflecting the amortization of goodwill from the acquisition of
Manchester Trust Bank on September 8, 1997. Salaries and employee benefits
increased by $269,000, or 15.4%, to $2.0 million for the three months ended
December 31, 1997 from $1.7 million for the three months ended December 31,
1996, reflecting normal salary increases, and management incentive awards. Net
occupancy expenses of $403,000 was the same in both three month periods. Other
operating expenses increased $57,000, or 6.3%, to $1.0 million for the three
months ended December 31, 1997 as compared to $900,000 for the three months
ended December 31, 1996.
Total operating expenses increased by $3.8 million, or 39.3%, to $13.5
million for the year ended December 31, 1997 as compared to $9.7 million for the
year ended December 31, 1996. During the same period the amortization of
intangible assets increased by $411,000 or 105.7% to $.8 million from $.4
million, reflecting the amortization of goodwill from the acquisition of BCB and
Manchester Trust Bank. Salaries and employee benefits increased $2.3 million, or
44.4%, to $7.4 million for the year ended December 31, 1997 from $5.1 million
for the year ended December 31, 1996, reflecting normal salary increases,
management incentive awards, and nine months of additional salaries from the
acquisition of BCB. Net occupancy expenses increased $268,000, or 20.5%, due the
additional of two branches as well as the acquisition of three BCB branches.
Other operating expenses increased $800,000, or 28.9%, to $3.7 million for the
year ended December 31, 1997 as compared to $2.9 million for the year ended
December 31, 1996, reflecting routine expense increases and nine months of
additional expenses from the acquisition of BCB.
Capital
The OTS requires that the Bank meet minimum tangible, core and
risk-based capital requirements. As of December 31, 1997, the Bank exceeded all
regulatory capital requirements. The Bank's required, actual, and excess capital
levels as of December 31, 1997, are as follows:
Excess of
Actual Over
Regulatory
Required Actual Requirement
-------------- ---------------- ----------------
% of % of % of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Tangible Capital .... $ 9,449 1.50% $ 99,260 15.76% $89,811 14.26%
Core Capital ........ 18,900 3.00 99,260 15.76 80,360 12.26
Risk-based Capital .. 31,019 8.00 102,675 26.48 71,656 18.48
Liquidity
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 4%. The
Bank's liquidity ratio averaged 28.32% during the fourth quarter of 1997 and
equaled 28.48% at December 31, 1997. The Bank adjusts liquidity as appropriate
to meet its asset and liability management objectives.
23
<PAGE>
RISK FACTORS
The following risk factors, in addition to the other information
presented in this Prospectus, should be considered by prospective investors in
deciding whether to purchase the Common Stock offered hereby.
Low Return on Equity Following the Conversion
At September 30, 1997, the Mid-Tier Holding Company's equity as a
percentage of assets was 16.9% and for the nine months ended September 30, 1997,
its return on average equity was 7.57%. The Company's equity position will be
significantly increased as a result of the Conversion. On a pro forma basis as
of September 30, 1997, assuming the sale of Common Stock at the midpoint of the
Offering Range, the Company's ratio of equity to assets would be approximately
33.6% and, assuming the sale of Common Stock at the adjusted maximum of the
Offering Range, the Company's ratio of equity to assets would be approximately
37.7%. The Company's ability to invest the Offering proceeds in loans and
ultimately leverage the capital raised in the Offering will be significantly
affected by industry competition for loans and deposits. In addition, future
income is likely to be adversely affected by the absence of securities gains
(see "--Absence of Securities Gains") and higher compensation expenses (see
"--Higher Compensation Expenses in Future Periods"). The Company currently
anticipates that it will take time to deploy prudently such capital, and, as a
result, the Company's return on equity initially is expected to be below the
industry average immediately after the Conversion.
Uncertainty as to Future Growth Opportunities and Ability to Successfully Deploy
Offering Proceeds
In an effort to fully deploy post-Conversion capital, in addition to
attempting to increase its loan and deposit growth, the Company may seek to
expand its banking franchise by acquiring other financial institutions or
branches. The Company's ability to grow through selective acquisitions of other
financial institutions or branches of such institutions will be dependent on
successfully identifying, acquiring and integrating such institutions or
branches. There can be no assurance the Company will be able to generate
internal growth or to identify attractive acquisition candidates, acquire such
candidates on favorable terms, successfully integrate any acquired institutions
or branches into the Company, or increase profits sufficiently to offset the
increase in expenses that will result from an acquisition.
The Bank has acquired two financial institutions since September 30,
1996, and the Company and the Bank intend to continue to actively explore
additional acquisitions, engage in discussions or negotiations from time to
time, and conduct business investigations of prospective target institutions.
Acquisitions typically involve the payment of a premium over book and market
values, and therefore, some dilution of the Company's book value and net income
per share may occur in connection with a future acquisition. Neither the Company
nor the Bank has any specific plans, arrangements or understandings regarding
any additional expansions or acquisitions at this time.
Independent Valuation of the Company and its Impact on the Trading Price of the
Common Stock
The offering price as a percentage of pro forma tangible book value of
the Common Stock sold in the Offering ranges from 98.5% at the minimum of the
Offering Range to 115.1% at the adjusted maximum of the Offering Range. For the
nine months ended September 30, 1997, on an annualized basis, the price to pro
forma earnings per share of the Common Stock sold in the Offering ranges from
19.7x at the minimum of the Offering Range to 25.9x at the adjusted maximum of
the Offering Range. The price to pro forma tangible book value at which the
Common Stock is being sold in the Offering substantially exceeds the price to
pro forma tangible book value of common stock sold in most mutual-to-stock
conversions that do not involve a mutual holding company conversion or
reorganization. Moreover, the Bank and the Company may determine to extend the
Community Offering for any reason, whether or not subscriptions have been
received for shares at the minimum, midpoint, or maximum of the Offering Range.
Prospective investors should be aware that as a result of the relatively high
valuation and any extension of the Community Offering to increase the number of
shares sold in the Offering, the after-market performance of the Common Stock is
likely to be less favorable during the period immediately following the
Conversion than the price performance of common stock sold in recent
mutual-to-stock conversions that do not involve a mutual-to-stock conversion of
a mutual holding company, and the price performance of common stock sold in the
Minority Stock Offering.
24
<PAGE>
Absence of Securities Gains
At the time it converted to a federal savings bank charter in January
1995, the Bank had a portfolio of equity securities that the OTS required to be
divested over a period of time. Such securities had appreciated in value, and
the Bank has recorded substantial gains on their sale. Due in large part to such
divestiture, the Bank recorded net securities gains of $2.9 million and $2.2
million, and $2.8 million, $4.2 million, and $2.4 million, for the nine months
ended September 30, 1997 and 1996, and the fiscal years ended December 31, 1996,
1995 and 1994, respectively. The Bank's portfolio of equity securities was
completely divested as of September 30, 1997, therefore the Company's earnings
after the Conversion will not be enhanced by net securities gains in the amounts
recently experienced by the Bank.
Possible Increase in Offering Range and Number of Shares Issued
The number of Subscription Shares to be sold in the Conversion may be
increased as a result of an increase in the Offering Range of up to 15% to
reflect changes in market and financial conditions following the commencement of
the Subscription and Community Offerings. In the event that the Offering Range
is so increased, it is expected that the Company will issue up to 23,805,827
shares of Common Stock at the Subscription Price. Based upon various
assumptions, such an increase in the number of shares issued in the Offering
will decrease a subscriber's pro forma annualized net earnings per share and pro
forma stockholders' equity per share, but will increase the Company's
consolidated pro forma stockholders' equity and pro forma net income. See "Pro
Forma Data."
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
The operations of the Bank are substantially dependent on its net
interest income, which is the difference between the interest income earned on
its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. Like most savings institutions, the Bank's
earnings are affected by changes in market interest rates, and other economic
factors beyond its control. If an institution's interest-earning assets have
longer effective maturities than its interest-bearing liabilities, the yield on
the institution's interest-earning assets generally will adjust more slowly than
the cost of its interest-bearing liabilities and, as a result, the institution's
net interest income and interest rate spread generally would be adversely
affected by material and prolonged increases in interest rates and positively
affected by comparable declines in interest rates. Based upon certain repricing
assumptions, the Bank's interest-earning liabilities repricing or maturing
within one year exceeded its interest-bearing assets with similar
characteristics by $17.3 million or 2.7 % of total assets. Accordingly, an
increase in interest rates generally would result in a decrease in the Bank's
average interest rate spread and net interest income. The Bank's average
interest rate spread remained relatively stable at 3.06%, 2.98% and 2.96% for
the nine months ended September 30, 1997 and the fiscal years ended December 31,
1996 and 1995, although no assurance can be given that the Bank's average
interest rate spread will not decrease in future periods. Any such decrease in
the Bank's average interest rate spread could adversely affect the Bank's net
interest income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Assets and Liability Management."
In addition to affecting interest income and expense, changes in
interest rates also can affect the value of the Bank's interest-earning assets,
which comprise fixed- and adjustable-rate instruments, and the ability to
realize gains from the sale of such assets. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. At September
30, 1997, the Bank had $127.7 million of securities available for sale and the
Bank had $0.6 million of net unrealized gains with respect to such securities,
which were included as a separate component in the Bank's total stockholders'
equity, net of tax, as of such date.
Changes in interest rates also can affect the average life of loans and
mortgage-related securities. Decreases in interest rates in recent periods have
resulted in increased prepayments of loans and mortgage-backed securities, as
borrowers refinanced to reduce borrowing costs. Under these circumstances, the
Bank is subject to reinvestment risk to the extent that it is not able to
reinvest such prepayments at rates which are comparable to the rates on the
maturing loans or securities. See "Business of the Bank--Lending Activities."
25
<PAGE>
Risks Related to Increased Portfolio of Higher-Yielding Loans
To complement the Bank's traditional emphasis on one- to four-family
residential real estate lending, the Bank has recently increased its portfolio
of higher-yielding loans. During the 21 months ended September 30, 1997, the
Bank's portfolio of commercial business loans increased by $50.7 million, or
438%, to $62.2 million from $11.6 million, the Bank's portfolio of commercial
real estate and multi-family residential real estate loans increased by $12.5
million, or 44.8%, to $40.3 million from $27.8 million, and the Bank's portfolio
of home equity loans increased by $12.1 million, or 55.3%, to $33.9 million from
$21.8 million. Management's goal is to continue to increase the Bank's portfolio
of these loans.
Commercial and multi-family residential real estate and commercial
business lending generally are considered to involve a higher degree of risk
than single-family residential lending due to a variety of factors, including
generally larger loan balances to single borrowers or groups of related
borrowers, the dependency for repayment on successful development and operation
of the project or business and income stream of the borrower, and loan terms
which often do not require full amortization of the loan over its term.
Commercial business loans are generally considered to involve a higher degree of
risk because, in addition to the factors described above, the collateral may be
in the form of intangible assets and/or inventory subject to market
obsolescence. Such risks can be significantly affected by economic conditions.
In addition, commercial real estate and commercial business lending generally
requires substantially greater oversight efforts compared to other lending.
Moreover, such lending frequently necessitates greater allowances for loan
losses to address these increased risks, and larger provisions for loan losses
that are charged to earnings. See "Business--Lending Activities." As of
September 30, 1997, the Bank had $3.0 million of non-performing real estate
loans, and $2.5 of non-performing commercial business loans. See
"Business--Asset Quality--Non-Performing Assets."
Certain Anti-Takeover Considerations
Provisions in the Company's and the Bank's Governing Documents.
Provisions in the Company's Certificate of Incorporation and the Bank's Charter
and their respective Bylaws provide for limitations on stockholder voting
rights. In addition, the Bank's Federal Stock Charter and Bylaws, as well as
certain federal regulations, assist the Company in maintaining its status as an
independent publicly owned corporation. These provisions may prevent a change of
control of the Company even if desired by a majority of stockholders. These
provisions provide for, among other things, supermajority voting, staggered
boards of directors, noncumulative voting for directors, limits on the calling
of special meetings, and certain uniform price provisions for certain business
combinations. In particular, the Company's Certificate of Incorporation provides
that beneficial owners of more than 10% of the Company's outstanding Common
Stock may not vote the shares owned in excess of the 10% limit. The Bank's
amended Federal Stock Charter also prohibits, for a period of five years from
the closing of the Conversion, the acquisition of, or offer to, acquire,
directly or indirectly, the beneficial ownership of more than 10% of the Bank's
voting securities. Any person violating this restriction, except for the
Company, may not vote any of the Bank's securities held in excess of the 10%
limitation. In the event that holders of revocable proxies for more than 10% of
the shares of Common Stock of the Company acting as a group or in concert with
other proxy holders attempt actions that could indirectly result in a change in
control of the Bank, management of the Bank will be able to assert this
provision of the Bank's Federal Stock Charter against such holders if it deems
such assertion to be in the best interests of the Bank, the Company and its
stockholders. It is uncertain, however, whether the Bank would be successful in
asserting such provision against such persons.
Provisions of Compensation Plans and Employment Agreements. Moreover,
the Bank's current and proposed employment agreements provide for benefits and
cash payments in the event of a change in control of the Company or the Bank.
Additionally, the Bank's current stock benefit plans, and the 1998 Recognition
Plan and 1998 Stock Option Plan (if adopted more than one year following the
Conversion) may provide for accelerated vesting in the event of a change in
control. These provisions may have the effect of increasing the cost of
acquiring the Company, thereby discouraging future attempts to acquire control
of the Company or the Bank. See "Restrictions on the Acquisition of the Company
and the Bank--Restrictions in the Company's Certificate of Incorporation and
Bylaws," and "Management of the Bank--Benefits."
26
<PAGE>
Implementation of Proposed Stock Benefit Plans
Following the Conversion, the Company intends to seek stockholder
approval of the 1998 Recognition Plan and the 1998 Stock Option Plan at a
meeting of stockholders which, under current OTS regulation, may be held no
earlier than six months after Completion of the Conversion. If the 1998
Recognition Plan is approved by stockholders of the Company, the Recognition
Plan intends to acquire an amount of Common Stock equal to 4% of the shares of
Common Stock sold in the Offering. Such shares would be granted to officers and
directors of the Bank at no cost to these recipients. If such shares are
acquired at a per share price equal to the Subscription Price, the cost of such
shares to the Company would be $8.0 million, assuming the Common Stock is sold
in the Offering at the maximum of the Offering Range. If the Stock Option Plan
is approved by stockholders of the Company, the Company intends to reserve for
future issuance pursuant to such plan a number of shares of Common Stock equal
to 10% of the Common Stock sold in the Offering (2,070,064 shares, based on the
issuance of the maximum 20,700,648 shares). Options to purchase these shares of
Common Stock will be granted to officers and directors of the Bank and the
Company at no cost to them.
Possible Dilutive Effective of Issuance of Additional Shares
Shares of Common Stock to be acquired by the 1998 Recognition Plan or
issued upon exercise of stock options may be acquired in the open market with
funds provided by the Company, or from authorized but unissued shares of Common
Stock. In the event that such shares are issued from authorized but unissued
shares of Common Stock , the voting interests of stockholders will be diluted by
approximately 8.4% and net earnings per share and stockholders' equity per share
would be decreased.
As of December 1, 1997, there were options outstanding to purchase
294,637 Minority Shares at an average exercise price of approximately $15.47 per
share. On the Effective Date these options will be converted into and become
options to purchase Common Stock of the Company. The number of shares of Common
Stock to be received upon exercise of such options will be determined pursuant
to the Exchange Ratio. The exercise of such currently existing stock options
will result in dilution of the Common Stock holdings of the existing
stockholders.
Higher Compensation Expenses in Future Periods
Management believes that the Company's compensation expenses will
increase substantially in the future due to the additional stock benefit plans
that the Company intends to implement, and the additional employees that the
Bank and its subsidiaries have recently hired and expect to hire in the future
to assist the Company in executing its strategy of growing the Company's
operations.
Among the benefit plans that the Company intends to establish are the
1998 Recognition Plan and the ESOP. Generally accepted accounting principles
will require the Company to record compensation expense upon the vesting of
shares of restricted stock awarded pursuant to the 1998 Recognition Plan and
upon the commitment to release shares under the ESOP. As regards the ESOP, the
compensation expense will be equal to the fair value of the shares at the time
the shares are committed to be released, and future increases and decreases in
fair value of Common Stock committed to be released will have a corresponding
effect on compensation expense related to the ESOP. To the extent that the fair
value of the Bank's ESOP shares differ from the cost of such shares, the
differential will be charged or credited to equity.
27
<PAGE>
Regulatory Oversight and Legislation
The Bank is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority, and by the FDIC as insurer
of its deposits up to applicable limits. The Bank is a member of the FHLB System
and is subject to certain limited regulations promulgated by the FRB. As the
holding company of the Bank, the Company also will be subject to regulation and
oversight by the OTS. Such regulation and supervision govern the activities in
which an institution can engage and are intended primarily for the protection of
the insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
banking and thrift industries, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight, whether by the OTS, the FDIC or Congress, could have a
material impact on the Company, the Bank and their respective operations. See
"Regulation."
On September 30, 1996, the Deposit Insurance Funds ("DIF") Act of 1996
was enacted into law. The DIF Act contemplates the development of a common
charter for all federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings associations. It is not
known what form the common charter may take and what effect, if any, the
adoption of a new charter would have on the financial condition or results of
operations of the Bank. See "Regulation--Federal Regulation of Savings
Institutions."
Legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) require federal savings associations to convert to a national bank or
a state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed, and, if
passed, in what form the legislation would be passed. As a result, management
cannot accurately predict the possible impact of such legislation on the Bank.
Possible Risk of Delay in the Completion of the Offering
The Offering will terminate at ____ p.m. local time, on March ___, 1998
(the "Expiration Date"). The Bank and the Company may extend the Offering for
any reason for up to 45 days past the Expiration Date. Subscriptions are
irrevocable unless and until an extension beyond the 45 day period following the
Expiration Date is granted to the Bank and the Company by the OTS, at which time
the Bank will notify subscribers of their rights to modify or rescind their
subscriptions. See "The Conversion--Subscription Offering and Subscription
Rights" and "--Community Offering."
Capability of the Bank's Data Processing Hardware to Accommodate the Year 2000
Like many financial institutions the Bank relies upon computers for the
daily conduct of its business and for data processing generally. There is
concern among industry experts that on January 1, 2000 computers will be unable
to "read" the new year and there may be widespread computer malfunctions. The
Bank generally relies on independent third parties to provide data processing
services to the Bank, and has been advised by its data processing service center
that the issue has been addressed. Based on these representations, management
does not believe that significant additional costs will be incurred in
connection with the year 2000 issue.
THE COMPANY
The Company was organized in December 1997 for the purpose of acquiring
all of the outstanding shares of capital stock of the Bank. The Company has
applied to the OTS to become a savings and loan holding company and as such will
be subject to regulation by the OTS. After completion of the Conversion, the
Company will conduct business initially as a unitary savings and loan holding
company. See "Regulation--Holding Company Regulation." Upon consummation of the
Conversion, the Company's assets will be primarily the shares of the Bank's
capital stock acquired in the Conversion, the portion of the net proceeds of the
Conversion permitted by the OTS to be retained by the Company, and the ESOP
loan. The Company initially will have no significant liabilities. See "Use of
Proceeds." The management of the Company is set forth under "Management of the
Company." Initially, the
28
<PAGE>
Company will neither own nor lease any property, but instead will use the
premises, equipment and furniture of the Bank. At the present time, the Company
does not intend to employ any persons other than officers but will utilize the
support staff of the Bank from time to time. Additional employees will be hired
as appropriate to the extent the Company expands its business.
The Conversion will provide the Bank with additional capital to support
future growth and enhance results of operations. Management believes that the
holding company structure will provide the Company with additional flexibility
to diversify its business activities through existing or newly formed
subsidiaries, or through acquisitions of or mergers with other financial
institutions and financial services related companies or for other business or
investment purposes, including the possible repurchase Common Stock as permitted
by the OTS. Although there are no current arrangements, understandings or
agreements, written or oral, regarding any such opportunities or transactions,
the Company will be in a position after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of any such
acquisition and expansion opportunities that may arise. The initial activities
of the Company are anticipated to be funded by the proceeds permitted to be
retained by the Company and earnings thereon or, alternatively, through
dividends received from the Bank.
The Company's executive office is located at 134 Franklin Corner Road,
Lawrenceville, New Jersey, and its telephone number is (609) 844-3100.
THE BANK
Chartered by the New Jersey State Legislature on March 7, 1844, the
Trenton Savings Fund Society was founded to promote thrift in the area of
Trenton, New Jersey. It adopted the name "Trenton Savings Bank" in early 1990.
Throughout its history, the Bank has been engaged in lending funds to home
buyers, consumers, and businesses within its local community. The Bank has
maintained a commitment to conservative lending practices, community service and
control of operating expenses, resulting in a strong capital position.
Management believes that this philosophy enabled the Bank to survive the Civil
War, the Great Depression, two World Wars, two stock market crashes and the
1980s crisis in the banking and thrift industries. At September 30, 1997, the
Bank had $638.9 million of total assets, $493.3 million of total deposits, and
$108.2 million of total stockholders' equity.
The Bank conducts its business from a corporate center located in
Lawrenceville, New Jersey, 14 branch offices located in Mercer, Burlington and
Ocean Counties, New Jersey, and a trust services subsidiary with an office in
Ocean County, New Jersey. On January 1, 1995, the Bank completed a charter
change from a New Jersey chartered mutual savings bank to a federally chartered
mutual savings bank, permitting expansion of branch offices into adjacent market
areas in Pennsylvania, and the OTS has recently approved, and the Bank intends
to establish, a branch office in Bucks County, Pennsylvania. In the
Reorganization on August 3, 1995, the Bank's mutual predecessor reorganized from
a federally chartered mutual savings bank into the Mutual Holding Company and
concurrently formed the Bank, which succeeded to the name and operations of the
Bank's mutual predecessor. At the time of the Reorganization, the Bank conducted
the Minority Stock Offering in which it raised approximately $30.0 million of
net proceeds.
The Bank has traditionally operated as a community-oriented savings
institution providing mortgage loans and other traditional financial services to
its local community. The Bank is primarily engaged in attracting deposits from
the general public through its offices and using those funds to originate
mortgage and commercial loans primarily located in Mercer and Burlington
Counties where the Bank's offices are located, as well as in neighboring Bucks
County, Pennsylvania. Loans secured by one- to four-family residences amounted
to $242.4 million, or 60.4%, of the Bank's total loan portfolio at September 30,
1997. The Bank also originates other mortgage loans secured by multi-family and
commercial real estate, commercial business loans, consumer loans and home
equity and property improvement loans, which, in the aggregate, amounted to
$158.7 million, or 39.6%, of the total loan portfolio at September 30, 1997. The
Bank also has a securities portfolio primarily consisting of U.S. Treasury and
federal government agency obligations, corporate and municipal bonds and
mortgage-backed securities which are insured by federal agencies, which
portfolio amounted to $201.8 million, or 31.6%, of the Bank's assets at
September 30, 1997. In addition, as of that same date, aggregate cash and cash
equivalents totaled $13.2 million, or 2.07%, of total assets.
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<PAGE>
The Bank's executive offices are located at 134 Franklin Corner Road,
Lawrenceville, New Jersey, and its telephone number at that location is (609)
844-3100.
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded all OTS regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the OTS
capital standards as of September 30, 1997, on a historical and pro forma basis
assuming that the indicated number of shares were sold as of such date, and that
the Company contributes to the Bank 50% of the estimated net proceeds of the
Offering. See "Pro Forma Data" for the assumptions used to determine the net
proceeds of the Offerings. For purposes of the table below, the amount expected
to be borrowed by the ESOP and the cost of the shares expected to be acquired by
the 1998 Recognition Plan are deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
Pro Forma at September 30, 1997, Based Upon the Sale of
Historical at ---------------------------------------------------------------------------------
September 30, 1997 15,300,404 Shares 18,000,691 Shares 20,700,648 Shares 23,805,827 Shares
------------------ ----------------- ----------------- ----------------- ------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(1)(2)
------ --------- ------ --------- ------ --------- ------ --------- ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital............. $108,239 16.94% $171,534 24.43% $182,875 25.63% $194,215 26.79% $207,257 28.09%
Tangible capital:
Capital level (3)....... $ 97,203 15.48% $160,498 23.22% $171,839 24.46% $183,179 25.66% $196,221 27.00%
Requirement............. 9,418 1.50 10,367 1.50 10,537 1.50 10,707 1.50 10,903 1.50
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess............. $ 87,785 13.98% $150,131 21.72% $161,302 22.96% $172,471 24.16% $185,318 25.50%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Core capital:
Capital level (3)....... $ 97,203 15.48% $160,498 23.22% $171,839 24.46% $183,179 25.66% $196,221 27.00%
Requirement (4)......... 18,835 3.00 20,734 3.00 21,074 3.00 21,414 3.00 21,806 3.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess............. $ 78,368 12.48% $139,764 20.22% $150,765 21.46% $161,764 22.66% $174,415 24.00%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Risk-based capital:
Capital level (3)(5).... $100,405 26.48% $163,700 40.46% $175,041 42.78% $186,381 45.04% $199,423 47.59%
Requirement............. 30,324 8.00 32,367 8.00 32,734 8.00 33,101 8.00 33,523 8.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess............. $ 70,081 18.48% $131,333 32.46% $142,307 34.78% $153,279 37.04% $165,899 39.59%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- ---------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market or general financial conditions following the commencement of the
Offering.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets. Pro forma total adjusted and risk-weighted assets
used for the capital calculations include the proceeds of the ESOP's
purchase of 4% of the Subscription Shares.
(3) Regulatory capital levels exclude $.2 million of net unrealized gains on
securities and intangible assets of $10.8 million.
(4) The current OTS core capital requirement for savings banks is 3% of total
adjusted assets. The OTS has proposed core capital requirements which would
require a core capital ratio of 3% of total adjusted assets for savings
banks that receive the highest supervisory rating for safety and soundness,
and a 4% to 5% core capital ratio requirement for all other savings banks.
See "Regulation--Federal Regulation of Savings Institution--Capital
Requirements."
(5) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weighting.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Subscription
Shares cannot be determined until the Offering is completed, it is presently
anticipated that the net proceeds will be between $151.1 million and $205.1
million (or $236.1 million if the Offering Range is increased by 15%), based
upon the assumptions set forth in "Pro
30
<PAGE>
Forma Data." The Company will be unable to utilize any of the net proceeds of
the Offering until the consummation of the Conversion.
The Company will contribute to the Bank 50% of the net proceeds of the
Offering, which will be added to the Bank's general funds that management
currently intends to initially utilize for general corporate purposes, including
investment in one-to-four family residential real estate loans and other loans
and investment in short-term and intermediate-term securities and
mortgage-backed securities. The Company intends to use a portion of the net
proceeds to loan funds to the ESOP to enable the ESOP to purchase 4% of the
Subscription Shares issued in the Offering. To the extent the 1998 Recognition
Plan is not funded with authorized but unissued common stock of the Company, the
Company or Bank may use net proceeds from the Offering to fund the purchase of
stock to be awarded under such plan. See "Management of the Bank--Benefit
Plans".
Net Offering Proceeds, including proceeds retained by the Company and
proceeds contributed to the Bank, may also used to support the future expansion
of operations through branch acquisitions, the establishment of new branch
offices, and the acquisition of other financial institutions or diversification
into other banking related businesses. The Bank has acquired two financial
institutions since September 30, 1996, and the Company and the Bank intend to
actively explore additional acquisitions, although neither the Company nor the
Bank has any specific plans, arrangements or understandings regarding any
additional expansions or acquisitions at this time.
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to repurchase stock, subject to statutory and
regulatory requirements. Unless approved by the OTS, the Company, pursuant to
OTS policy, will be prohibited from repurchasing any shares of the Common Stock
for three years except (i) for an offer to all stockholders on a pro rata basis,
or (ii) for the repurchase of qualifying shares of a director. Notwithstanding
the foregoing and except as provided below, beginning one year following
completion of the Conversion, the Company may repurchase its Common Stock so
long as: (i) the repurchases within the following two years are part of an
open-market program not involving greater than 5% of its outstanding capital
stock during a twelve-month period; (ii) the repurchases do not cause the Bank
to become "undercapitalized" within the meaning of the OTS prompt corrective
action regulation; and (iii) the Company provides to the Regional Director of
the OTS no later than ten days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. However, the Regional
Director has authority to permit repurchases during the first year following
consummation of the Conversion and to permit repurchases in excess of 5% during
the second and third years upon the establishment of exceptional circumstances,
as determined by the Regional Director.
Based upon facts and circumstances following the Conversion and subject
to applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
will not be limited to (i) market and economic factors such as the price at
which the stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the
opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Company and its shareholders. In the event the Company determines to repurchase
stock, such repurchases may be made at market prices which may be in excess of
the Subscription Price in the Offering. To the extent that the Company
repurchases stock at market prices in excess of the per share book value, such
repurchases may have a dilutive effect upon the interests of existing
stockholders.
DIVIDEND POLICY
The Company intends to pay a quarterly cash dividend of $.025 per
share, or $.10 per share on an annual basis. The first dividend is expected to
be declared for the fiscal quarter ended June 30, 1998. Declarations of
dividends by the Company's Board of Directors will depend upon a number of
factors, including the amount of the net proceeds from the Offerings retained by
the Company, investment opportunities available to the Company or the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operation, tax considerations and general
economic conditions. Consequently, there can be no assurance that
31
<PAGE>
dividends will in fact be paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods. See "Market for
the Common Stock."
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion and
Reorganization--Liquidation Rights." For information concerning federal and
state law and regulations which apply to the Bank in determining the amount of
proceeds which may be retained by the Company and regarding a savings
institution's ability to make capital distributions including payment of
dividends to its holding company, see "Federal and State Taxation--Federal
Taxation--Distributions" and "Regulation--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Bank. The Company is subject, however, to the requirements of Delaware law,
which generally limit dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital (generally defined as the aggregate par
value of the outstanding shares of the Company's capital stock without par
value) or, if there is no such excess, to its net profits for the current and/or
immediately preceding fiscal year.
Additionally, in connection with the Conversion, the Company and the
Bank have committed to the OTS that during the one-year period following the
consummation of the Conversion and the Reorganization, the Company will not take
any action to declare an extraordinary dividend to stockholders which would be
treated by recipient stockholders as a tax-free return of capital for federal
income tax purposes without prior approval of the OTS.
Since the completion of the first full fiscal quarter following the
August 1995 Reorganization and Minority Stock Offering, the Bank or the Mid-Tier
Holding Company have paid, in the aggregate, annual cash dividends of $.35 per
common share, which amounts to a quarterly dividend of $.0875 per share. The
Mid-Tier Holding Company intends to continue to pay regular quarterly dividends
through the fiscal quarter ended March 31, 1997.
MARKET FOR THE COMMON STOCK
There is an established market for Mid-Tier Common Stock which is
currently listed on the Nasdaq National Market under the symbol, "TSBS," and the
Mid-Tier Holding Company had 12 market makers as of September 30, 1997. As a
newly formed company, however, the Company has never issued capital stock and
consequently there is no established market for its Common Stock. It is expected
that the Common Stock will be more liquid than the Mid-Tier Common Stock since
there will be significantly more outstanding shares owned by the public.
Minority Shares will automatically, without further action by the holders
thereof, be converted into and become a right to receive a number of shares of
Company Common Stock that is determined pursuant to the Exchange Ratio. See "The
Conversion and Reorganization--Share Exchange Ratio."
The Company has received conditional approval to have its Common Stock
listed on the Nasdaq National Market under the Mid-Tier Holding Company's
previous symbol "TSBS." There are various requirements for qualification and
continued quotation of the Common Stock on the Nasdaq National Market including
a minimum number of market makers for the Common Stock. The Company will seek to
encourage and assist market makers to make a market in its Common Stock, and,
based upon the number of market markers for the Mid-Tier Common Stock, believes
that enough market markers will make a market in the Common Stock in order to
continue listing the Common Stock on the Nasdaq National Market. Making a market
involves maintaining bid and ask quotations and being able, as principal, to
effect transactions in reasonable quantities at those quoted prices, subject to
various securities laws and other regulatory requirements. Although not legally
or contractually required to do so, FBR has advised the Company that upon
completion of the Conversion, it intends to act as a market maker in the Common
Stock.
Additionally, the development of a public market having the desirable
characteristics of depth, liquidity and orderliness depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Bank or any market maker. In the event that institutional
investors buy a relatively large proportion
32
<PAGE>
of the Offering, the number of active buyers and sellers of the Common Stock at
any particular time may be limited. There can be no assurance that persons
purchasing the Common Stock will be able to sell their shares at or above the
Subscription Price. Therefore, purchasers of the Common Stock should have a
long-term investment intent and should recognize that a possibly limited trading
market may make it difficult to sell the Common Stock after the Conversion and
may have an adverse effect on the price of the Common Stock.
The following table sets forth the high and low bid quotes for the
Minority Shares since the completion of the Minority Stock Offering in which the
Minority Shares were sold for $10.00 per share, together with the cash dividends
declared subsequent thereto.
Cash
Fiscal Year Ended Dividends
December 31, 1995 High Low Declared
- ----------------- ------- ------- --------
Third quarter.......... $ 141/8 $ 11 $ .0575
Fourth quarter......... 133/4 127/8 .0875
Fiscal Year Ended
December 31, 1996
- -----------------
First quarter.......... 15 127/8 .0875
Second quarter......... 15 131/4 .0875
Third quarter.......... 151/8 131/4 .0875
Fourth quarter......... 163/8 14 .0875
Fiscal Year Ended
December 31, 1997
- -----------------
First quarter.......... 185/8 153/4 .0875
Second quarter......... 205/8 177/8 .0875
Third quarter.......... 331/2 191/8 .0875
Fourth quarter......... 453/4 28 .0875
At August 7, 1997 (the day immediately preceding the public
announcement of the Conversion) and at February __, 1998, the last sale of
Minority Shares as reported on the Nasdaq National Market was at a price of $22
per share and $_____ per share, respectively. All Minority Shares, including
shares held by the Bank's officers and directors, will on the Effective Date be
automatically converted into and become the right to receive a number of shares
of Common Stock of the Company determined pursuant to the Exchange Ratio, and
options to purchase Minority Shares will be converted into options to purchase a
number of shares of Common Stock determined pursuant to the Exchange Ratio, for
the same aggregate exercise price. See "Beneficial Ownership of Common Stock.
33
<PAGE>
CAPITALIZATION
The following table presents the historical consolidated capitalization
of the Mid-Tier Holding Company at September 30, 1997, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion, based upon the assumptions set forth in the "Pro Forma Data"
section.
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based Upon the Sale for $10.00 Per Share of
-------------------------------------------------------
Historical 15,300,408 18,000,691 20,700,648 23,805,827
Capitalization Shares Shares Shares Shares(1)
-------------- ---------- ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Deposits ................................ $493,334 $493,334 $493,334 $493,334 $493,334
Borrowed funds........................... 30,000 30,000 30,000 30,000 30,000
-------- -------- -------- -------- --------
Total deposits and borrowed funds........ 523,334 523,334 523,334 523,334 523,334
Stockholders' equity:
Preferred Stock, $.01 par value,
70,000,000 shares authorized;
none to be issued(3) .................. -- -- -- -- --
Common Stock, $.01 par value, 1,000,000
shares authorized; shares to be issued
as reflected(3)........................ 904 233 274 315 362
Additional paid-in capital(4) ......... 30,495 182,256 209,218 236,176 267,181
Retained income (5).................... 77,592 77,592 77,592 77,592 77,592
Net unrealized holding gain on securities 202 202 202 202 202
Less:
Unearned Common Stock held by
1996 Recognition Plan.............. 954 954 954 954 954
Common Stock acquired by ESOP........ -- 6,120 7,200 8,280 9,522
Common Stock acquired by 1998
Recognition Plan .................. -- 6,120 7,200 8,280 9,522
-------- -------- -------- -------- --------
Total stockholders' equity......... $108,239 $247,089 $271,932 $296,771 $325,339
======== ======== ======== ======== ========
Total stockholders' equity as a percentage
of pro forma total assets.............. 16.9% 31.5% 33.6% 35.5% 37.7%
======== ======== ======== ======== ========
</TABLE>
- ---------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market or general financial conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) The Mid-Tier Holding Company has 30,000,000 authorized shares of Mid-Tier
Common Stock, par value $.10 per share, and 10,000,000 authorized shares of
preferred stock, par value $.10 per share.
(4) Does not include proceeds from the Offering that the Company intends to
lend to the ESOP to enable it to purchase shares of Common Stock in the
Offering. No effect has been given to the issuance of additional shares of
Common Stock pursuant to the 1998 Stock Option Plan and 1998 Recognition
Plan expected to be adopted by the Company. If such plans are approved by
stockholders, an amount equal to 10% of the shares of Common Stock issued
in the Offering will be reserved for issuance upon the exercise of options
under the 1998 Stock Option Plan, and the 1998 Recognition Plan will
acquire an amount of Common Stock equal to 4% of the number of shares sold
in the Offering, either through open market purchases or from authorized
but unissued shares. No effect has been given to the exercise of options
currently outstanding. See "Management of the Bank--Benefits."
(5) The retained income of the Bank will be substantially restricted after the
Conversion, see "The Conversion--Liquidation Rights" and "Regulation and
Supervision--Federal Regulations of Savings Institutions--Limitations on
Capital Distributions."
(6) Assumes that, subsequent to the Conversion, an amount equal to 4% of the
Subscription Shares is purchased by the 1998 Recognition Plan through open
market purchases. If the issuance of these shares were to come from
authorized but unissued shares of the Company's Common Stock instead of
open market purchases, the dilutive effect of the voting interest of
stockholders would be approximately 2.6%. The common stock to be purchased
by the 1998 Recognition Plan is reflected as a reduction of stockholders'
equity. See "Risk Factors--Possible Dilutive Effect of Issuance of
Additional Shares," "Pro Forma Data" and "Management of the Bank--Benefit
Plans."
PRO FORMA DATA
The actual net offering proceeds from the sale of the Common Stock in
the Offering cannot be determined until the Conversion is completed. However,
net offering proceeds are currently estimated to be between $147.7
34
<PAGE>
million and $200.5 million based upon the assumption that FBR receives a
marketing fee of $1.0 million and that Conversion expenses, excluding FBR's
marketing fee, are $935,000.
Actual Conversion expenses may vary from those estimated, because the
fees paid will depend upon the percentages and total number of the shares sold
in the Offering and other factors. Under the Plan of Conversion, the Common
Stock must be sold in the Offering at an aggregate Subscription Price not less
than nor greater than the Offering Range, which is subject to adjustment. The
Offering Range, as established by the Board of Directors is between a minimum of
$153.0 million and a maximum of $207.0 million, with a midpoint of $180.0
million. This represents a range between a minimum of 15,300,408 shares and a
maximum of 20,700,648 shares, based upon the Subscription Price of $10.00 per
share. If the Offering Range is increased by up to 15% to reflect market or
general financial conditions following the commencement of the Offering, the
adjusted maximum number of shares of Common Stock to be issued would be
23,805,827, for estimated gross proceeds of $238.1 million.
Pro forma consolidated net income of the Company for the nine months
ended September 30, 1997 and for the fiscal year ended December 31, 1996 has
been calculated as if the Company had been in existence and estimated net
proceeds received by the Company and the Bank had been invested at an assumed
interest rate of 5.52% for the nine months ended September 30, 1997, and the
fiscal year ended December 31, 1996. The reinvestment rate was calculated based
on the one year U.S. Treasury bill rate (which, in light of changes in interest
rates in recent periods are deemed by the Company and the Bank to more
accurately reflect pro forma reinvestment rates than the arithmetic average
method). The effect of withdrawals from deposit accounts for the purchase of
Common Stock has not been reflected. The pro forma after-tax yield on the
estimated net proceeds is assumed to be 3.53% for the nine months ended
September 30, 1997, and 3.53% for the fiscal year ended December 31, 1996, based
on an effective tax rate of 36.0%. Historical and pro forma per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock. No effect has been given in the pro
forma stockholders' equity calculations for the assumed earnings on the net
proceeds. It is assumed that the Company will retain 50% of the estimated
adjusted net Conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with generally accepted accounting principles
("GAAP"). The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
35
<PAGE>
The following table summarizes historical data of the Bank and pro
forma data of the Company at or for the nine months ended September 30, 1997 and
at or for the year ended December 31, 1996, based on assumptions set forth above
and in the table and should not be used as a basis for projections of market
value of the Common Stock following the Conversion. No effect has been given in
the tables to the possible issuance of additional shares reserved for future
issuance pursuant to currently outstanding stock options or the 1998 Stock
Option Plan, nor does book value give any effect to the liquidation account to
be established in the Conversion or the bad debt reserve in liquidation. See
"The Conversion--Liquidation Rights," and "Management of the Bank--Directors'
Compensation," and "--Executive Compensation."
<TABLE>
<CAPTION>
At or For the Nine Months Ended September 30, 1997
Based upon the Sale for $10.00 of
15,300,408 18,000,691 20,700,648 23,805,827
Shares Shares Shares Shares (1)
----------- ----------- ----------- -----------
(Dollars and Number of Shares in Thousands)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 153,004 $ 180,007 $ 207,006 $ 238,058
Expenses............................................ (1,935) (1,935) (1,935) (1,935)
--------- --------- --------- ---------
Estimated net proceeds............................ 151,069 178,072 205,071 236,123
Common stock purchased by ESOP (2)................ (6,120) (7,200) (8,280) (9,522)
Common stock purchased by 1998 Recognition Plan (3) (6,120) (7,200) (8,280) (9,522)
Estimated net cash proceeds..................... $ 138,829 $ 163,672 $ 188,511 $ 217,079
For the nine months ended September 30, 1997:
Net income:
Historical........................................ $ 5,898 $ 5,898 $ 5,898 $ 5,898
Pro forma adjustments:
Income on net proceeds............................ 3,675 4,333 4,991 5,747
ESOP (2)........................................ (245) (288) (331) (381)
1998 Recognition Plan (3)......................... (588) (691) (795) (914)
Pro forma net income............................ $ 8,740 $ 9,252 $ 9,763 $ 10,350
========== ========= ========= =========
Net income per share (4):
Historical........................................ $ 0.26 $ 0.22 $ 0.19 $ 0.17
Pro forma adjustments:
Income on net proceeds............................ 0.16 0.16 0.16 0.16
ESOP (2).......................................... (0.01) (0.01) (0.01) (0.01)
1998 Recognition Plan (3)......................... (0.03) (0.03) (0.03) (0.03)
Pro forma net income per share (4)(5)........... $ 0.38 $ 0.34 $ 0.31 $ 0.29
========= ========= ========= =========
Pro forma price to annualized earnings.............. 19.74 22.06x 24.19x 25.86x
Number of shares used in calculating pro forma price
to net income per share......................... 22,716 26,725 30,734 35,345
At September 30, 1997:
Stockholders' equity:
Historical........................................ $ 108,239 $ 108,239 $ 108,239 $ 108,239
Mutual Holding Company assets..................... 21 21 21 21
Estimated net proceeds............................ 151,069 178,072 205,071 236,123
Less: Common stock acquired by ESOP (2)........... (6,120) (7,200) (8,280) (9,522)
Common Stock acquired by 1998 Recognition
Plan (3)................................... (6,120) (7,200) (8,280) (9,522)
Pro forma stockholders' equity (6)............... 247,089 271,932 296,771 325,339
Intangible assets................................ (10,834) (10,834) (10,834) (10,834)
--------- --------- --------- ---------
Pro form tangible stockholders' equity........... $ 236,255 $ 261,098 $ 285,937 $ 314,505
Stockholders' equity per share (7):
Historical........................................ $ 4.64 $ 3.95 $ 3.43 $ 2.99
==== ==== ==== ====
Estimated net proceeds............................ 6.49 6.50 6.51 6.51
Less: Common stock acquired by ESOP (2)........... (0.26) (0.26) (0.26) (0.26)
Common Stock acquired by 1998
Recognition Plan (3)........................ (0.26) (0.26) (0.26) (0.26)
--------- --------- --------- ---------
Pro forma stockholders' equity per share (6) (7) 10.61 9.93 9.42 8.98
Intangible assets per share..................... (0.47) (0.40) (0.34) (0.30)
Pro forma tangible stockholders' equity per share $ 10.14 $ 9.53 $ 9.07 $ 8.68
========= ========= ========= =========
Number of shares used in calculating stockholders'
equity per share.................................. 23,290 27,400 31,510 36,237
Offering prices as a percentage of pro forma stockholders'
equity per share.................................. 94.25% 100.70% 106.16% 111.36%
Offering price as a percentage of pro forma tangible
stockholders' equity per share.................... 98.62% 104.93% 110.25% 115.21%
========== ========= ========= =========
(Footnotes begin on next page)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
Based upon the Sale for $10.00 of
15,300,408 18,000,691 20,700,648 23,805,827
Shares Shares Shares Shares (1)
----------- ----------- ----------- -----------
(Dollars and Shares in Thousands)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 153,004 $ 180,007 $ 207,006 $ 238,058
Expenses............................................ (1,935) (1,935) (1,935) (1,935)
--------- --------- --------- ---------
Estimated net proceeds............................ 151,069 178,072 205,071 236,123
Common stock purchased by ESOP (2)................ (6,120) (7,200) (8,280) (9,522)
Common stock purchased by 1998 Recognition Plan (3) (6,120) (7,200) (8,280) (9,522)
Estimated net proceeds........................ $ 138,829 $ 163,672 $ 188,511 $ 217,079
For the twelve months ended December 31, 1996:
Net income:
Historical........................................ $ 8,391 $ 8,391 $ 8,391 $ 8,391
Pro forma adjustments:
Income on adjusted net proceeds................... 4,901 5,778 6,654 7,663
ESOP (2)........................................ (326) (384) (442) (508)
1998 Recognition Plan (3)......................... (783) (922) (1,060) (1,219)
Pro forma net income.......................... $ 12,183 $ 12,863 $ 13,543 $ 14,327
Net income per share (4):
Historical........................................ $ 0.37 $ 0.31 $ 0.27 $ 0.24
==== ====
Pro forma adjustments:
Income on net proceeds............................ 0.22 0.22 0.22 0.22
ESOP (2).......................................... (0.01) (0.01) (0.01) (0.01)
1998 Recognition Plan (3)......................... (0.03) (0.03) (0.03) (0.03)
Pro forma net income per share (4) (5).......... $ 0.55 $ 0.49 $ 0.45 $ 0.42
========= ========= ========= =========
Pro forma price to earnings......................... 18.18x 20.41x 22.22x 23.81x
========= ========= ========= ==========
Number of shares used in calculating pro forma price
net income per share............................. 22,729 26,740 30,751 35,364
At December 31, 1996:
Stockholders' equity:
Historical........................................ $ 103,352 $ 103,352 $ 103,352 $ 103,352
Mutual Holding Company assets..................... 21 21 21 21
Estimated net proceeds............................ 151,069 178,072 205,071 236,123
Less: Common stock acquired by ESOP (2)........... (6,120) (7,200) (8,280) (9,522)
Common Stock acquired by 1998
Recognition Plan (3)....................... (6,120) (7,200) (8,280) (9,522)
Pro forma stockholders' equity (6).................. 242,202 267,045 291,884 320,452
Intangible assets................................. (9,164) (9,164) (9,164) (9,164)
--------- --------- --------- ---------
Pro forma tangible stockholders' equity........... $233,038 $ 257,881 $ 282,720 $ 311,288
Stockholders' equity per share (7):
Historical........................................ $ 4.44 $ 3.77 $ 3.28 $ 2.85
Estimated net proceeds............................ 6.48 6.49 6.50 6.51
Less: Common stock acquired by ESOP (2)........... (0.26) (0.26) (0.26) (0.26)
Common Stock acquired by 1998
Recognition Plan (3)........................ (0.26) (0.26) (0.26) (0.26)
--------- ---------- ---------- ----------
Pro forma stockholders' equity per share (6)(7) 10.40 9.74 9.26 8.84
Intangible assets per share....................... (0.39) (.33) (.29) (.25)
Pro forma tangible stockholders' equity per share $ 10.01 $ 9.41 $ 8.97 $ 8.59
========= ========= ========= =========
Number of shares used in calculating stockholders'
equity per share.................................. 23,290 27,400 31,510 36,237
Offering price as a percentage of pro forma stockholders'
equity per share.................................. 96.15% 102.67% 107.99% 113.12%
Offering price as a percentage of pro forma tangible
stockholders' equity per share.................... 99.90% 106.27% 111.48% 116.41%
</TABLE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market and financial conditions following the commencement of the
Offering.
(2) Assumes that 4% of shares of Common Stock sold in the Offering will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
net proceeds of the Offering retained by the Company. The Bank intends to
make annual contributions to the ESOP in an amount at least equal to the
principal of the debt. The Bank's total annual payments on the ESOP debt is
based upon 12 equal annual installments of principal. SOP 93-6 requires
that an employer record compensation expense in an amount equal to the fair
value of the shares
37
<PAGE>
(footnotes continued)
committed to be released to employees. The pro forma adjustments assume
that the ESOP shares are allocated in equal annual installments based on
the number of loan repayment installments assumed to be paid by the Bank,
and the fair value of the Common Stock remains at the Subscription Price.
The unallocated ESOP shares are reflected as a reduction of stockholders'
equity. No reinvestment is assumed on proceeds contributed to fund the
ESOP. The pro forma net income further assumes (i) that 38,000, 45,000,
52,000 and 60,000 shares were committed to be released with respect to the
nine months ended September 30, 1997, and 51,000, 60,000, 69,000 and 79,000
shares were committed to be released with respect to the fiscal year ended
December 31, 1996, in each case at the minimum, midpoint, maximum, and
adjusted maximum of the Offering Range, respectively, and (ii) in
accordance with SOP 93-6, only the ESOP shares committed to be released
during the respective period were considered outstanding for purposes of
net income per share calculations. See "Management of the Bank--Benefit
Plans--Employee Stock Ownership Plan and Trust."
(3) Subject to the approval of the Company's stockholders, the 1998 Recognition
Plan intends to purchase an aggregate number of shares of Common Stock
equal to 4.0% of the shares to be sold in the Offering. The shares may be
acquired directly from the Company, or through open market purchases. The
funds to be used by the 1998 Recognition Plan to purchase the shares will
be provided by the Bank or the Company. If these shares were issued from
authorized but unissued Common Stock instead of open market purchases, the
dilutive effect of the voting interest of shareholders would be
approximately 2.6%. See "Management of the Bank--Benefit Plans--1998
Recognition Plan." Assumes that the 1998 Recognition Plan acquires the
shares through open market purchases at the Subscription Price with funds
contributed by the Bank, and that 15% of the amount contributed to the 1998
Recognition Plan is amortized as an expense during the nine months ended
September 30, 1997, and 20% during the fiscal year ended December 31, 1996.
(4) Per share figures include shares of Common Stock that will be exchanged for
Minority Shares in the Share Exchange. Net income per share computations
are determined by taking the number of subscription shares assumed to be
sold in the Offering and the number of Exchange Shares assumed to be issued
in the Share Exchange and, in accordance with SOP 93-6, subtracting the
ESOP shares which have not been committed for release during the respective
period. See Note 2 above. The number of shares of Common Stock actually
sold and the corresponding number of Exchange Shares may be more or less
than the assumed amounts.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the 1998 Stock Option Plan, which is expected to be
adopted by the Company following the Offering and presented to stockholders
for approval. If the 1998 Stock Option Plan is approved by stockholders, an
amount equal to 10% of the Common Stock sold in the Offerings will be
reserved for future issuance upon the exercise of options to be granted
under the 1998 Stock Option Plan. The issuance of authorized but previously
unissued shares of Common Stock pursuant to the exercise of options under
such plan would dilute stockholders' voting interest by approximately 6.2%
interests. Assuming stockholder approval of the plan, that all the options
were exercised at the end of the period at an exercise price equal to the
Subscription Price, and that the 1998 Recognition Plan purchases shares in
the open market at the Subscription Price, (i) pro forma net income per
share for the nine months ended September 30, 1997 would be $0.38, $0.35,
$0.32, and $0.29, and pro forma stockholders' equity per share at September
30, 1997 would be $10.57, $9.93, $9.45 and $9.04, in each case at the
minimum, midpoint, maximum and adjusted maximum of the Offering Range,
respectively, and (ii) pro forma net income per share for the fiscal year
ended December 31, 1996 would be $0.54, $0.48, $0.44 and $0.41, and the pro
forma stockholders' equity per share at December 31, 1996 would be $10.37,
$9.76, $9.31, and $8.91, in each case at the minimum, midpoint, maximum and
adjusted maximum of the Offering Range, respectively.
(6) The retained income of the Bank will be substantially restricted after the
Conversion. See "Dividend Policy," "The Conversion--Liquidation Rights" and
"Regulation and Supervision--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions."
(7) Per share figures include shares of Common Stock that will be exchanged for
Minority Shares in the Share Exchange. Stockholders' equity per share
calculations are based upon the sum of (i) the number of Subscription
Shares assumed to be sold in the Offering, and (ii) Exchange Shares equal
to the minimum, midpoint, maximum and adjusted maximum of the Offering
Range, respectively. The Exchange Shares reflect an Exchange Ratio of
2.4580, 2.8917, 3.3255, and 3.8243, respectively, at the minimum, midpoint,
maximum, and adjusted maximum of the Offering Range, respectively. The
number of Subscription Shares actually sold and the corresponding number of
Exchange Shares may be more or less than the assumed amounts.
38
<PAGE>
PEOPLES BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Mid-Tier Holding
Company for each of the years in the three-year period ended December 31, 1996
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants whose report appears elsewhere herein. The Consolidated Statements
of Income for the nine month periods ended September 30, 1997 and 1996 are
unaudited and, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the results for
the unaudited periods have been made. All such adjustments are of a normal
recurring nature. The results of operations for the nine month period ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year or any other subsequent period. These Consolidated
Statements of Income should be read in conjunction with the Consolidated
Financial Statements and related Notes included elsewhere herein.
<TABLE>
<CAPTION>
September 30, December 31,
------------------ ------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(unaudited)
(In Thousands except per share data)
Interest and dividend income:
<S> <C> <C> <C> <C> <C>
Interest and fees on loans........................ $ 22,393 $ 18,085 $ 25,503 $ 22,347 $ 20,569
Interest on securities available for sale......... 5,825 3,594 4,762 4,484 5,058
Interest and dividends on investment securities
held to maturity................................ 3,992 4,464 5,861 5,183 3,485
Interest on federal funds sold.................... 406 519 777 1,504 355
-------- -------- -------- -------- --------
Total interest income......................... 32,616 26,662 36,903 33,518 29,467
Interest expense on deposits (note 11)............... 14,734 12,865 17,941 17,010 12,851
Interest expense on borrowings (note 12)............. 1,489 -- -- -- --
-------- -------- -------- -------- --------
Total interest expense........................ 16,223 12,865 17,941 17,010 12,851
-------- -------- -------- -------- --------
Net interest income........................... 16,393 13,797 18,962 16,508 16,616
Provision for loan losses (note 8)................... 1,488 -- -- 150 180
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses...................................... 14,905 13,797 18,962 16,358 16,436
-------- -------- -------- -------- --------
Other income:
Service fees on deposit accounts.................. 651 259 485 361 346
Fees and other income............................. 595 240 471 390 394
Net gain on sale of other real estate............. -- 23 23 2 3
Net gain on sale of securities (note 5)........... 2,923 2,189 2,839 4,193 2,406
-------- -------- -------- -------- --------
Total other income............................ 4,169 2,711 3,818 4,946 3,151
-------- -------- -------- -------- --------
Operating expense:
Salaries and employee benefits (note 15).......... 5,357 3,361 5,104 3,959 3,626
Net occupancy expense (note 9).................... 1,171 903 1,306 1,131 1,033
Equipment expense................................. 84 53 88 58 71
Data processing fees.............................. 392 302 416 346 334
Amortization of intangible assets................. 577 204 389 226 21
FDIC insurance premium (note 18).................. 39 232 233 492 873
FDIC special assessment........................... -- 177 177 -- --
Other operating expense........................... 2,224 1,202 1,956 1,580 1,517
-------- -------- -------- -------- --------
Total operating expense....................... 9,844 6,434 9,669 7,792 7,475
-------- -------- -------- -------- --------
Income before income taxes.................... 9,230 10,074 13,111 13,512 12,112
Income taxes (note 13)............................... 3,332 3,626 4,720 4,864 4,437
-------- -------- -------- -------- --------
Net income.................................... $ 5,898 $ 6,448 $ 8,391 $ 8,648 $ 7,675
======== ======== ======== ======== ========
Earnings per common share
Basic......................................... $ .66 $ .72 $ 0.94 -- --
======== ======== ======== ======== ========
Diluted....................................... $ .66 $ .72 $ 0.94 -- --
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The profitability of the Bank depends primarily on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans and investment securities and
interest expense on interest-bearing deposits and borrowed funds. Recognizing
that sole reliance upon net interest income for earnings is becoming an
increasing matter of concern the Bank has formed an asset-based lending arm and
acquired a trust company as the first steps towards increasing off-balance sheet
income. The Bank's net income also is dependent, to a lesser extent, on the
level of its other operating income (including service charges and, when
available, gains on sales of securities) and operating expenses, such as
salaries and employee benefits, net occupancy expense, deposit insurance
premiums, professional fees, goodwill amortization, data processing and
miscellaneous other expenses, as well as federal and state income tax expenses.
Business Strategy
The Bank's current business strategy is to continue to serve its market
area as a community-oriented financial institution dedicated to financing home
ownership and commercial activity and providing financial services to its
customers in an efficient manner. The principal components of its strategy are
discussed below.
o Emphasizing Traditional Lending and Investment Activities. The Bank is a
community-oriented savings institution operating primarily in Mercer, Burlington
and Ocean counties, New Jersey. The Bank's current lending emphasis is the
origination of one- to four-family residential mortgage loans, multi-family and
commercial mortgage loans, home equity and property improvement loans,
commercial business loans and consumer loans. The Bank generally originates
loans for its own portfolio and, with limited exceptions, has not engaged in the
purchase or sale of loans. The Bank generally limits its lending activities to
Mercer and Burlington Counties, New Jersey, and Bucks County, Pennsylvania.
However, the Bank's asset-based lending subsidiary, TSBusiness Finance ("TSBF"),
provides funds to corporations located throughout the State of New Jersey and
the greater Delaware Valley. The Bank does not engage in securities trading and
limits its investments to U.S. Treasury and federal government agency
obligations, mortgage-backed securities issued by federal government agencies or
sponsored corporations, municipal securities and corporate obligations which are
rated A or higher by a national rating agency. By investing in these types of
assets, the Bank's objective has been to supplement its loan portfolio and
reduce significantly the credit and interest rate risk of its asset base in
exchange for lower rates of return than would typically be available through
lending activities. In addition, the Bank in January 1997 instituted an
investment leverage program by borrowing $30 million for reinvestment in federal
agency securities which are designated as available for sale.
o Complementing the Bank's Traditional Lending by Growing the Portfolio of
High-Yielding Loans. To complement the Bank's traditional emphasis on one- to
four-family residential real estate lending, the Bank has recently increased its
portfolio of higher-yielding loans. During the 21 months ended September 30,
1997, the Bank's portfolio of commercial business loans increased by $50.7
million, or 438%, to $62.2 million from $11.6 million, the Bank's portfolio of
commercial real estate and multi-family residential real estate loans increased
by $12.5 million, or 44.8%, to $40.3 million from $27.8 million, and the Bank's
portfolio of home equity loans increased by $12.1 million, or 55.3%, to $33.9
million from $21.8 million. This growth has resulted primarily from the Bank's
acquisition of Burlington County Bank, discussed below, and its establishment of
TSBF. Because the yields on these types of loans are generally higher than the
yields on one- to four-family residential real estate loans, the Bank's goal
over the next several years is to continue to increase its portfolio of such
loans in a controlled, safe and sound manner. Although management believes that
it can safely originate, service and monitor these loans, such loans generally
expose lenders to greater risk of loss than one- to four-family residential real
estate loans.
o Increasing the Bank's Fee Income. On September 8, 1997, the Bank completed the
acquisition of Manchester Trust Bank ("Manchester Trust"), Ocean County, New
Jersey, a trust services company . Manchester Trust was acquired at a purchase
price of $4.0 million. As of September 30, 1997, Manchester Trust had $140.1
million of assets under management. Manchester Trust, which is operated as a
subsidiary of the Bank, provides trust services
40
<PAGE>
primarily to retirees in Ocean County, New Jersey. Management views this
acquisition as the first step in a strategic growth into the trust services
business, and its goal over the next several years is to increase its total
assets under management, and its level of noninterest income derived from
providing such services, by offering similar services in the other counties in
the Bank's market area.
o Strong Retail Deposit Base. The Bank has 12 full-service offices located in
Mercer and Burlington County and two full service offices located in limited
access retirement communities located in Ocean County, New Jersey. The Bank
believes it has a stable community retail deposit base. The Bank believes its
market share of deposits is approximately 4.7% in Mercer County, New Jersey and
3.4% in Burlington County, New Jersey. The Bank has recently introduced several
new products and services as part of a strategy of increasing its transaction
accounts and decreasing its reliance on certificates of deposit. As of September
30, 1997, transaction and savings accounts totaled $290.2 million, or 41.1% of
the Bank's total deposit. The Bank does not solicit for deposits outside its
primary market area and does not utilize the services of deposit brokers.
o Growth Through Acquisitions. A component of the Bank's operating strategy has
recently been and continues to be growth through acquisitions. The Bank believes
that assets and expertise acquired in whole-bank acquisitions can supplement the
Bank's internal growth in areas that have not traditionally been emphasized by
the Bank. Accordingly, the Bank's growth in its portfolio of higher yielding
loans was supplemented by its acquisition on October 1, 1996 of Burlington
County Bank ("BCB"), an $80.2 million commercial bank located in Burlington
Township, New Jersey, at a purchase price of $12.5 million, and the Bank's
development of its trust services business was the result of its acquisition of
Manchester Trust with $140.1 million of assets under management, and BCB with
approximately $10 million of assets under management at the time of the
acquisition. Management's strategy is to continue to grow these lines of
business, as well as the Bank's deposits and portfolio of other loans, through
additional acquisitions and internal development. The Company's ability to grow
through selective acquisitions of other financial institutions or branches of
such institutions will depend on successfully identifying, acquiring and
integrating such institutions or branches. There can be no assurance the Company
will be able to generate internal growth or to identify attractive acquisition
candidates, acquire such candidates on favorable terms or successfully integrate
any acquired institutions or branches into the Company. Neither the Company nor
the Bank has any specific plans, arrangements or understandings regarding any
additional expansions or acquisitions at this time. In addition, the Bank
intends to grow internally through de novo branching, and has received OTS
approval to open a branch office in Bucks County, Pennsylvania.
Market Risk and Asset and Liability Management
General. The Bank's most significant form of market risk is interest
rate risk, as the majority of the Bank's assets and liabilities are sensitive to
interest rate changes. It is the objective of the Bank to minimize, to the
degree prudently possible, its exposure to interest rate risk, while maintaining
an acceptable interest rate spread. Interest rate spread is the difference
between the Bank's yield on its interest-earning assets and its cost of
interest-bearing liabilities. Interest rate risk is generally understood to be
the sensitivity of the Bank's earnings, net asset values, and stockholders'
equity to changes in market interest rates.
Changes in interest rates affect the Bank's earnings. The effect on
earnings of changes in interest rates generally depends on how quickly the
Bank's yield on interest-earning assets and cost of interest-bearing liabilities
react to the changes in market rates of interest. If the Bank's cost of deposit
accounts reacts more quickly to changes in market interest rates than the yield
on the Bank's mortgage loans and other interest-earnings assets, then an
increasing interest rate environment is likely to adversely affect the Bank's
earnings and a decreasing interest rate environment is likely to favorably
affect the Bank's earnings. On the other hand, if the Bank's yield on its
mortgage loans and other interest-earnings assets reacts more quickly to changes
in market interest rates than the Bank's cost of deposit accounts, then an
increasing interest rate environment is likely to favorably affect the Bank's
earnings and a decreasing interest rate environment is likely to adversely
affect the Bank's earnings. Interest rate sensitivity is managed by the
Asset/Liability Management Committee ("ALCO"). The principal objective of ALCO
is to maximize income within acceptable levels of established risk policy.
41
<PAGE>
The table set forth below shows that the Bank's interest-bearing
liabilities which mature or reprice within short periods exceed its
interest-earning assets with similar characteristics. Accordingly, a material
and prolonged increasing interest rate environment generally would adversely
affect net interest income, while a material and prolonged decreasing interest
rate environment generally would have a positive effect on net interest income.
The Bank's current investment strategy is to maintain an overall
securities portfolio that provides a source of liquidity and that contributes to
the Bank's overall profitability and asset mix within given quality and maturity
considerations. The securities portfolio is concentrated in U.S. Treasury and
federal government agency securities providing high asset quality to the overall
balance sheet mix. Most securities recently purchased by the Bank have been
classified as available for sale to provide management with the flexibility to
make adjustments to the portfolio given changes in the economic or interest rate
environment, to fulfill unanticipated liquidity needs, or to take advantage of
alternative investment opportunities.
The following table presents the difference between the Bank's
interest-earning assets and interest-bearing liabilities at September 30, 1997
expected to reprice or mature, based on certain assumptions, in each of the
future time periods shown. This table does not necessarily indicate the impact
of general interest rate movements on the Bank's net interest income because the
repricing of certain assets and liabilities is subject to competitive and other
limitations. As a result, certain assets and liabilities indicated as maturing
or otherwise repricing within a stated period may in fact mature or reprice at
different times and at different volumes.
<TABLE>
<CAPTION>
Within One to Three to Over
One Year Three Years Five Years Five Years Total
-------- ----------- ---------- ---------- -----
Interest-earning assets:
Mortgage loans:
<S> <C> <C> <C> <C> <C>
Fixed-rate......................... $ 13,384 $ 22,639 $ 14,401 $57,148 $107,572
Adjustable-rate.................... 81,249 56,105 33,460 4,293 175,107
Non-mortgage loans:
Fixed-rate......................... 9,230 18,444 9,193 13,504 50,371
Adjustable rate.................... 62,521 4,540 794 128 67,983
Securities available for sale: (1)
Debt securities.................... 41,853 65,890 3,511 680 111,934
Equity securities.................. 10 -- -- -- 10
Mortgage-backed securities......... 1,809 2,993 2,317 7,953 15,072
Securities held to maturity:
Debt securities.................... 25,234 3,349 235 2,340 31,158
Mortgage-backed securities......... 18,926 13,789 6,278 610 39,603
Federal Home Loan Bank stock....... -- -- -- 3,386 3,386
Federal funds sold..................... 2,300 -- -- -- 2,300
-------- -------- -------- ------- --------
Total interest-earning assets.......... $256,516 $187,749 $ 70,189 $90,042 $604,496
-------- -------- -------- ------- --------
Interest-bearing liabilities:
Deposits:
Demand accounts.................... 39,285 21,405 7,732 37,753 106,175
Savings accounts................... 16,478 13,677 10,684 56,091 96,930
Certificates of deposit............ 218,046 68,098 4,078 7 290,229
Borrowings........................ -- 30,000 -- -- 30,000
-------- -------- -------- ------- --------
Total interest-bearing liabilities $273,809 $133,180 $ 22,494 $93,851 $523,334
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities .................. $(17,293) $ 54,569 $ 47,695 $(3,809)
======== ======== ======== =======
Cumulative excess (deficiency) of
interest- earning assets over
interest-bearing liabilities ........ $(17,293) $ 37,276 $ 84,971 $81,162
======== ======== ======== =======
Cumulative ratio of excess (deficiency)
of interest-earning assets as a
percentage of total assets........... (2.7%) 5.8% 13.3% 12.7%
==== ==== ===== ====
</TABLE>
- ---------
(1) Debt securities available for sale are reflected in this table at amortized
cost, equity securities are reflected at estimated market value.
42
<PAGE>
In preparing the table above, it has been assumed, in assessing the
interest rate sensitivity of the Bank, that: (i) mortgage loans will prepay at a
rate of 12.0% per year, (ii) fixed maturity deposits will not be withdrawn prior
to maturity; and (iii) Demand and Savings accounts will decay at the following
rates:
Over 1 Over 3
1 Year Through Through Over 5
or Less 3 Years 5 Years Years
------- ------- ------- -----
Demand accounts .... 37.0% 32.0% 17.0% 17.0%
Savings accounts ... 17.0% 17.0% 16.0% 14.0%
Certain shortcomings are inherent in the method of analysis presented
in the preceding table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. In addition, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Certain assets, such as adjustable-rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis and
over the life of the assets. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to make payments on their adjustable-rate debt may decrease in the
event of an interest rate increase.
Net Portfolio Value. The OTS has adopted a final rule that incorporates
an interest rate risk ("IRR") component into the risk-based capital rules. The
IRR component is a dollar amount that will be deducted from total capital for
the purpose of calculating an institution's risk-based capital requirement and
is measured in terms of the sensitivity of its net portfolio value ("NPV") to
changes in interest rates. NPV is the difference between discounted incoming and
outgoing cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% of the estimated market value of its assets will require
the institution to deduct from its capital 50% of that excess change. The rule
provides that the OTS will calculate the IRR component quarterly for each
institution from the institution's Thrift Financial Reports. The following table
presents the Bank's NPV as of September 30, 1997, as calculated by the OTS,
based on information provided to the OTS by the Bank.
Change in Change in NPV
Interest Rates as a percentage of
in Basis Points Net Portfolio Value Estimated Market
(Rate Shock) Amount $ Change % Change Value of Assets
- -------------- ------- -------- -------- -----------------
(Dollars in Thousands)
400 $ 70,771 $ 37,887 34.90% (6.0)%
200 91,206 17,452 16.01 (2.8)%
Stat 108,658 -- -- --
(200) 121,742 13,084 12.00 2.1 %
(400) 133,351 24,693 22.70 3.9 %
As shown by the table above, increases in interest rates will result in
net decreases in the Bank's NPV, while decreases in interest rates will result
in smaller net increases in the Bank's NPV. The table suggests that in the event
of a 200 basis point change in interest rates, the Bank would experience a 2.8%
decrease in NPV in a rising interest rate environment, and a 2.1% increase in
NPV in a decreasing interest rate environment.
Certain shortcomings are inherent in the methodology used in the above
table. Modeling changes in NPV requires the making of certain assumptions that
may tend to oversimplify the manner in which actual yields and costs respond to
changes in market interest rates. First, the models assume that the composition
of the Bank's interest
43
<PAGE>
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured. Second, the models assume that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements do provide an indication
of the Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to provide a precise forecast of the effect of
changes in market interest rates on the Bank's net interest income.
Comparison of Financial Condition
Total assets increased $37.9 million, or 6.3%, to $638.9 million at
September 30, 1997 from $601.0 million at December 31, 1996. Deposit growth from
the branch system and net earnings after dividend payments generated $7.1
million of asset growth. Deposits increased by $2.1 million, or .4%, to $493.3
million at September 30, 1997 from $491.2 million at December 31, 1996. Cash and
cash equivalents decreased by $7.7 million, or 36.9%, to $13.2 million on
September 30, 1997 from $20.9 million at December 31, 1996. Primarily as the
result of the investment leverage program described below, securities available
for sale increased $40.0 million, or 45.6%, to $127.7 million at September 30,
1997 from $87.6 million at December 31, 1996. Securities and mortgage-backed
securities held to maturity decreased by $15.8 million from $86.6 million at
December 31, 1996 to $70.8 million at September 30, 1997 due to maturities of
securities and principal payments on mortgage-backed securities during the nine
month period ended September 30, 1997. Securities held to maturity decreased
$15.8 million or 18.2% to $70.8 million at September 30, 1997 from $86.6 million
at December 31, 1996 due to maturities and principal payments on mortgage-backed
securities of securities during 1997. On January 4, 1997, the Bank instituted an
investment leverage program by borrowing $30 million for reinvestment in federal
agency securities which were designated as available for sale. Included in
securities and mortgage-backed securities held to maturity and securities
available for sale are corporate bonds that the Bank invests in from time to
time. All of the corporate bonds are rated A or greater by nationally recognized
rating agencies. Corporate bonds generally offer the Bank higher returns then
government issued instruments with minimal risk due to the bonds' high credit
rating. Net loans increased $17.6 million, or 4.6%, to $397.9 million at
September 30, 1997 from $380.3 million at December 31, 1996. The Bank's
investment in Federal Home Loan Bank ("FHLB") stock increased $297,000, or 9.6%,
to $3.4 million at September 30, 1997 from $3.1 million at December 31, 1996, as
the Bank's larger mortgage loan portfolio required additional investment in FHLB
stock.
Total assets increased $86.8 million, or 16.9%, to $601.0 million at
December 31, 1996 from $514.2 million at December 31, 1995. Deposit growth from
the branch system and net earnings after dividend payments generated $12.0
million of asset growth. The acquisition of BCB added an additional $74.8
million in assets. Deposits increased by $80.5 million, or 19.6%, to $491.2
million at December 31, 1996 from $410.8 million at December 31, 1995. Deposit
growth consisted of $7.3 million from the Bank's branch system and $73.2 million
from the acquisition of BCB. Cash and cash equivalents increased by $4.7
million, or 28.8%, to $20.9 million on December 31, 1996 from $16.3 million at
December 31, 1995. Securities and mortgage-backed securities held to maturity
decreased by $4.7 million from $91.3 at December 31, 1995 to $86.6 million at
December 31, 1996 due to maturities and principal payments on mortgage-backed
securities during 1996. Securities available for sale increased $3.9 million, or
4.6%, to $87.6 million at December 31, 1996 from $83.8 million at December 31,
1995. Securities held to maturity decreased $4.6 million, or 5.0%, to $86.6
million at December 31, 1996 from $91.2 million at December 31, 1995. Net loans
increased $74.2 million, or 24.2%, to $380.3 million at December 31, 1996 from
$306.1 million at December 31, 1995. These portfolios also increased as loan and
mortgage-backed securities principal payments, and deposit flows were reinvested
in these asset categories and as a result of the acquisition of BCB. The Bank's
investment in FHLB stock increased $225,000, or 7.9%, to $3.1 million at
December 31, 1996 from $2.9 million at December 31, 1995, as the Bank's larger
mortgage loan portfolio permitted additional investment in FHLB stock.
Stockholders' equity increased by $4.9 million, or 4.7%, to $108.2
million at September 30, 1997 from $103.4 million at December 31, 1996. The
increase was due to $5.9 million of net income combined with a $.7 million
amortization of unearned shares of Mid-Tier Common Stock under a restricted
stock plan, offset by a $.9 million decrease in unrealized gains on sales of
investments and $.9 million in dividends. The decrease in unrealized gains was
primarily attributable to the Bank's sale of equity securities to comply with
OTS requirements that the Bank divest its portfolio of equity securities.
Stockholders' equity increased by $5.8 million, or 6.0%, to $103.4 million
44
<PAGE>
at December 31, 1996 from $97.5 million at December 31, 1995. The increase in
stockholders' equity was due to net income of $8.4 million, offset by $1.1
million of dividends and a decline in the net unrealized gain on sale of
securities of $1.6 million.
Average Balance Sheet
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from daily average balances.
<TABLE>
<CAPTION>
At September 30, For the Nine Months Ended September 30,
1997 1997 1996
---------------- -------------------------- --------------------------
Average Average
Actual Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost(6) Balance Interest Cost(6)
------- ---- ------- -------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets: (1)
Interest-earning assets:
Mortgage loans.................... $282,679 7.43% $268,505 14,810 7.35% $263,421 $14,503 7.34%
Consumer loans.................... 56,109 8.10 56,946 3,335 7.81 45,012 2,669 7.91
Commercial business loans......... 62,245 8.54 62,867 4,248 9.01 13,497 913 9.02
Securities available for sale: (2)
Debt securities................... 127,006 6.55 117,810 5,764 6.51 72,540 3,462 6.36
Equity securities................. 10 -- 485 61 16.77 1,478 132 11.91
Investments held to maturity:
Debt securities and Federal Home Loan
Bank stock...................... 34,544 6.06 39,562 1,787 6.02 40,924 1,967 6.41
Mortgage-backed securities........ 39,603 5.72 44,085 2,205 6.67 48,942 2,497 6.80
Federal funds sold.................. 2,300 6.25 9,181 406 5.90 13,035 519 5.31
------- ------- ------ -------- -------
Total interest-earning assets 604,496 7.14 599,441 32,616 7.25 498,849 26,662 7.12
------ ------
Noninterest-earning assets (3) 34,446 29,750 19,293
------ ------ -------
Total assets.................. $638,942 $629,191 $518,142
======== ======== ========
Liabilities and Stockholders' equity:
Certificates of deposits.......... $290,229 5.40 $289,656 11,611 5.34 262,765 10,304 5.23
Transaction and savings deposits 203,105 2.16 196,854 3,123 2.12 149,635 2,561 2.28
Borrowed funds.................... 30,000 6.03 31,950 1,489 6.21 -- -- --
------- ------- ------ -------- ------- -----
Total interest-bearing liabilities 523,334 4.18 518,460 16,223 4.19 412,400 12,865 4.16
------ ------
Non-interest-bearing liabilities 7,369 6,809 5,924
----- ------ -------
Total liabilities............. 530,703 525,269 418,324
------- ------- --------
Stockholders' equity................ 108,239 103,922 99,818
------- ------- --------
Total liabilities and stockholders'
equity $638,942 $629,191 $518,142
======== ======== ========
Net interest income................. $16,393 $13,797
======= =======
Net interest spread (4)............. 2.96% 3.06% 2.96%
===== ====== =====
Net interest margin (5)............. 3.61% 3.65% 3.69%
===== ====== =====
Interest-earning assets as a percentage of
interest-bearing liabilities...... 115.63% 115.62% 120.96%
====== ====== ======
</TABLE>
(1) Average balances and rates include non-accrual loans.
(2) Securities available for sale are reflected in this table at amortized
cost.
(3) Includes market value adjustment on securities available for sale.
(4) Net interest spread represents the difference between the weighted average
rates earned on interest-earning assets and the weighted average rates paid
on interest-bearing liabilities.
(5) Net yield on average interest-earning assets represents net interest income
as a percentage of average interest-earning assets.
(6) Average Yields and cost have been reflected on an annualized basis.
45
<PAGE>
Average Balance Sheet (continued)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets: (1)
Interest-earning assets:
Mortgage loans........................... $264,984 $19,489 7.35% $251,520 $18,558 7.38% $247,697 $17,926 7.24%
Consumer loans........................... 47,823 3,727 7.79 35,662 2,866 8.04 23,885 1,789 7.49
Commercial business loans................ 24,973 2,287 9.16 9,861 922 9.35 10,486 854 8.14
Securities available for sale: (2)
Debt securities........................ 74,817 4,601 6.15 67,938 4,076 6.00 51,438 2,849 5.54
Equity securities...................... 1,367 161 11.78 4,944 409 8.27 9,861 684 6.94
Investments held to maturity:
Investment securities and Federal Home
Loan Bank stock....................... 40,858 2,627 6.43 29,331 1,910 6.51 42,994 2,849 6.63
Mortgage-backed securities............. 47,990 3,234 6.74 51,323 3,273 6.38 34,707 2,162 6.23
Federal funds sold....................... 14,650 777 5.30 25,175 1,504 5.97 8,533 355 4.16
------- ------- ------ ------- ------- ------
Total interest-earning assets 517,462 36,903 7.13 475,754 33,518 7.05 429,601 29,468 6.86
------ ------ ------
Noninterest-earning assets (3)......... 21,195 24,175 16,863
------- ------ -------
Total assets..................... $538,657 $499,929 $446,464
======== ======== ========
Interest-bearing liabilities and retained earnings:
Certificates of deposits............. $271,362 14,045 5.18 $251,932 13,006 5.16 $220,873 8,918 4.04
Transaction and savings deposits 160,576 3,896 2.43 164,213 4,004 2.44 160,265 3,933 2.45
--------- ----- ------- ----- ------- -----
Total interest-bearing liabilities 431,938 17,941 4.15 416,145 17,010 4.09 381,138 12,851 3.37
------ ------ ------
Noninterest-bearing liabilities........ 6,166 7,437 8,279
------- ------ -------
Total liabilities................ 438,104 423,582 389,417
------- ------- -------
Stockholders' equity..................... 100,553 76,347 57,047
------- ------ -------
Total liabilities and stockholders' equity $538,657 $499,929 $446,464
======== ======== ========
Net interest income...................... $18,962 $16,508 $16,617
======= ======= =======
Net interest spread (4).................. 2.98% 2.96% 3.49%
==== ===== ====
Net interest margin (5).................. 3.66% 3.47% 3.87%
==== ===== ====
Interest-earning assets as a percentage of
interest-bearing liabilities.......... 119.80% 114.32% 112.72%
====== ====== ======
</TABLE>
- ---------------------------
(1) Average balances and rates include non-accrual loans.
(2) Securities available for sale are reflected in this table at amortized
cost.
(3) Includes market value adjustment on securities available for sale.
(4) Interest rate spread represents the difference between the weighted average
rates earned on interest-earning assets and the weighted average rates paid
on interest-bearing liabilities.
(5) Net yield on average interest-earning assets represents net interest income
as a percentage of average interest-earning assets.
46
<PAGE>
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Bank's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated to the change due to volume.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
------------------------------- --------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
------------------------------- ------------------------------ ---------------------------
Increase/(Decrease) Due to Increase/(Decrease) Due to Increase/(Decrease) Due to
------------------------------- ------------------------------ ---------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- --- ------ ---- ---
(In Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans............ $ 281 $ 26 $ 307 $ 1,006 $ (75) $ 931 $ 285 $ 347 $ 632
Consumer loans............ 711 (45) 666 950 (89) 861 946 131 1,077
Commercial business loans 3,336 (1) 3,335 1,384 (19) 1,365 (59) 127 68
Securities available for sale:
Debt securities........ 2,193 109 2,302 423 102 525 990 237 1,227
Equity securities...... (143) 72 (71) (422) 174 (248) (406) 131 (275)
Securities held to maturity:
Debt securities and Federal
Home Loan Bank stock (20) (160) (180) 740 (23) 717 (887) (52) (939)
Mortgage-backed securities (228) (64) (292) (224) 185 (39) 1,059 52 1,111
Federal funds sold........ (190) 77 (113) (558) (169) (727) 995 154 1,149
------ ------- ------- -------- -------- -------- ------- ------ ------
Total................ 5,940 14 5,954 3,299 86 3,385 2,923 1,127 4,050
------ ------- ------- ------- ------- ------- ------- ------ ------
Interest-bearing liabilities:
Certificates of deposit 995 315 1,310 989 50 1,039 1,614 2,474 4,088
Interest-bearing savings
deposits 801 (239) 562 (92) (16) (108) 87 (16) 71
Borrowed funds............ 1,486 0 1,486 -- -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- ------ ------
Total................ 3,282 76 3,358 897 34 931 1,701 2,458 4,159
------ ------- ------- ------- ------- ------- ------- ------ ------
Net change in net interest
income $ 2,658 $ (62) $ 2,596 $ 2,402 $ 52 $ 2,454 $1,222 $(1,331) $ (109)
======= ======= ======= ======= ======= ======= ====== ======= ======
</TABLE>
Comparison of Result of Operations
General. The Bank reported net income of $5.9 million and $6.4 million
for the nine months ended September 30, 1997 and 1996, respectively, and $8.4
million, $8.6 million and $7.7 million for the years ended December 31, 1996,
1995 and 1994, respectively. Net income includes net gains from the sale of
equity securities of $2.9 million and $2.2 million for the nine months ended
September 30, 1997 and 1996, respectively, and $2.8 million, $4.2 million and
$2.4 million for the fiscal years ended December 31, 1996, 1995 and 1994,
respectively. Net income net of securities gains was $4.0 million and $5.0
million for the nine months ended September 30, 1997 and 1996, and $6.6 million,
$6.0 million and $6.2 million for the fiscal years ended December 31, 1996, 1995
and 1994, respectively. Net income net of securities gains decreased for the
nine months ended September 30, 1997 compared to the nine months ended September
30, 1996 primarily due to a $1.5 million increase in the provision for loan
losses.
Interest and Dividend Income. The Bank's net interest income is
determined by its interest rate spread (i.e., the difference between the yields
earned on its interest-earning assets and the rates paid on its interest-bearing
liabilities , including borrowings) and the relative amounts of interest-earning
assets and interest-bearing liabilities . Total interest income increased by
$6.0 million, or 22.3%, to $32.6 million for the nine months ended September 30,
1997 from $26.7 million for the nine months ended September 30, 1996, as the
Bank increased its interest income from all loan categories, debt securities
available for sale, investment securities and FHLB stock, which increases were
partially offset by decreases in interest income from equity securities
available for sale, federal funds sold, and mortgage-backed securities. The
increase in interest income resulted primarily from a $100.6 million, or 20.2%,
increase in average interest-earning assets to $599.4 million from $498.8
million and a 13 basis point increase in yield
47
<PAGE>
on the Bank's average interest-earning assets to 7.25% from 7.12%. The increase
in average interest-earning assets resulted from the Bank's acquisition of BCB,
the $30 million leverage program, and deposit inflows.
Interest income from mortgage loans increased by $307,000, or 2.1%, to
$14.8 million for the nine months ended September 30, 1997, from $14.5 million
for the nine months ended September 30, 1996. This increase was due to a $5.1
million, or 1.9%, increase in average mortgage loans to $268.5 million from
$263.4 million, combined with an increase in the yield on average mortgage loans
to 7.35% from 7.34%. Interest income from consumer loan increased by $666,000,
or 25.0%, to $3.3 million from $2.7 million as a result of a $11.9 million
increase in average consumer loans to $56.9 million from $45.0 million, which
was partially offset by a 10 basis point decrease in the yield on average
consumer loans. Interest income from commercial business loans increased by $3.3
million or 365.3%, to $4.2 million for the nine months ended September 30, 1997
from $913,000 for the nine months ended September 30, 1996. This increase was
due to a $49.4 million or a 365.8%, increase in average commercial business
loans to $62.9 million from $13.5 million which offset a 1 basis point decrease
in the yield on average commercial business loans to 9.01% from 9.02%. The
increase in average commercial business loan balances was due to the acquisition
of BCB and increased commercial business loan activity. Interest income from
debt securities available for sale increased by $2.3 million, or 66.49%, to $5.8
million from $3.5 million due to a 15 basis point increase in the yield on
average debt securities available for sale to 6.51% from 6.36%, and a $45.3
million, or 62.4%, increase in average debt securities available for sale to
$117.8 million from 72.5 million. The increase in average debt securities
available for sale was primarily attributable to the investment of funds for the
$30 million leverage program. Interest income from the mortgage-backed
securities held to maturity declined to $2.2 million, from $2.5 million or 11.7%
for the nine months ended September 30, 1996. The decrease in income was
primarily attributed to $4.9 million decrease in the average balance of
mortgage-backed securities to $44.1 million from $48.9 million combined with a
decrease in the yield on average mortgage-backed securities to 6.67% from 6.80%.
Income from equity securities available for sale decreased by $71,000,
or 53.8%, to $61,000 from $132,000 due to a $1.0 million, or 67.2%, decrease in
the average balance of equity securities available for sale to $.5 million from
$1.5 million which was partially offset by a 486 basis point increase in the
yield on average equity securities available for sale to 16.77% from 11.91%. The
decrease in the average balance of equity securities available for sale resulted
from the Bank's liquidation of this portfolio, as required in connection with
the Bank's conversion to a federally-chartered savings bank, while the increase
in yield resulted from the favorable market conditions for equity securities
that existed during 1997.
Interest income from debt securities held to maturity and FHLB stock
decreased by $180,000, or 9.2%, to $1.8 million for the nine months ended
September 30, 1997 from $2.0 million for the nine months ended September 30,
1996 due to a $1.4 million, or 3.3%, decrease in the average balance of debt
securities to $39.6 million for the nine months ended September 30, 1997 from
$40.9 million for the nine months ended September 30, 1996. The decrease in
income was also attributed to a 39 basis point decrease in yield to 6.02% from
6.41%. Interest income from federal funds sold decreased $113,000 to $406,000
from $519,000 due to a $3.9 million decrease in average federal funds sold to
$9.2 million from $13.0 million, which offset a 59 basis point increase in the
yield on average federal funds sold to 5.90% from 5.31%.
The increase in the Bank's average balance of mortgage loan, commercial
loans, consumer loans, and debt securities available for sale, resulted from the
Bank's leverage program, the acquisition of BCB and internal loan growth. The
changes in yields on mortgage loans, consumer loans, commercial loans,
investment securities and federal funds sold resulted from the purchase of
interest-earning assets at 1997 market yields.
Total interest income increased by $3.4 million, or 10.1%, to $36.9
million for the year ended December 31, 1996 from $33.5 million for the year
ended December 31, 1995, as the Bank increased its interest income from all loan
categories, debt securities available for sale, investment securities and FHLB
stock, which increases were partially offset by decreases in interest income
from equity securities available for sale, federal funds sold, and
mortgage-backed securities. The increase in interest income resulted primarily
from a $41.7 million, or 8.8%, increase in average interest-earning assets to
$517.5 million from $475.8 million and an eight basis point increase in yield on
the Bank's average interest-earnings assets to 7.13% from 7.05%. The increase in
average interest-earning assets resulted from the Bank's acquisition of BCB and
deposit inflows.
48
<PAGE>
Interest income from mortgage loans increased by $931,000, or 5.0%, to
$19.5 million for the year ended December 31, 1996, from $18.6 million for the
year ended December 31, 1995. This increase was due to a $13.5 million, or 5.4%,
increase in average mortgage loans to $265.0 million from $251.5 million, which
offset a decrease in the yield on average mortgage loans to 7.35% from 7.38%.
Interest income from consumer loans increased by $861,000, or 30.0%, to $3.7
million from $2.9 million as a result of a $12.2 million increase in average
consumer loans to $47.8 million from $35.7 million, which was partially offset
by a 25 basis point decrease in the yield on average consumer loans. Interest
income from commercial business loans increased by $1.4 million, or 148.0%, to
$2.3 million for the year ended December 31, 1996, from $922,000 for the year
ended December 31, 1995. This increase was due to a $15.1 million, or 153.3%
increase in average commercial business loans to $25.0 million from $9.9 million
which offset a 19 basis point decrease in the yield on average commercial
business loans to 9.16% from 9.35%. The increase in average commercial business
loan balances was due to the acquisition of BCB and increased commercial
business loan activity. Interest income from debt securities available for sale
increased by $525,000, or 12.9%, to $4.6 million from $4.1 million due to a 15
basis point increase in the yield on average debt securities available for sale
to 6.15% from 6.00%, and a $6.9 million, or 10.1%, increase in average debt
securities available for sale to $74.8 million from $67.9 million. Interest
income from mortgage-backed securities remained at $3.2 million, as a $3.3
million, or 6.5%, decrease in the average balance of mortgage-backed securities
to $48.0 million from $51.3 million was offset by an increase in the yield on
average mortgage-backed securities to 6.74% from 6.38%.
Income from equity securities available for sale decreased by $248,000,
or 60.6%, to $161,000 from $409,000 due to a $3.6 million, or 72.4%, decrease in
average equity securities available for sale to $1.4 million from $4.9 million,
partially offset by a 351 basis point increase in the yield on average equity
securities available for sale to 11.78% from 8.27%. The decrease in average
equity securities available for sale resulted from the Bank's continuing
strategy of liquidating such securities, as required in connection with the
Bank's conversion to a federally-chartered savings bank, while the increase in
yield resulted from the favorable market conditions for equities that existed
during 1996.
Interest income from debt securities held to maturity and FHLB stock
increased by $717,000, or 37.5%, to $2.6 million from $1.9 million due to an
$11.5 million, or 39.3% increase in the average balance of debt securities to
$40.9 million for 1996 from $29.3 million for 1995. This increase offset an 8
basis point decrease in yield to 6.43% from 6.51%. Interest income from federal
funds sold decreased $727,000 to $777,000 from $1.5 million due to a $10.5
million decrease in average federal funds sold to $14.7 million from $25.2
million, and a 67 basis point decrease in the yield on average federal funds
sold to 5.30% from 5.97%.
The increase in the Bank's average balance of mortgage, commercial
loans, consumer loans, debt securities available for sale, and investment
securities resulted from the acquisition of BCB and internal loan growth. The
decrease in yields on mortgage loan, consumer loans, commercial loans,
investment securities and federal funds sold resulted from the purchase of
interest-earning assets at market yields which were lower in 1996 than in 1995.
Total interest income increased by $4.1 million, or 13.7%, to $33.5
million for the year ended December 31, 1995 from $29.5 million for the year
ended December 31, 1994, as the Bank increased its interest income from mortgage
and consumer loans, debt securities available for sale, mortgage-backed
securities, and federal funds sold, which increases were partially offset by
decreases in interest income from equity securities available for sale, and
investment securities and FHLB stock. The increase in interest income resulted
primarily from a $46.2 million, or 10.7%, increase in average interest-earning
assets to $475.8 million from $429.6 million and a 19 basis point increase in
the yield on the Bank's average interest-earnings assets to 7.05% from 6.86%.
The increase in average interest-earning assets resulted from the Bank's
deployment of the $29.6 million of net proceeds from the Bank's August 1995
stock offering (the "Stock Offering"), assumption of $34.0 million of deposits
from the Resolution Trust Corporation (the "RTC"), and retained earnings over
the period.
Interest income from investment securities and FHLB stock decreased by
$939,000, or 33.0%, to $1.9 million in 1995 from $2.8 million in 1994 primarily
due to a decrease in average investment securities as a result of maturities of
such securities and the Bank's strategy of deploying the proceeds of such
maturities into higher-yielding assets. Interest income from federal funds sold
increased by $1.1 million, to $1.5 million in 1995 from $355,000
49
<PAGE>
in 1994 due to a $16.6 million increase in average federal funds sold to $25.2
million from $8.5 million, and a 181 basis point increase in the yield on
average federal funds sold to 5.97% from 4.16%. The increase in federal funds
sold resulted from excess funds received from the oversubscription of the
initial public offering, which were invested in Federal funds awaiting refund to
subscribers.
Total Interest Expense. Total interest expense increased by $3.4
million, or 26.1%, to $16.2 million for the nine months ended September 30,
1997, from $12.9 million for the nine months ended September 30, 1996. The
increase was due to a $104.1 million, or 25.21%, increase in average
interest-bearing liabilities to $516.5 million from $412.4 million, and a 3
basis point increase in the average cost of the Bank's interest bearing
liabilities to 4.19% from 4.16%. The increase in average interest-bearing
liabilities resulted from the $30 million borrowing in January 1997 for the
Bank's leverage investment program combined with a $26.9 million, or 10.2%,
increase in average certificates of deposit and a $47.2 million, or 31.6
increase in average core deposits. The increase in interest-bearing liabilities
was largely the result of the acquisition of BCB. The increase in the average
rate paid for funds was attributable to the higher cost of monies for the Bank's
leverage program and the increased cost of certificates of deposit during 1997.
As a result of the foregoing, the Bank's net interest income was $16.4
million for the nine months ended September 30, 1997 compared to $13.8 million
for the nine months ended September 30, 1996. The Bank's interest rate spread
was 3.06% for the nine months ended September 30, 1997 compared to 2.96% for the
nine months ended September 30, 1996, as the yield on the Bank's
interest-earning assets increased more rapidly than the Bank's cost of
interest-bearing liabilities.
Total interest expense increased by $931,000, or 5.5%, to $17.9 million
for the year ended December 31, 1996, from $17.0 million for the year ended
December 31, 1995. The increase was due to a $15.8 million, or 3.8%, increase in
average interest-bearing liabilities to $431.9 million from $416.1 million, and
a 6 basis point increase in the average cost of the Bank's interest-bearing
liabilities to 4.15% from 4.09%. The increase in average interest-bearing
liabilities resulted from a $19.4 million, or 7.7%, increase in average
certificates of deposit which offset a $3.6 million, or 2.2% decrease in average
core deposits. The increase in interest-bearing liabilities was largely the
result of the acquisition of BCB. The increase in rates paid on deposits was
attributable to the effect of paying higher market rates on certificates of
deposit in 1996 and a slight decline in rates paid on less expensive core
deposits.
As a result of the foregoing, the Bank's net interest income was $19.0
million for 1996 compared to $16.5 million for 1995. The Bank's interest rate
spread was 2.98% for 1996 compared to 2.96% for 1995, as the yield on the Bank's
interest-earning assets increased more rapidly than the Bank's cost of
interest-bearing liabilities.
Total interest expense increased by $4.2 million, or 32.4%, to $17.0
million for the year ended December 31, 1995, from $12.9 million for the year
ended December 31, 1994. The increase was due to a $35.0 million, or 9.2%,
increase in average interest-bearing liabilities to $416.1 million from $381.1
million, and a 72 basis point increase in the average cost of the Bank's
interest-bearing liabilities to 4.09% from 3.37%. The increase in average
interest-bearing liabilities resulted from a $31.1 million, or 14.1%, increase
in average certificates of deposit, and a $3.9 million, or 2.5% increase in
average core deposits. The increase in interest-bearings liabilities was largely
the result of the assumption of $34.0 million of deposits form the RTC. The
increase in rates paid on deposits was attributable to the higher average cost
of the certificates of deposit purchased from the RTC, and the effect of paying
higher market rates on certificates of deposit in 1994 which continue until the
maturity of the certificates after 1995.
Provision for Loan Losses. The Bank's provision for loan losses
amounted to $1.5 million, $0, $0, $150,000 and $180,000 for the nine months
ended September 30, 1997 and 1996, and the years ended December 31, 1996, 1995
and 1994, respectively. Provisions for loan losses represent charges to income
in order to maintain the allowance for loan losses at a level deemed appropriate
by management based on historical experience, the volume and type of lending
conducted by the Bank, the amount of non-performing loans, general economic
conditions (particularly as they relate to the Bank's market area), and other
factors relating to the Bank's loan portfolio. During the third quarter of 1997
the bank increased its loan loss provision by $1.3 million, as compared to no
provision in the third quarter of 1996. This increase was primarily attributable
to a niche line of business that was acquired through the acquisition of
Burlington County Bank, an increase in other non-performing loans and modest
loan growth. Management has
50
<PAGE>
made the decision to exit the automobile dealer floorplan financing business and
has made provisions for the deterioration of this portfolio. Of the $1.3 million
provision, $687,000 was immediately charged-off as the Bank expeditiously
addressed the credit risk in these loans and any potential losses associated
with exiting this line of business. No further losses or additional reserves on
the portfolio are anticipated at this time. Total charge offs during the nine
month period ended September 30, 1997 were $1.3 million. The total amount of
automobile dealer floorplan loans outstanding at September 30, 1997 was $1.3
million. The remaining balance of these loans after the $687,000 charge off was
approximately $600,000. Management does not anticipate any restructuring costs
as a result of the decision to exit this line of business. The charge offs
comprised $1.1 million of loans acquired from Burlington County Bank and
$200,000 from loans originated by the Bank. Non-performing loans totaled $5.7
million at September 30, 1997 compared to $3.9 million at December 31, 1996.
Non-performing assets as a percentage of total assets increased to .91% at
September 30, 1997 from .69% at December 31, 1996. The increase in
non-performing loans was due principally to the automobile dealer floorplan
financing loans which represented 252,400, or 5.04% of total non-performing
assets as of September 30, 1997, and further deterioration in small balance
commercial loans, mostly part of the BCB portfolio. Based upon management's
evaluation of the factors listed above, management believes that the Bank's
asset quality remains strong, and that the allowance for loan losses as of
September 30, 1997 is adequate to provide for loan losses, although there can be
no assurance that such losses will not exceed estimated amounts. The Bank's
allowance for loan losses as a percentage of total loans outstanding increased
to.80% at September 30,1997 from .76% at December 31, 1996.
The decrease in the provisions to $0 in 1996 from $150,000 and $180,000
in 1995 and 1994, respectively, was based upon the Bank's analysis of the loan
portfolio, history of charge-offs, and strength of the Bank's coverage ratios.
The acquisition of BCB added $1.2 million, or 67.1%, to the Bank's loan loss
reserves, increasing the total loan loss reserves at December 31, 1996 to $2.9
million. Nonperforming loans totaled $3.9 million at December 31, 1996 compared
to $2.2 million at December 31, 1995, primarily as the result of the acquisition
of BCB's substantial commercial loan portfolio. Nonperforming assets as a
percentage of total assets increased from .43% at December 31, 1995 to .69% at
December 31, 1996.
Other Income. For the nine months ended September 30, 1997, the net
gain on securities sales increased $.7 million, or 33.5%, to $2.9 million,
compared to a net gain of $2.2 million for the nine months ended September 30,
1996. Service fees and other income increased $.7 million or 149.7% for the nine
months ended September 30, 1997 to $1.2 million from $.5 million for the nine
months ended September 30, 1996. The increase in fees is primarily attributable
to the acquisition of BCB deposits and loans which have higher fee generating
characteristics.
In 1996, the net gain on security sales decreased $1.4 million, or
32.3%, to $2.8 million, compared to a net gain in 1995 of $4.2 million.
Consequently, other income decreased $1.1 million for the year ended December
31, 1996 compared to the year ended December 31, 1995. Service fees and other
income increased $206,000 for fiscal 1996 compared to fiscal 1995.
Other income increased by $1.7 million, or 57.0%, to $4.9 million for
1995 compared to $3.2 million for 1994. The increase resulted primarily from a
$1.8 million increase in gain on sale of securities. In 1995, the Bank realized
a net gain on security sales of $4.2 million as compared to a net gain in 1994
of $2.4 million.
Operating Expenses. Total operating expenses increased by $3.4 million,
or 53.0%, to $9.8 million for the nine months ended September 30, 1997 as
compared to $6.4 million for the nine months ended September 30, 1996. Salaries
and employee benefits increased $2.0 million, or 59.4%, to $5.4 million for the
nine months ended September 30, 1997 from $3.4 million for the nine months ended
September 30, 1996. This increase is primarily from additional salaries of
former BCB employees, an increase in management incentive awards of $454,000 and
to a lesser degree normal salary increases. The Bank retained 20 former BCB
employees as of September 30, 1997. During the same period the amortization of
intangible assets increased from $204,000 to $577,000, reflecting the
amortization of nine months of goodwill from the acquisition of BCB. Net
occupancy expenses increased $268,000, or 29.7%, due to the addition of one
branch as well as the acquisition of two BCB branches. Other operating expenses
increased $1.0 million, or 85.0%, to $2.2 million for the nine months ended
September 30, 1997 as compared to $1.2 million for the nine months ended
September 30, 1996, reflecting routine expense increases and nine months of
expenses from the acquisition of BCB. These expense increases were offset by a
$193,000 reduction in FDIC insurance premiums
51
<PAGE>
to $39,000 from $232,000 for the nine months ended September 30, 1996. Included
in the FDIC premiums for the nine months ended September 30, 1996 was a special
FDIC assessment of $177,000 a result of legislation, enacted in September 1996,
to recapitalize the Savings Association Insurance Fund (the "SAIF") by a
one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
Although the majority of the Bank's deposits are BIF-insured, in 1995 the Bank
assumed approximately $34.0 million of SAIF-insured deposits from the RTC. The
assessment was 65.7 basis points per $100 in deposits, payable on November 30,
1996. In addition, beginning January 1, 1997, interest payments on FICO bonds
issued in the late 1980's by the Financing Corporation to recapitalize the now
defunct Federal Savings and Loan Insurance Corporation will be paid jointly by
institutions such as the Bank that are insured by the BIF or the SAIF. The FICO
assessment will be 1.29 basis points per $100 in BIF deposits and 6.44 basis
points per $100 in SAIF deposits. Beginning January 1, 2000, the FICO interest
payments will be paid pro-rata by banks and thrifts based on deposits
(approximately 2.4 basis points per $100 in deposits). The BIF and SAIF will be
merged on January 1, 1999, provided the bank and saving association charters are
merged by that date. In that event, pro-rata FICO sharing will begin on January
1, 1999.
Total operating expenses increased by $1.9 million, or 24.0%, to $9.7
million in 1996 as compared to $7.8 million in 1995. Salaries and employee
benefits increased $1.1 million, or 28.9%, to $5.1 million in 1996 from $4.0
million in 1995, reflecting normal salary increases, management incentive
awards, and three months of additional salaries from the acquisition of BCB.
Amortization of intangible assets increased from $226,000 in 1995 to $389,000 in
1996, reflecting the amortization of three months of goodwill from the
acquisition of BCB. Net occupancy expenses increased $175,000, or 15.5%, due to
the addition of one branch as well as the acquisition of three BCB branches.
Other operating expenses increased $553,000, or 35.0%, to $2.1 million in 1996
as compared to $1.6 million in 1995, reflecting routine expense increases and
three months of expenses from the acquisition of BCB. These expense increases
were offset by a $259,000 reduction in FDIC insurance premiums.
Total operating expenses increased by $317,000, or 4.2%, to $7.8
million in 1995 as compared to $7.5 million in 1994. Salaries and employee
benefits increased $333,000, or 9.2%, to $4.0 million in 1995 from $3.6 million
in 1994 reflecting normal salary increases and staff enhancements. Amortization
of intangible assets increased from $21,000 in 1994 to $226,000 in 1995,
reflecting the amortization of the premium paid for the assumption of $34.0
million in deposits from the RTC in March 1995. Net occupancy expenses and other
operating expense increased $98,000, or 9.5%, and $75,000 or 4.1%, respectively,
reflecting routine expense increases. These expense increases were offset by a
$13,000 equipment expense reduction and a $381,000 reduction in FDIC insurance
premiums.
Income Taxes. For the nine months ended September 30, 1997, the income
tax expense amounted to $3.3 million compared to $3.6 million for the nine
months ended September 30, 1996, reflecting primarily the differences in income
before taxes. The effective tax rate remained consistent at 36.1% in 1997
compared to 36.0% in 1996.
Income tax expense amounted to $4.7 million, $4.9 million, and $4.4
million in 1996, 1995, and 1994, reflecting primarily the differences in income
before income taxes for such periods. The effective income tax rate remained
consistent in 1996, 1995 and 1994 at 36.0%, 36.0% and 36.6%, respectively.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings institution maintain
liquid assets of not less than 4% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet applicable liquidity
requirements. At September 30, 1997, the Bank's liquidity, as measured for
regulatory purposes, was 28.83%, or $115.0 million in excess of the minimum OTS
requirement.
Cash was generated by the Bank's operating activities during the nine
months ended September 30, 1997 and 1996, and the years ended December 31, 1996,
1995 and 1994, primarily as a result of the acquisition of BCB, the assumption
of deposits, proceeds from the conversion, borrowings for a leverage program and
retained earnings. The
52
<PAGE>
adjustments to reconcile net income to net cash provided by operations during
the years presented consisted primarily of net gains from sale of securities,
the provision for loan losses, depreciation and amortization expense, increases
or decreases in accrued interest payable or receivable, and increases or
decreases in other assets and other liabilities. The primary investing activity
of the Bank is lending, which is funded with cash provided from operations and
financing activities including deposits, as well as proceeds from amortization
and prepayments on existing loans and proceeds from maturities of
mortgage-backed securities and other investment securities. For additional
information about cash flows from the Bank's operating, financing and investing
activities, see the Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements.
At September 30, 1997, the Bank had outstanding $19.4 million in
commitments to originate and purchase loans, $5.5 million to purchase investment
securities and $28.3 million in commitments under unused lines of credit for
commercial business loans. At the same date, the total amount of certificates of
deposit which are scheduled to mature by September 30, 1998 was $218.0 million.
The Bank believes that it has adequate resources to fund commitments as they
arise and that it can adjust the rate on savings certificates to retain deposits
in changing interest rate environments. If the Bank requires funds beyond its
internal funding capabilities, advances from the FHLB of New York and borrowings
from correspondent banks are available as an additional source of funds. At
September 30, 1997, the Bank had $30.0 million of borrowings, which mature in
January 2000. See "Business of the Bank- Sources of Funds Borrowings".
The Bank is required to maintain specified amounts of capital pursuant
to federal law and regulations promulgated thereunder by the OTS. The capital
standards generally require the maintenance of regulatory capital sufficient to
meet a tangible capital requirement, a core capital requirement and a risk-based
capital requirement. At September 30, 1997, the Bank's tangible and core capital
totaled $97.2 million, or 15.5%, of adjusted total assets, which exceeded the
minimum requirements at that date by approximately $87.8 million and $78.4
million, respectively, or 14.0% and 12.5%, respectively, of adjusted total
assets. The Bank's risk-based capital totaled $100.4 million at September 30,
1997, or 26.5%, of risk-weighted assets, which exceeded the current requirement
of 8% by approximately $70.1 million, or 18.5%, of risk-weighted assets. See
"Historical and Pro Forma Capital Compliance."
Impact of New Accounting Standards
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. These standards are based on consistent application of a
financial-component approach and focuses on control. Under this approach, after
a transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS is effective for transfers occurring after December 31, 1996
and has been applied prospectively.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," an amendment of
SFAS 125. SFAS 127 defers for one year the effective date of portions of SFAS
125 that address secured borrowings and collateral for all transactions.
Additionally, SFAS 127b defers for one year the effective date of transfers of
financial assets that are part of repurchase agreements, securities lending and
similar transactions. The adoption of SFAS 125 and SFAS 127 is not expected to
have a material effect on the Mid-Tier Holding Company's consolidated financial
statements.
Statement of Financial Accounting Standards No. 128, "Earnings per
share" (SFAS 128) establishes standards for computing and presenting earnings
per share (EPS) and applies to entities with publicly held common stock or
potential common stock. SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. SFAS 128 requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the dilute EPS
computation. SFAS 128 is effective for financial statements issued for periods
ending after December 14, 1997, including interim periods, earlier application
is not permitted.
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<PAGE>
SFAS 128 also requires restatement of all prior period EPS data presented. SFAS
128 is not expected to have a material effect on the Mid-Tier Holding Company's
reported earnings per share. The Bank adopted SFAS 128 in 1997. Per share
amounts for prior periods have been restated. The adoption of SFAS 128 did not
have a material effect on the Bank's reported earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This Statement is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. The Mid-Tier Holding Company has not determined the impact that this
Statement will have on its reporting of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This Statement established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also established standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This Statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. This Statement is not expected to change the reporting
requirements of the Mid-Tier Holding Company.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets
and liabilities are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
does the effect of inflation.
Capability of the Bank's Data Processing Hardware to Accommodate the Year 2000
Like many financial institutions the Bank relies upon computers for the
daily conduct of its business and for data processing generally. There is
concern among industry experts that on January 1, 2000 computers will be unable
to "read" the new year and there may be widespread computer malfunctions. The
Bank generally relies on independent third parties to provide data processing
services to the Bank, and has been advised by its data processing service center
that the issue has been addressed. The Bank recognized that a comprehensive and
coordinated plan of action was needed to ensure 100% readiness to perform Year
2000 processing. A Year 2000 Committee has been formed to imitate and implement
the year 2000 project, policies, document readiness of TSB to accommodate year
2000 processing, and to track and test progress towards full compliance. The
Bank contracts with service bureaus to provide the majority of its data
processing and is dependent upon purchased application software. In house
applications are limited to wordprocessing and spreadsheet functions. The Bank
is in the process of ensuring that external vendors and servicers are adequately
addressing the system and software issues related to the year 2000 by obtaining
written system certifications that the system are fully Year 200 compliant or
that the vendor has a plan to become fully compliant in the very near future.
Beginning in the 3rd quarter of 1998, the Bank will coordinate with primary
servicer end-to-end tests which allow the bank to simulate daily processing on
sensitive century dates. In the evaluation, the bank will ensure that critical
operations will continue if servicers or vendors are unable to achieve the year
2000 requirements. Upon the completion of the system inventory and vendor
certification, the committee will identify critical applications and develop
detailed plans for hardware/system upgrades and system replacements where
necessary. All upgrades are scheduled to be implemented by December 31, 1998 to
allow a full year for system testing.
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<PAGE>
BUSINESS OF THE BANK
General
The Bank has traditionally operated as a community-oriented savings
institution providing mortgage loans and other traditional financial services to
its local community. The Bank is primarily engaged in attracting deposits from
the general public through its offices and using those funds to originate loans
secured by one- to four-family residences primarily located in Mercer and
Burlington Counties where the Bank's offices are located, as well as in
neighboring Bucks County, Pennsylvania. In recent years the Bank has
substantially increased its portfolio of mortgage loans secured by multi-family
and commercial real estate, commercial business loans, consumer loans and home
equity and property improvement loans. The Bank also has a securities portfolio
primarily consisting of U.S. Treasury and federal government agency obligations,
corporate and municipal bonds and mortgage-backed securities issued by federal
agencies.
Market Area
The Bank conducts business through its 14 branch offices located in the
central New Jersey counties of Mercer, Burlington and Ocean, and a trust
services subsidiary located in Ocean County, New Jersey. The Bank's market area
for loans includes neighboring Bucks County, Pennsylvania which borders to the
west of Mercer County, New Jersey. Lawrenceville, New Jersey, where the Bank is
headquartered, is located in Mercer County which had a population of
approximately 326,000 according to the 1990 Census. Population is forecasted to
be 368,000 by 1999. Ocean County, which is located along the central New Jersey
shore, is among the fastest growing population areas in New Jersey. Ocean
County's population is comprised of a significant number of retired residents.
The Bank's market area is both urban and suburban. Trenton, which is in
Mercer County, is the capital of the State of New Jersey. The two largest
employers in Mercer County are the State of New Jersey and Princeton University.
Other large employers in the Bank's market area include Lockheed Martin,
Princeton Medical Center, Bristol-Myers Squibb, N.J. Manufacturer, Helene Fuld
Medical and Educational Testing Services.
The economy in the Bank's market area economy has remained relatively
stable in recent years. The unemployment rates in Mercer and Burlington Counties
were 5.7% and 5.2%, respectively during 1996.
Lending Activities
Loan Portfolio Composition. The principal components of the Bank's loan
portfolio are mortgage loans secured by one- to four-family residential,
commercial, and multi-family residential real estate. In addition, the Bank's
loan portfolio includes non-mortgage loans which include home equity loans,
commercial business loans, and other consumer loans. At September 30, 1997, the
Bank's total loans receivable totaled $401.0 million, of which $242.4 million,
or 60.4%, were one- to four-family residential real estate mortgage loans, $40.3
million, or 10.1%, were commercial and multi-family residential real estate
loans, $33.9 million, or 8.5%, were home equity loans, $62.2 million, or 15.5%,
were commercial business loans, and $22.2 million, or 5.5%, were other consumer
loans.
As a federally chartered savings bank, the Bank has general authority
to originate and purchase loans secured by real estate located throughout the
United States. Notwithstanding this nationwide lending authority, the mortgage
loans of the Bank are primarily secured by properties located in Mercer,
Burlington and Ocean Counties, New Jersey, and Bucks County, Pennsylvania.
55
<PAGE>
Loan Portfolio Composition. The following table sets forth information
regarding the composition of the Bank's loan portfolio by type of loan at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
At September 30, ---------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars In Thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family real estate.................... $242,374 60.4% $239,470 62.5% $227,717 74.0% $228,133 78.3%
Commercial and multi-family residential real estate 40,305 10.1 53,415 14.0 27,827 9.0 23,833 8.2
------ ---- -------- ------ ------ ----- -------- -----
Total mortgage loans........................... 282,679 70.5 292,885 76.5 255,544 83.0 251,966 86.5
-------- ----- ------- ---- -------- ----- -------- ----
Non-mortgage loans:
Home equity loans (1).............................. 33,914 8.5% 28,138 7.3 21,833 7.1 22,043 7.6
Commercial business loans.......................... 62,245 15.5 34,486 9.0 11,573 3.8 8,998 3.1
Other consumer loans (2)........................... 22,195 5.5 27,478 7.2 18,783 6.1 8,256 2.8
-------- --- ------- ---- -------- ----- -------- ----
Total non-mortgage loans......................... 118,354 29.5 90,102 23.5 52,189 17.0 39,297 13.5
-------- ---- ------- ---- -------- ----- -------- ----
Total loans.................................. 401,033 100.00% 382,987 100.0% 307,733 100.0% 291,263 100.0%
====== ===== ===== =====
Net deferred costs (fees).......................... 18 226 104 (117)
Premiums (discounts)............................... 17 (24) 23 --
Allowance for possible loan losses................. (3,202) (2,901) (1,767) (1,642)
------- -------- --------
Net loans........................................ $397,866 $380,288 $306,093 $289,504
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
1993 1992
---- ----
Amount Percent Amount Percent
(Dollars In Thousands)
Mortgage loans:
<S> <C> <C> <C> <C>
One- to four-family real estate.................... $206,585 80.2% $163,322 80.3%
Commercial and multi-family residential real estate 18,972 7.4 12,732 6.3
-------- ----- -------- ----
Total mortgage loans........................... 225,557 87.6 176,054 86.6
-------- ----- -------- ----
Non-mortgage loans:
Home equity loans (1).............................. 19,117 7.4 16,673 8.2
Commercial business loans.......................... 7,300 2.9 8,023 4.0
Other consumer loans (2)........................... 5,513 2.1 2,488 1.2
-------- ----- -------- ----
Total non-mortgage loans......................... 31,930 12.4 27,184 13.4
-------- ----- -------- ----
Total loans.................................. 257,487 100.0% 203,328 100.0%
===== =====
Net deferred costs (fees).......................... 360 715
Premiums (discounts)............................... -- --
Allowance for possible loan losses................. 1,471 634
-------- --------
Net loans........................................ $255,656 $201,889
======== ========
</TABLE>
- ------------------------------------
(1) Includes home equity credit lines and second mortgages. (2) Includes student
loans, installment loans and auto loans.
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<PAGE>
Contractual Principal Repayments and Interest Rates. The following
table sets forth the maturity of the Bank's loan portfolio at September 30,
1997. Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due Within Due 1-3 Due 3-5 Due 5-10 Due 10+
One Year Years Years Years Years Total
-------- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total mortgage loans......... $12,602 $14,354 $44,479 $68,862 $142,382 $282,679
Total non-mortgage loans..... 53,025 13,747 32,359 10,754 8,469 118,354
------- ------- ------- ------- -------- --------
Total loans.................. $65,627 $28,101 $76,838 $79,616 $150,851 $401,033
======= ======= ======= ======= ======== ========
</TABLE>
Fixed- and Adjustable-Rate Loan Schedule. The following table sets
forth the dollar amount of total loans due after one year from September 30,
1997 which have fixed interest rates or which have floating or adjustable
interest rates.
Fixed Adjustable
Rates Rates Total
----- ----- -----
(In Thousands)
Mortgage loans...... $ 102,287 $ 167,790 $ 270,077
Non-mortgage loans.. 49,179 16,150 65,329
----------- --------- ----------
Total loans......... $ 151,466 $ 183,940 $ 335,406
=========== ========= ==========
Scheduled contractual amortization of loans does not reflect the
anticipated actual term of the Bank's loan portfolio. The average life of loans
is substantially less than their contractual terms because of prepayments and
due on sale clauses, which give the Bank the right to declare a conventional
loan immediately due and payable in the event, among other things, that borrower
sells the real property subject to the mortgage.
Loan Originations and Underwriting. The lending activities of the Bank
are subject to written, non-discriminatory, underwriting standards and the loan
origination procedures established by the Bank's Board of Directors. Loan
originations are obtained by a variety of sources, including referrals from real
estate brokers, developers, builders, existing customers, newspaper, radio,
periodical advertising and walk-in customers. Loan applications are taken by
lending personnel, and the loan department supervises the obtainment of credit
reports, appraisals and other documentation involved with a loan. Property
valuations are performed by one of a list of licensed independent certified
appraisers approved annually by the Board of Directors. The Bank requires title
insurance on nearly all first mortgage loans secured by real estate. Hazard
insurance is also required on all secured property and flood insurance is
required if the property is within a designated flood plain.
The Bank's loan approval process assesses the borrower's ability to
repay the loan and the adequacy of the value of the property that will secure
the loan. A loan application file is first reviewed by a loan officer of the
Bank and then is submitted for approval to an officer with specific delegated
authority from the Board of Directors to approve that type of loan up to a
certain amount. The legal lending limit of the Bank at September 30, 1997 was
$16.2 million. In March of 1996, the Board of Directors approved an increase in
the internal lending limit to one borrower to $5.0 million from $2.5 million,
and an increase in the maximum non-commercial mortgage loan limit to $1.0
million from $500,000. In general, the maximum home equity loan the Bank will
make is $100,000 and the maximum installment (automobile) loan the Bank will
make is $50,000. The Bank can exceed these limitations on a case-by-case basis
and intends to reevaluate the limitations after the completion of the
Conversion.
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<PAGE>
The following table shows loans originated, purchased, loan reductions
and the net change in the Bank's loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------------- ----------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable at beginning of period..... $ 382,987 $ 307,733 $ 307,733 $ 291,263 $257,487
Originations:
Residential............................... 16,875 36,159 42,318 23,363 54,777
Commercial real estate and multi-family .. 11,610 2,585 4,142 8,811 8,025
Commercial business loans................. 25,311 11,142 14,474 5,307 6,131
Home equity............................... 9,290 8,321 11,578 6,662 10,055
Other..................................... 9,903 14,238 16,787 16,375 6,555
---------- ---------- ---------- ---------- --------
Total originations...................... 72,989 72,445 89,299 60,518 85,543
Purchased residential mortgage loans........ -- 1,534 1,534 5,038 --
Loans acquired.............................. -- -- 48,229 -- --
Transfer of mortgage loans to foreclosed
real estate............................... (274) (89) (682) -- (77)
Repossession of assets in lieu of loans..... (100) (21) (41) (34) --
Net charge offs............................. (1,187) (26) (52) (25) (9)
Repayments.................................. (53,382) (44,280) (63,033) (49,027) (51,681)
---------- ---------- ---------- ---------- --------
Net loan activity........................... 18,046 29,563 75,254 16,470 33,776
---------- ---------- ---------- ---------- --------
Total loans receivable at end of period $ 401,033 $ 337,296 $ 382,987 $307,733 $291,263
========== ========== ========== ======== ========
</TABLE>
One- to Four-Family Real Estate Loans. The primary lending activity of
the Bank is the origination of loans secured by first mortgage liens on one- to
four-family residences. At September 30, 1997, $242.4 million, or 60.4%, of the
Bank's total loan portfolio consisted of one- to four-family real estate loans.
The loan-to-value ratio, maturity and other provisions of the loans
made by the Bank generally have reflected the policy of making less than the
maximum loan permissible under regulations in accordance with sound practices,
market conditions and underwriting standards established by the Bank. The Bank's
lending policies on one- to four-family owner occupied real estate loans
generally limit the maximum loan-to-value ratio to 80% of the lesser of the
appraised value or purchase price of the property and 75% of the appraised value
or purchase price on condominiums.
As of September 30, 1997, the Bank offered 30-year fixed and adjustable
rate mortgage loans on one- to four-family residences. The Bank began to
originate 30-year fixed-rate mortgage loans in early 1996. All residential
mortgage loans are amortized on a monthly basis with principal and interest due
each month. These loans include "due on sale" clauses, which are provisions
giving the Bank the right to declare a loan immediately due and payable in the
event the borrower sells or otherwise disposes of the real property subject to
the mortgage. The Bank enforces due on sale clauses to the extent permitted
under applicable laws. Substantially all of the Bank's residential mortgage loan
portfolio consists of conventional loans.
The Bank offers adjustable rate one- to four-family real estate loans,
originated directly, which are fully amortizing loans with contractual
maturities of up to 30 years. These loans have interest rates which are
scheduled to adjust in accordance with designated indices. Initial rates are
fixed for one, three, five or seven years before adjusting annually. The Bank
currently offers its adjustable rate mortgage loans with a 2% cap on the rate
adjustment per year and a 6% rate adjustment cap over the life of the loan. The
Bank's underwriting standards for one year adjustable rate mortgages requires
that it assess a potential borrower's ability to make principal and interest
payments based on the initial note rate or the current index rate, whichever is
greater at the time of application. Adjustable rate mortgages with initial
payment periods greater than one year utilize the initial note rate. The Bank's
adjustable rate mortgage loans are not convertible by their terms into fixed
rate loans, do not contain prepayment penalties and do not produce negative
amortization. The Bank's loans are frequently underwritten according to criteria
which do not conform to those established by Fannie Mae or Freddie Mac. Although
this may prohibit the sale of loans in the secondary market to these entities,
management still considers the Bank's portfolio very salable to other investors,
and
58
<PAGE>
may consider selling loans in the secondary market in the future. However, the
Bank has historically originated loans for its own portfolio.
Commercial and Multi-family Residential Real Estate Mortgage Loans. At
September 30, 1997, $40.3 million, or 10.1%, of the Bank's total loan portfolio
consisted of loans secured by multi-family and commercial real estate. The
Bank's multi-family and commercial mortgage loans include primarily loans
secured by apartment buildings, small office buildings and small retail
establishments. Substantially all of the Bank's multi-family and commercial
mortgage loans are secured by properties located in the Bank's primary market
area. Management believes that multi-family and commercial mortgage loans will
continue to be an integral component of the Bank's loan portfolio. Originations
of multi-family and commercial mortgage loans amounted to $11.6 million, $4.1
million, $8.8 million and $8.0 million, or 12.0%, 4.6%, 14.6% and 9.4% of total
loan originations during the nine months ended September 30, 1997 and during
fiscal 1996, 1995 and 1994, respectively.
The Bank originates both fixed and adjustable rate multi-family and
commercial mortgage loans. The Bank currently offers multi-family and commercial
mortgage loans with terms generally up to ten years amortizing over no more than
a 20-year period, with no more than five years at a fixed rate of interest.
Pursuant to the Bank's underwriting standards, it offers multi-family and
commercial mortgage loans with loan-to-value ratios generally up to 70% of the
lower of the purchase price or an independent appraisal. Those standards also
require that the cash flow from the collateral, after consideration of expense
and vacancy assumptions, be generally at least 120% of the debt service.
The Bank requires appraisals of substantially all properties securing
multi-family and commercial real estate loans. All appraisals are performed by
an independent licensed appraiser from a list of appraisers approved by the
Bank. In originating multi-family and commercial mortgage loans, the Bank
considers the value of the property, the credit history of the borrower, cash
flow of the project, location of the real estate and the quality of management
involved with the property. Multi-family and commercial mortgage loans to
corporations are generally guaranteed by the principals. The Bank may also
require an environmental audit on such loans.
Multi-family and commercial mortgage lending is generally considered to
involve a higher degree of credit risk than one- to four-family residential
lending. Such lending typically involves large loan balances concentrated in a
single borrower or groups of related borrowers. In addition, the payment
experience on loans secured by income-producing properties is typically
dependent on the successful operation of the related real estate project and
thus may be subject to a greater extent to adverse conditions in the real estate
market or in the economy generally.
The Bank also offers construction loans on commercial real estate
properties. Construction financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate because of the uncertainties of construction, including the possibility
of costs exceeding the initial estimates. Construction lending is generally
limited to the Bank's primary lending area. Construction loans are structured to
be converted to permanent loans at the end of the construction phase, which
typically is no more than nine months. Construction loans have terms which
generally match the non-construction loans then offered by the Bank except that
during the construction phase the borrower only pays interest on the loan.
Home Equity Loans. The Bank offers home equity fixed rate, home equity
credit line and FHA Title I property improvement loans. The home equity
portfolio amounted to $33.9 million, or 8.5%, of the total loan portfolio as of
September 30, 1997. Of this amount, $24.2 million, or 71.3%, were in the form of
home equity fixed rate loans; $8.2 million, or 24.3% were in the form of home
equity credit lines; and $1.5 million, or 4.4% were in the form of second
mortgages. FHA Title I property improvement loans amounted to $217,000.
The home equity fixed rate loan is available on any owner-occupied one-
to four-family home, townhouse, or condominium in the Bank's lending area. It is
a fixed-rate mortgage which is based on the equity in the home, and is generally
secured by a first or second mortgage on the residence. Loan amounts generally
range from $5,000 to $100,000 (up to 75% of the appraised value of the home less
any outstanding senior mortgage/lien). The current maximum term is 180 months.
59
<PAGE>
The home equity credit line is available on any owner-occupied one- to
four-family home, townhouse, or condominium in the Bank's lending area. It is a
variable rate mortgage which is based on the equity in the home, and is
generally secured by a first or second mortgage on the residence. Loan amounts
generally range from $5,000 to $100,000 (up to 75% of the appraised value of the
home less any outstanding senior mortgage/lien).
The FHA Title I property improvement loan is a fixed-rate installment
loan available on any owner-occupied one- to four-family home in the Bank's
lending area. Under the Title I program, the Bank makes loans from their own
funds to eligible borrowers to finance property improvements, and the U.S.
Department of Housing and Urban Development ("HUD") insures the Bank against
loss if the borrower(s) defaults. Title I loans are not government loans or
grants, and are not low interest-rate loans. HUD does not lend money or regulate
interest rates. Currently, the maximum loan amount is $25,000, and the maximum
term is 180 months. Any loan amount over $7,500 is secured by a mortgage on the
property. The Bank conducts an on-site inspection on any property improvement
loan where the principal obligation is $7,500 or more, and where the borrower(s)
fails to submit a completion certificate.
The second mortgage portfolio consists of purchased notes secured by
second mortgages on real estate located throughout New Jersey. The purchases
occurred between 1983 and 1991; however, the consumer lender is still servicing
the portfolio, pursuant to the original agreement. The portfolio is 100%
guaranteed by the consumer lender.
Other Consumer Loans. Subject to the restrictions contained in federal
laws and regulations, the Bank also is authorized to make loans for a wide
variety of personal or consumer purposes. As of September 30, 1997, $22.2
million, or 5.5%, of the Bank's total loan portfolio, consisted of consumer
loans (this figure does not include home equity fixed-rate, home equity credit
line, FHA Title I home improvement loans and second mortgage loans). The primary
component of the Bank's consumer loan portfolio was $20.3 million of indirect
and direct automobile loans which are no longer being originated and are being
allowed to mature. The servicer of these loans established dealer agreements,
application processing and credit underwriting, documentation and legal support,
loan billing and accounting, customer service, full collection support, and
management reporting. The servicer made preliminary underwriting decisions and
made recommendations according to the Bank's underwriting criteria and the final
credit decision was made by the Bank.
Automobile loans generally involve more credit risk than mortgage loans
because of the type and nature of the collateral. In addition, consumer lending
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness, and
personal bankruptcy. In many cases, any repossessed collateral resulting from a
defaulted consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of depreciation and improper repair and
maintenance of the underlying security. See "Management's Discussion and
Analysis of Results of Operations--Comparison of Results of Operation--Provision
for Loan Losses."
The Bank also has collateral loans secured by deposits, which as of
September 30, 1997 amounted to $1.1 million. The collateral deposit loans are
originated through the branches. The minimum loan amount is $1,000, and the
maximum loan-to-value is 90% of the principal deposit balance. The loan is
priced at 3% over the savings instrument rate. Deposit loans are payable on
demand. However, payment of interest is due quarterly and payment to the loan
principal can be made at any time provided the quarterly interest has been paid.
The Bank also has personal loans (secured and unsecured) and overdraft
protection accounts, which as of September 30, 1997 totaled $321,000.
Commercial Business Loans. Commercial business loans are generally
provided to various types of closely held businesses located principally in the
Bank's primary market area. The Bank's commercial business loans may be
structured as short-term self-liquidating time notes, revolving credits, and
term loans. Time notes generally have terms of less than one year to accommodate
seasonal peaks and valleys in the borrower's business cycle. Commercial business
term loans generally have terms of seven years or less and interest rates which
float in accordance with the prime rate, although the Bank also originates
commercial business loans with fixed rates of interest. The Bank's commercial
loans generally are secured by equipment, machinery or other corporate assets
including real estate and
60
<PAGE>
receivables but may be unsecured. The Bank generally obtains personal guarantees
from the principals of the borrower with respect to all commercial business
loans.
The Bank, through its subsidiary, TSBusiness Finance Corporation
("TSBF"), provides secured lines of credit for businesses where conventional
financing is unavailable or inadequate. TSBF's borrowing relationships include
companies involved in manufacturing, wholesaling, distribution and service
companies. Credit accommodations range from $500,000 to $5,000,000 for
businesses in New Jersey and the greater Delaware Valley.
Commercial business loans generally are deemed to entail significantly
greater credit risk than that which is involved with residential real estate
lending. The repayment of commercial business loans typically is dependent on
the successful operations and income of the borrower. Such risks can be
significantly affected by economic conditions. In addition, commercial business
lending generally requires substantially greater oversight efforts compared to
residential real estate lending.
As of September 30, 1997, the Bank had $62.2 million or 15.5% of the
total loan portfolio secured by commercial business loans outstanding.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank generally receives loan origination fees or "points" for
originating loans. Loan points are a percentage of the principal amount of the
mortgage loan and are charged to the borrower in connection with the origination
of the loan. In accordance with SFAS No. 91, which deals with the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as an
adjustment to the yield of such loans over their contractual life. The increase
in net deferred costs is a result of substantial originations of auto loans
which have a net cost associated with their origination and minimal loan points
being generated from mortgage loans.
Trust Services
The Bank recently began providing trust services through its
wholly-owned subsidiary, Manchester Trust. Manchester Trust currently offers
trust services through its main office in Manchester Township, a fully-staffed
branch office in the Bank's corporate headquarters in Lawrenceville, New Jersey
and a mini branch in Tinton Falls, New Jersey. Manchester Trust provides a full
line of trust and investment services, including living trusts, investment
advisory and investment management accounts, estate settlement services, 401(k)
and other retirement plan services and estate planning. As of September 30,
1997, Manchester Trust managed funds totaling more than $165.0 million.
Asset Quality
Delinquent Loans. The following table sets forth information regarding
number and total balance of loans delinquent 30 days to 59 days, 60 days to 89
days and 90 days or more as of September 30, 1997.
<TABLE>
<CAPTION>
Commercial
Mortgage Business Consumer Total Loans
-------------- -------------- -------------- --------------
Number Amount Number Amount Number Amount Number Amount
(Dollars in Thousands)
Loans delinquent for:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days................... 26 $1,774 51 $1,382 74 $ 360 151 $3,516
60-89 days................... 7 500 15 660 18 61 40 1,221
90 days and over............. 48 2,788 38 1,166 7 109 93 4,063
----- ------ ----- ------ ------ ------ ----- ------
Total delinquent loans..... 81 $5,062 104 $3,208 99 $ 530 284 $8,800
===== ====== ===== ====== ====== ====== ===== ======
</TABLE>
Non-Performing Assets. The loan portfolio is reviewed on a regular
basis by management and, in addition, the commercial business loan portfolio is
reviewed periodically by an independent loan review consulting firm. The loans
are placed on a non-accrual status when, in the opinion of management, there is
reasonable probability of loss or principal or the collection of additional
interest is deemed insufficient to warrant further accrual. Generally, the
Bank's loans are placed on a non-accrual status when a default of principal or
interest has existed for a period of 90
61
<PAGE>
days except when, in the opinion of management, the collection of the principal
or interest is reasonably anticipated or adequate collateral exists. In
addition, the Bank places any loan on non-accrual if any part of it is
classified as doubtful or loss or if any part has been charged to the allowance
for loan losses. When a loan is placed on non-accruing status, total interest
accrued and unpaid to date is reversed.
Real estate owned consists of property acquired through formal
foreclosures and acquired by deed in lieu of foreclosure, and is recorded at the
lower of cost or fair value. Write-downs from cost to fair value which are
required at the time of foreclosure are charged to the allowance for loan
losses. After transfer, the property is carried at the lower of cost or fair
value as determined by an independent appraisal, less estimated selling
expenses. Adjustments to the carrying value of such properties that result from
subsequent declines in value are charged to operations in the period in which
the declines occur. At September 30, 1997, the Bank had one property classified
as real estate owned.
As part of the acquisition of BCB on October 1, 1996, the Bank acquired
BCB's loan portfolio. BCB's underwriting standards and related risk
characteristics of the loan portfolio differed from those of the Bank. The
addition of this portfolio has increased the Bank's non-performing loan
portfolio and negatively effected certain coverage ratios. However, management
believes that the Bank's overall asset quality remains strong. The Bank
continually reviews the quality of the loan portfolio and engages an outside
consultant to perform routine reviews of the portfolio on a quarterly basis.
Management believes that any further negative effects of the BCB merger on
non-performing loans will be in the ordinary course of business, and will be
consistent with the operation of a normal commercial loan portfolio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Provision for Loan Losses." Management believes that the allowance
for loan losses is adequate based on historical experience, the volume and type
of lending conducted by the Bank, the amount of non-performing loans, general
economic conditions and other factors relating to the Bank's loan portfolio.
However, there can be no assurance that actual losses will not exceed estimated
amounts.
The following table sets forth information as of September 30, 1997,
December 31, 1996, 1995 and 1994 concerning non-performing assets in dollar
amounts and as a percentage of the Bank's net loans and total assets.
<TABLE>
<CAPTION>
At September At December 31,
------------ ------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Dollars In Thousands)
Non-accruing loans less than 90 days delinquent
<S> <C> <C> <C> <C>
Mortgage.................................................. $ 200 $ -- $ -- $ --
Non-mortgage.............................................. 1,237 -- -- --
Non-accruing loans 90 days or more delinquent:
Mortgage.................................................. 2,055 1,756 1,008 994
Non-mortgage.............................................. 985 1,195 114 31
Troubled debt restructured loans............................ 192 206 1,052 1,044
Accruing loans 90 days or more delinquent:
Mortgage loans............................................ 733 602 10 448
Commercial business loans................................. 287 151 -- --
Consumer loans............................................ 3 -- -- --
--------- --------- --------- --------
Total non-performing loans.................................. 5,692 3,910 2,184 2,517
Foreclosed assets........................................... 142 253 34 77
--------- --------- --------- --------
Total non-performing assets................................. $ 5,834 $ 4,163 $ 2,218 $ 2,594
========= ========= ========= ========
Total non-performing loans as a percentage
of net loans.............................................. 1.43% 1.03% 0.71% 0.87%
========= ========= ========= ========
Total non-performing assets as a percentage
of total assets........................................... 0.91% 0.69% 0.43% 0.59%
========= ========= ========= ========
</TABLE>
Classified Assets. Federal regulations require that each insured
savings institution classify its assets on a regular basis. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of some
loss. An asset classified loss
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<PAGE>
is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. Another category designated "special
mention," although not a "classification," also must be established and
maintained for assets which do not currently expose an insured institution to a
sufficient degree of risk to warrant classification as substandard, doubtful or
loss. Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specific loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. Federal
examiners may disagree with an insured institution's classifications and amounts
reserved and have the authority to require a savings institution to classify
additional assets, or to change the classification of existing classified
assets, and, if appropriate, to establish additional reserves. At September 30,
1997, the Bank had $3.3 million of loans criticized as special mention, $6.4
million classified as substandard and $.6 million classified as doubtful or
loss. As of September 30, 1997, total classified assets, which includes
repossessed assets, amounted to $7.1 million or 1.09% of total assets.
Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated loan losses based upon an assessment (1) in the case of
residential loans, management's review of delinquent loans, loans in foreclosure
and market conditions, (2) in the case of commercial business loans and
commercial mortgage loans, when a significant decline in value can be identified
and (3) in the case of consumer loans, based on the assessment of risks inherent
in the loan portfolio. Although management uses available information to make
such determinations, future adjustments to allowances may be necessary based on
economic and market conditions and as a result of future examinations by
regulatory authorities, and net earnings could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial determinations. At September 30, 1997, the Bank's allowance for loan
losses, which includes a general valuation allowance, amounted to $3.2 million
compared to $2.9 million at December 31, 1996.
The following table sets forth an analysis of the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
At and for the Nine At and for
Months Ended September 30, the Year Ended December 31,
-------------------------- -------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- -------- -------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total loans outstanding $ 401,033 $ 337,296 $ 382,987 $307,733 $291,263 $ 257,487 $203,238
========= ========= ========= ======== ======== ========= ========
Average loans outstanding $ 388,318 $ 321,930 $ 337,780 $297,043 $282,068 $ 231,375 $187,839
========= ========= ========= ======== ======== ========= ========
Balance at beginning
of period 2,901 $ 1,767 $ 1,767 $ 1,642 $ 1,471 $ 634 $ 100
Charge-offs:
Mortgage loans........ (80) (57) (67) -- -- -- --
Consumer loans........ (164) (9) (34) (32) (23) -- --
Commercial business loans (1,069) (9) (9) -- -- (43) --
Recoveries.............. 126 49 58 7 14 -- 14
--------- --------- --------- --------- -------- -------- --------
Net charge-offs......... (1,187) (26) (52) (25) (9) (43) 14
Provision for loan losses 1,488 -- -- 150 180 880 520
Acquired allowance...... -- -- 1,186 -- -- -- --
--------- --------- --------- --------- -------- ======== ========
Balance at end of period $ 3,202 $ 1,741 $ 2,901 $ 1,767 $ 1,642 $ 1,471 634
========= ========= ========= ======== ======== ========= ========
Allowance for loan losses
as a percentage of total
loans outstanding 0.80% 0.52% 0.76% 0.57% 0.56% 0.57% 0.31%
======== ======== ======== ========= ========= ========= ========
Net charge-offs as a
percentage of average
loans outstanding..... 0.41% 0.01% 0.02% 0.01% 0.00% 0.02% 0.00%
========= ========= ======== ========= ======== ======== ========
Allowance for loan losses to
non-performing loans 56.25% 109.15% 74.19% 80.91% 65.24% 80.65% 38.35%
========= ========= ======== ======== ======== ======== ========
</TABLE>
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<PAGE>
The following table sets forth the allocation of allowance for loan
losses by loan category for the periods indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- ----------------------------------------------------
1997 1996 1995 1994
---------------- --------------- ---------------- ---------------
% of % of % of % of
Total Total Total Total
Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1)
------ -------- --------------- ------ -------- ---------------
(Dollars in Thousands)
Balance at end of period applicable to:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans.................................... $ 758 70.5% $ 906 76.5% $ 591 83.0% $ 593 86.5%
Consumer loans.................................... 959 14.0 877 14.5 610 13.2 453 10.4
Commercial business loans......................... 1,260 15.5 813 9.0 116 3.80 90 3.1
Unallocated....................................... 225 -- 305 -- 450 -- 506 --
------ ------ ----- ----- ------ ------ ------ -----
Total allowance for loan losses................. $3,202 100.0% $2,901 100.0% $1,767 100.0% $1,642 100.0%
====== ====== ====== ===== ====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
1993 1992
--------------- -----------------
% of % of
Total Total
Amount Loans(1) Amount Loans(1)
--------------- ------ --------
(Dollars in Thousands)
Balance at end of period applicable to:
<S> <C> <C> <C> <C>
Mortgage loans.................................... $ 519 87.6% $ 223 86.6%
Consumer loans.................................... 369 9.5 159 9.4
Commercial business loans......................... 73 2.9 32 4.0
Unallocated....................................... 510 -- 220 --
----- ------ ------ -----
Total allowance for loan losses................. $1,471 100.0% $ 634 100.0
====== ====== ====== =====
</TABLE>
- ------------------------------------
(1) Represents percentage of loans in each category to total loans.
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<PAGE>
Investment Activities
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposit at federally insured banks and savings institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest a portion of their
assets in commercial paper, corporate debt securities and mutual funds, the
assets of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. In addition, the Bank
has certain additional investment authority under OTS regulations as a result of
certain grandfathered powers permitted under the terms of the approval of its
conversion from state to federal charter.
The following table sets forth certain information relating to the
Bank's investment securities and mortgage-backed securities held to maturity and
securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
At September 30, -----------------------------------------------------------
1997 1996 1995 1994
------------------ ------------------ ------------------- --------------------
Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- ----- ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments and mortgage-backed securities
held to maturity:
United States Government Agency
obligations ............................$ 14,350 $14,321 $17,042 $16,907 $24,934 $24,928 $ 5,826 $ 5,666
Obligations of State and political
subdivisions ........................... 2,293 2,412 3,400 3,497 1,055 1,156 1,055 1,081
Federal Home Loan Bank stock.............. 3,386 3,386 3,089 3,089 2,864 2,864 2,495 2,495
Mortgage-backed securities................ 39,603 39,650 48,618 48,587 54,316 55,032 35,087 34,096
Other corporate bonds..................... 14,515 14,539 17,493 17,521 10,955 11,041 20,136 19,991
------- ------- ------- ------ ------ ------- ------- ------
Total investments held to maturity including
Federal Home Loan Bank stock........... 74,147 74,308 89,642 89,601 94,124 95,021 64,599 63,329
------- ------- ------- ------ ------ ------- ------- ------
Securities available for sale: (1)
United States Treasury securities......... 51,320 51,444 65,336 65,507 -- -- -- --
United States Government and Agency
obligations 46,067 46,386 9,924 9,767 75,955 76,653 51,958 50,866
Equity securities......................... 10 10 894 3,201 2,536 7,123 8,375 14,095
Mortgage-backed securities................ 15,072 15,221 -- -- -- -- -- --
Other bonds............................... 14,547 14,590 9,151 9,172 -- -- -- --
------- ------- ------- ------ ------ ------- ------- ------
Total securities available for sale 127,016 127,651 85,305 87,647 78,491 83,776 60,333 64,961
-------- ------- ------ ------ ------- ------- ------- -------
Total investments......................... $201,163 $201,959 $174,947 $177,248 $172,615 $178,797 $124,932 $128,290
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) The Bank adopted FASB No. 115 "Accounting for Investments" as of January 1,
1994 and transferred certain securities held to maturity to available for
sale. See the notes to the audited financial statements.
As of September 30, 1997, the Bank's investment securities held to maturity
portfolio had a carrying value of $74.1 million, of which $14.4 million were
securities issued by U.S. Agencies and other governmental subdivisions and $16.8
million were corporate and municipal bonds. As of that same date, the Bank's
securities available for sale portfolio had an estimated market value of $127.7
million, of which $97.8 million were securities issued by the U.S.
Treasury and federal government agencies, and $14.6 million were other bonds.
At September 30, 1997, $16.8 million, or 22.7%, of the $74.1 million of
total securities held to maturity by the Bank were scheduled to mature within
one year and had a weighted average yield of 5.79%. At September 30, 1997, $32.5
million, or 25.5%, of the $127.7 million of securities available for sale by the
Bank were scheduled to mature within one year and had a weighted average yield
of 5.85%.
65
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
amortized cost, market values and weighted average yields for the Bank's
investment portfolio at September 30, 1997.
<TABLE>
<CAPTION>
At September 30, 1997
-----------------------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years More than Ten Years
-------------------- --------------------- --------------------- ---------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments and mortgage-backed
securities held to maturity:
Mortgage-backed securities.......... $ 5,540 5.6% $ 21,884 6.7% $ -- --% $ 12,179 7.4%
Federal Home Loan Bank stock........ -- -- -- -- -- -- 3,386 --
United States Agency obligations 350 4.7 14,000 6.0 -- -- -- --
Obligations of State and political
subdivisions...................... 909 6.2 418 6.7 199 6.9 766 10.5
Other bonds......................... 10,009 5.9 3,156 6.3 1,349 7.5 -- --
------- -------- ------- --------
Total investments held to maturity $16,808 $39,458 $1,548 $16,331
======= ======= ====== =======
Securities available for sale:
Mortgage-backed securities.......... $ -- --% $ -- --% $ -- --% $ 15,071 7.4%
United States Treasury
securities........................ 26,186 5.8 25,134 6.0 -- -- -- --
United States agency obligations 300 5.1 299 7.4 45,468 7.2 -- --
Equity securities................... -- -- -- -- -- -- 10 --
Other bonds......................... 6,011 6.1 7,659 6.3 877 6.6 -- --
------- -------- ------- --------
Total securities available for sale $32,497 $33,092 $46,345 $15,081
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1997
--------------------------------
Total
--------------------------------
Weighted
Amortized Market Average
Cost Value Yield
---- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Investments and mortgage-backed
securities held to maturity:
Mortgage-backed securities.......... $39,603 $ 39,650 6.72%
Federal Home Loan Bank stock........ 3,386 3,386 --
United States Agency obligations 14,350 14,320 5.97
Obligations of State and political
subdivisions...................... 2,292 2,411 7.81
Other bonds......................... 14,514 14,539 6.12
------- --------
Total investments held to maturity $ 74,145 $74,308
======== =======
Securities available for sale:
Mortgage-backed securities.......... $15,071 $ 15,221 7.40%
United States Treasury
securities........................ 51,320 51,444 5.91
United States agency obligations 46,067 46,386 7.14
Equity securities................... 10 10 --
Other bonds......................... 14,547 14,589 6.24
------- --------
Total securities available for sale $127,015 $127,651
======== ========
</TABLE>
66
<PAGE>
Cash and Cash Equivalents. The Bank also had cash and cash equivalents
consisting primarily of cash due from banks and federal funds sold totaling
$20.9 million, and $13.2 million at December 31, 1996 and September 30, 1997,
respectively.
Mortgage-Backed Securities
The Bank has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by Freddie Mac, the Government National Mortgage
Association ("Ginnie Mae") or Fannie Mae. Mortgage-backed securities increase
the liquidity and the quality of the Bank's assets by virtue of their greater
liquidity compared to individual mortgage loans, the guarantees that back the
securities themselves and their ability to be used to collateralize borrowings
or other obligations of the Bank, including repurchase agreements. In addition,
at September 30, 1997, 20.3% of the Bank's mortgage-backed securities portfolio
consisted of pools of adjustable rate mortgages. Mortgage-backed securities of
this type serve to reduce the interest rate risk associated with changes in
interest rates. Also, 48.2% of the Bank's mortgage-backed securities consist of
five- to seven-year balloon maturities, providing further protection against
interest rate increases.
At September 30, 1997, the Bank's mortgage-backed securities in the
held to maturity category had a carrying value and estimated market value of
$39.6 million. Of the entire $53.8 million portfolio (including mortgage-backed
securities held to maturity and available for sale), $27.4 million was scheduled
to mature in five years or less and $27.3 million was scheduled to mature after
ten years. Due to prepayments of the underlying loan, the actual maturities of
mortgage-backed securities generally are substantially less than the scheduled
maturities. The mortgage-backed securities held to maturity include a valuation
allowance of $169,000 at September 30, 1997. These securities were designated as
available for sale portfolio on January 1, 1994 upon the adoption of SFAS No.
115 and were subsequently transferred to held to maturity on October 1, 1994.
The October 1, 1994 transfer was designed to more accurately reflect the Bank's
then current intent to hold these securities to maturity. The unrealized loss at
the time of the October 1, 1994 transfer is being amortized to equity over the
estimated life of the related mortgage-backed securities.
The $27.4 million of mortgage-backed securities held to maturity which
were scheduled to mature in five years or less at September 30, 1997 qualify for
regulatory liquidity and have fixed interest rates. Of the Bank's total
investment in mortgage-backed securities at September 30, 1997, $38.1 million
consisted of Freddie Mac certificates, $1.5 million consisted of Ginnie Mae
certificates and $15.2 million consisted of Fannie Mae certificates.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments. Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions. Borrowings may be used on
a short-term basis to compensate for reductions in the availability of
funds from other sources. They may also be used on a longer term basis for
specific leverage investment programs.
Deposits. The Bank's deposits are attracted principally from within the
Bank's primary market area through the offering of a broad selection of deposit
instruments, money market accounts, regular savings accounts, and term
certificate accounts. Deposit account terms vary, with the principal differences
being the minimum balance required, the time periods the funds must remain on
deposit and the interest rate.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal regulations. The Bank does
not advertise for deposits outside its primary market area and does not utilize
the services of deposit brokers.
67
<PAGE>
The following table sets forth the amount, percentage of total deposits
and the change in dollar amounts of the various types of deposit accounts
offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
At At December 31,
September 30, ------------------------------------------------------------------------
1997 1996 1995 1994
-------------------------- -------------------------- ------------------------- --------------
Amount Percent $ Change Amount Percent $ Change Amount Percent $ Change Amount Percent
------ ------- -------- ------ ------- -------- ------ ---------------- --------------
(Dollars in Thousands)
Certificates of deposit:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maturing within 12 months 218,046 44.2% $ 29,302 $188,744 38.4% $ 5,086 $183,658 44.7% $57,884 $125,774 33.3%
Maturing within 13-24 months 47,621 9.6 7,818 39,803 8.2 11,883 27,920 6.7 (8,517) 36,437 9.7
Maturing within 25-36 months 20,474 4.2 176 20,298 4.1 (7,455) 27,753 6.8 (2,341) 30,094 8.0
Maturing beyond 36 months 4,088 0.8 (43,613) 47,701 9.7 25,235 22,466 5.5 (9,747) 32,213 8.5
----- ------ -------- ------ ------ ------ ------- ------ ------ ------- ----
Total certificates of deposit 290,229 58.8 (6,317) 296,546 60.4 34,749 261,797 63.7 37,279 224,518 59.5
--------- ------ -------- ------- ------ -------- ------- ------ ------ ------- ----
Transaction accounts:
NOW......................... 14,955 3.0% (1,476) 16,431 3.3 6,876 9,555 2.3 38 9,517 2.5
Noninterest-bearing demand 27,982 5.7 2,616 25,366 5.2 14,566 10,800 2.6 1,405 9,395 2.5
Passbook statement.......... 95,132 19.3 (9,078) 104,210 21.2 11,464 92,746 22.6 (6,694) 99,440 26.3
Club accounts............... 1,069 0.2 800 269 0.1 50 219 0.1 7 212 0.1
Money market demand deposits 58,394 11.8 13,600 44,794 9.1 11,899 32,895 8.0 1,349 31,546 8.3
Other....................... 5,573 1.2 1,943 3,630 0.7 872 2,758 0.7 (173) 2,931 0.8
------- ---- ------- ------- ----- ------ ------ ---- ------- ------- ----
Total transaction accounts 203,105 41.2 8,405 194,700 39.6 45,727 148,973 36.3 (4,068) 153,041 40.5
-------- ----- ------- ------ ------ ------- ------- ------ -------
Total deposits.......... $493,334 100.0% $ 2,088 $491,246 100.0% $80,476 $410,770 100.0% $33,211 $377,559 100.0%
======== ===== ======= ======== ===== ======= ======== ===== ======= ======== =====
</TABLE>
The following table shows the interest rate and maturity information
for the Bank's certificates of deposit at September 30, 1997.
<TABLE>
<CAPTION>
Over 1 Over 2
1 Year Through Through Over 3
Interest Rate or Less 2 Years 3 Years Years Total
--------- --------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.01-4%........................... $ 3,624 $ 46 $ -- $ --$
3,670
4.01-5%............................. 40,463 3,366 5 7 43,841
5.01-6%............................. 166,700 42,069 7,107 4,053 219,929
6% and above........................ 7,259 2,140 13,362 28 22,789
-------- ------- -------- -------- --------
Total............................. $218,046 $47,621 $ 20,474 $ 4,088 $290,229
======== ======= ======== ======== ========
</TABLE>
The following table sets forth the scheduled maturities of the Bank's
certificates of deposit having principal amounts of $100,000 or more at
September 30, 1997.
Certificates
Maturity Period of Deposit
(In Thousands)
Three months or less...................... $ 7,183
Over three through six months............. 6,576
Over six through twelve months............ 6,802
Over twelve months........................ 6,137
----------
Total................................... $ 26,698
==========
68
<PAGE>
The following table sets forth the savings activities of the Bank
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
September 30, ------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Net decrease before
interest credited and assumption of liabilities ........ $ (10,460) $ (10,642) $ (17,773) $ (19,132)
Deposit liabilities acquired.............................. -- 73,177 33,974 --
Interest credited......................................... 12,548 17,941 17,010 12,851
--------- --------- --------- ---------
Net increase (decrease) in deposits....................... $ 2,088 $ 80,476 $ 33,211 $ (6,281)
========= ========= ========= ==========
</TABLE>
The following table sets out the average balances in the main
categories of the Bank's deposit base, for the periods indicated.
<TABLE>
<CAPTION>
December 31,
September 30, ---------------------------------------------------------
1997 1996 1995 1994
------------------ ----------------- ------------------- -------------------
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average certificates of deposit........... $289,656 5.35% $271,362 5.18% $251,932 5.16% $220,873 4.04%
-------- -------- -------- --------
Interest-bearing savings deposits......... 99,857 2.20 94,569 2.54 112,269 2.59 106,435 2.50
Money market accounts..................... 50,134 3.29 33,841 3.54 28,162 3.09 32,466 3.26
Demand deposit accounts................... 27,387 1.23 16,971 1.74 12,479 1.85 12,221 1.50
Other deposit accounts.................... 19,476 0.00 15,195 -- 11,303 -- 9,143 --
------- ------- ------ -------
Average core deposits..................... 196,854 2.12 160,576 2.43 164,213 2.44 160,265 2.44
------- ------- ------- -------
Total average deposits.................. $486,510 4.05% $431,938 4.15% $416,145 4.09% $381,138 3.37%
======== ======== ======== ========
</TABLE>
Borrowings. The Bank may obtain advances from the FHLB of New York upon
the security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending and investment.
In January of 1997, the Board of Directors approved a borrowing agreement with
Morgan Stanley & Co., Inc. Pursuant to the borrowing agreement, the Bank
borrowed $30.0 million at an interest rate of approximately 6.0% and for a term
of three years, and purchased a FNMA security that yields approximately 7.2%,
matures approximately ten years after the date of the purchase and is callable
after three years. Management may periodically recommend to the Board similar
borrowing opportunities.
Competition
The Bank faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, commercial banks and credit
unions located in central New Jersey, including many large financial
institutions which have greater financial and marketing resources available to
them. The Bank has eight branches in Mercer County, four in Burlington County
and two in Ocean County. In addition, the Bank has faced additional competition
for investors' funds from short-term money market securities and corporate
stocks and bonds. The ability of the Bank to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank competes for loans principally from other savings
institutions, commercial banks, and mortgage banking companies. The Bank
competes for loans principally through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers. TSBF
also markets asset-based lending products within the same geographic areas.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.
69
<PAGE>
As of June 30, 1996, 27 commercial banks, 69 credit unions, and 59
savings institutions maintained 568 branch offices in the Bank's market area.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, other savings
associations, and credit unions in its market area. The Bank expects continued
strong competition from such financial institutions in the foreseeable future,
including increased competition from "super-regional" banks entering the market
by purchasing large banks and savings banks, as well as institutions marketing
"non-traditional" investments. Many of these regional institutions have greater
financial and marketing resources available to them than does the Bank. As of
June 30, 1996, the Bank held approximately 1.4% of all deposits held by
commercial banks, credit unions, and savings associations in the Bank's market
area. The Bank competes for savings deposits by offering depositors a high level
of personal service and a wide range of competitively priced financial services.
The competition for real estate and other loans comes principally from
commercial banks, other savings institutions, and mortgage banking companies.
The Bank is one of a large number of institutions that compete for real estate
loans in the Bank's market area. This competition for loans has increased
substantially in recent years. Many of the Bank's competitors have substantially
greater financial and marketing resources available to them than does the Bank.
The Bank competes for real estate loans primarily through the interest rates and
loan fees it charges and advertising.
Properties
At September 30, 1997, the Bank conducted its business from its
corporate center in Lawrenceville, New Jersey, 14 full service branch offices
located in Mercer, Burlington and Ocean Counties, New Jersey and a trust office
in Ocean County, New Jersey. The aggregate net book value of the Bank's premises
and equipment was $6.8 million as of September 30, 1997. The following table
sets forth certain information regarding such offices at September 30, 1997.
Year Leased Lease Expiration Description/Address Opened Owned Date
<TABLE>
<CAPTION>
Description/Address Year Opened Leased/Owned Lease Expiration Date
- ------------------- ----------- ------------ ---------------------
<S> <C> <C> <C>
Administrative Office
134 Franklin Corner Road 1993 Owned
Lawrenceville, New Jersey
Branch Offices
Trenton Branch 1994 Leased July 31, 1999
33 West State Street Three 5-year options
Trenton, New Jersey
Ewing Branch 1976 Leased August 31, 2006
1980 North Olden Avenue One 10-year option
Trenton, New Jersey
Hamilton Branch 1977 Leased April 30, 2007
2465 South Broad Street One 10-year option
Trenton, New Jersey
Robbinsville Branch 1980 Owned
2371 Route 33 & 526
Robbinsville, New Jersey
Lawrenceville Branch 1990 Leased January 31, 2000
2495 Brunswick Avenue Two 5-year options
Lawrenceville, New Jersey
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Pennington Branch 1991 Owned
2583 Pennington Road
Pennington, New Jersey
Burlington Branch 1983 Owned
332 High Street
Burlington, New Jersey
Mt. Holly Branch 1989 Leased December 20, 2004
501 High Street Three 5-year options
Mt. Holly, New Jersey
Mercerville Branch 1991 Leased March 31, 2001
1750 Whitehorse-Mercerville Road One 5-year option
Mercerville, New Jersey
Leisure Village East 1995 Leased June 30, 2005
1 Dumbarton Drive Two 5-year options
Lakewood, NJ 08701
West Windsor Branch 1996 Leased August 31, 2006
1349 Princeton-Highstown Road Three 5-year options
Cranbury, NJ 08512
Burlington Branch 1988 Owned
1660 Beverly Road
Burlington, NJ 08016
Delanco Branch 1989 Leased August 31, 1999
Burlington Avenue & Coopertown Road Three 5-year options
Delanco, NJ 08075
Leisure Village West Branch 1997 Leased February 28, 2007
3--C Buckingham Drive Two 5-year options
Lakehurst, NJ 08733
Manchester Trust 1997 Leased May 31, 2000
2002 Route 70
Lakehurst, NJ 08733
</TABLE>
Legal Proceedings
There are various claims and lawsuits in which the Bank is
periodically involved incident to the Bank's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
Personnel
The Bank and its subsidiaries, TSBF and Manchester Trust had 128
full-time employees and 27 part-time employees at September 30, 1997. None of
these employees is party to a collective bargaining agreement, and the Bank
believes that it enjoys good relations with its personnel.
71
<PAGE>
REGULATION
As a federally chartered BIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of the Federal Home Loan Bank ("FHLB") system. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the BIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Holding Company and the Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which savings association
may engage. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to a single or related
group of borrowers. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus , and an additional 10% of unimpaired capital and surplus if
such loan is fully secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. The OTS by regulation has
amended the loans to one borrower rule to permit savings associations meeting
certain requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by qualifying
under the Code as a "domestic building and loan association." The Bank qualifies
as a domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and education loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At September 30, 1997, under the
expanded QTL test, approximately 73.6% of the Bank's portfolio assets were
qualified thrift investments.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution, such as the
Bank, that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could,
72
<PAGE>
after prior notice but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of: (i) 100% of its
net earnings to date during the calendar year plus the amount that would reduce
by one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year; or (ii)
75% of its net earnings for the previous four quarters; provided that the
institution would not be undercapitalized, as that term is defined in the OTS
Prompt Corrective Action regulations, following the capital distribution. Any
additional capital distributions would require prior regulatory approval. In the
event the Bank's capital fell below its fully-phased in requirement or the OTS
notified it that it was in need of more than normal s supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average liquidity ratio
for the quarter ended September 30, 1997 was 28.8%, which exceeded the then
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements.
Community Reinvestment Act and Fair Lending Laws. Savings association
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to complete with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received an
outstanding CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Holding
Company and any non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation
73
<PAGE>
fees and benefits and such other operational and managerial standards as the
agency deems appropriate. The federal banking agencies adopted a final
regulation and Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement the safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
Guidelines address internal controls and information systems; internal audit
system; credit underwriting; loan documentation; interest rate risk exposure;
asset growth; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest that risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and a risk-based
capital ratio in excess of 12% is not subject to the interest rate risk
component, unless the OTS determines otherwise. The rule also provides that the
Director of the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis. The OTS has postponed the date that the
component will first be deducted from an institution's total capital to provide
it with an opportunity to review the interest rate risk approaches taken by the
other federal banking agencies.
At September 1997, the Bank met each of its capital requirements, in
each case on a fully phased-in basis. See "Historical and Pro Forma Capital
Compliance" for a table which sets forth in terms of dollars and percentages
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the OTS tangible, leverage and risk-based capital requirements, the Bank's
historical amounts and percentages at September 30, 1997, and pro forma amounts
and percentages based upon the issuance of the shares within the Offering Range
and assuming that a portion of the net proceeds are retained by the Company.
Thrift Charter. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. Recent legislation required the
Treasury Department to prepare for Congress a comprehensive study on development
of a common charter for federal savings association and commercial banks; and,
in the event that the thrift charter was eliminated by January 1, 1999, would
require the merger of the BIF and the SAIF into a single deposit insurance fund
on that date. The Bank cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would not adversely affect the Bank and the Company.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
As of September 30, 1997, the Bank was considered "well capitalized."
See "Historical and Pro Forma Capital Compliance."
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such e action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLBs provide a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB-New York, is required to acquire
and hold shares of capital stock in that FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. As of September 30, 1997, the
Bank was in compliance with this requirement.
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The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $49.3 million, the reserve requirement is $1.5
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) of the portion of total transaction accounts in excess of $49.3
million. The first $4.4 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.
Holding Company Regulation
The Company. The Company will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company will
be required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a QTL.
See "--Federal Regulation of Savings Institutions--Qualified Thrift Lender Test"
for a discussion of the QTL requirements. Upon any non-supervisory acquisition
by the Company of another savings association, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject
to the prior approval of the OTS, and to other activities authorized by OTS
regulation. Recently proposed legislation would treat all savings and loan
holding companies as bank holding companies and limit the activities of such
companies to those permissible for bank holding companies. See "Risk
Factors--Regulatory Oversight and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
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The Mid-Tier Holding Company and the Mutual Holding Company. The Mutual
Holding Company and the Mid-Tier Holding Company are non-diversified mutual
savings and loan holding companies within the meaning of the HOLA, as amended.
As such, the Mutual Holding Company and the Mid-Tier Holding Company are
registered with the OTS and are subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Mutual Holding Company and the Mid-Tier Holding Company and
any non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution.
Pursuant to Section 10(o) of the HOLA and OTS regulations and policy, a
mutual holding company and a federally chartered mid-tier holding company may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company; one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest of any non-conforming
investments.
The HOLA prohibits a savings and loan holding company, including the
Mid-Tier Holding Company and the Mutual Holding Company, directly or indirectly,
or through one or more subsidiaries, from acquiring another savings institution
or holding company thereof, without prior written approval of the OTS. It also
prohibits the acquisition or retention of, with certain exceptions, more than 5%
of a non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
In addition, OTS regulations require the Mutual Holding Company to
notify the OTS of any proposed waiver of its right to receive dividends. It is
the OTS' recent practice to review dividend waiver notices on a case-by-case
basis, and, in general, not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the
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savings association determines that the payment of such dividend to the mutual
holding company is probable, an appropriate dollar amount is recorded as a
liability; (iv) the amount of any waived dividend is considered as having been
paid by the savings association in evaluating any proposed dividend under OTS
capital distribution regulations; and (v) in the event the mutual holding
company converts to stock form, the appraisal submitted to the OTS in connection
with the conversion application takes into account the aggregate amount of the
dividends waived by the mutual holding company.
Federal Securities Laws
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended ("Securities Act"), for the registration of
the Common Stock to be issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock will be registered with the SEC under the
Exchange Act. The Company will then be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of shares of the Common Stock
to be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
TAXATION
Federal Income Taxes
General. The Mid-Tier Holding Company and the Bank are, and the Company
will be subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Bank.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of September 30, 1997, was approximately
$2.5 million
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a 8 bank
charter.
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At September 30, 1997, the Bank's total federal pre-1988 reserve was
approximately $3.5 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At September 30, 1997, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated return, and corporations which own less
than 20% of the stock of a corporation distributing a dividend may deduct only
70% of dividends received or accrued on their behalf.
The Bank's federal tax return has not been audited by the Internal
Revenue Service for any of the last ten years.
State and Local Taxation
State of New Jersey. The Bank files New Jersey income tax returns. For
New Jersey income tax purposes, savings institutions are presented taxed at a
rate equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of net interest income on state and municipal obligations). The Bank is
not currently under audit with respect to its New Jersey income tax returns.
The Company will be required to file a New Jersey income tax return
because it will be doing business in New Jersey. For New Jersey tax purposes,
regular corporations are presently taxed at a rate equal to 9% of taxable
income. For this purpose, "taxable income" generally means Federal taxable
income subject to certain adjustments (including addition of interest income on
state and municipal obligation). However, if the Company meets certain
requirements, it may be eligible to elect to be taxed as a New Jersey Investment
Company at a tax rate presently equal to 2.25% (25% of 9%) of taxable income.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
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MANAGEMENT OF THE COMPANY
The Boards of Directors of the Company and the Mid-Tier Holding Company
are divided into three classes and are elected by the stockholders of the
Mid-Tier Holding Company and the Company, respectively, for staggered three year
terms, or until their successors are elected and qualified. One class of
directors, consisting of directors Breithaupt, Longstreth, Stokes and Truesdell
have terms of office expiring in 1998; a second class, consisting of directors
Pruitt, Reinhard and Trainer have terms of office expiring in 1999; and a third
class, consisting of director Sill has a term of office expiring in 2000. Their
names and biographical information are set forth under "Management of the
Bank--Directors."
The following individuals hold positions as executive officers of the
Company and the Mid-Tier Holding Company, or its subsidiary TSBusiness Finance,
as is set forth below opposite their names.
Name Position With the Company, the
Mid-Tier Holding Company of TS
Business Finance
Wendell T. Breithaupt........... Director, President and Chief
Executive Officer
Leo J. Bellarmino............... Executive Vice President Officer
Richard L. Gallaudet............ Vice President
Dean H. Lippincott.............. Vice President
Robert Russo.................... Vice President and Treasurer
Robert C. Hollenbeck............ Vice President and Corporate Secretary
Frank Sannella, Jr.............. President and Chief Executive Officer,
TSBusiness Finance
The executive officers of the Mid-Tier Holding Company and the Company
are elected annually and hold office until their respective successors have been
elected and qualified or until death, resignation or removal by the Board of
Directors.
Since the formation of the Mid-Tier Holding Company and the Company,
none of the executive officers, directors or other personnel has received
remuneration from the Mid-Tier Holding Company or the Company. Information
concerning the principal occupations, employment and compensation of the
directors and officers of the Mid-Tier Holding Company and the Company during
the past five years is set forth under "Management of the Bank."
MANAGEMENT OF THE BANK
Directors
The Bank's Board of Directors is composed of eight members. Directors
of the Bank are generally elected to serve for a three year period or until
their respective successors shall have been elected and shall qualify. The
following table sets forth certain information regarding the composition of the
Bank's Board of Directors as of September 30, 1997, including the terms of
office of Board members.
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<TABLE>
<CAPTION>
Positions
Held in the Director Current Term
Name Age Bank Since (1) to Expire
---- --- ------------ --------- ---------
<S> <C> <C> <C> <C>
John B. Sill, Jr. 75 Chairman 1977 2000
Wendell T. Breithaupt 64 Director, President and 1979 1998
Chief Executive Officer
Peter S. Longstreth 53 Director 1992 1998
George A. Pruitt 51 Director 1991 1999
George W. Reinhard 65 Director 1983 1999
Charles E. Stokes, III 67 Director 1978 1998
Raymond E. Trainer 50 Director 1986 1999
Miles W. Truesdell, Jr. 54 Director 1992 1998
</TABLE>
(1) Reflects initial appointment to the Board of Directors of the Bank's mutual
predecessor.
Executive Officers Who Are Not Directors
The following table sets forth information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
Positions
Held in the
Name Age Bank
---- --- --------
<S> <C> <C>
Leo J. Bellarmino 49 Executive Vice President
Richard L. Gallaudet 53 Vice President and Senior Lending Officer
Dean H. Lippincott 45 Vice President
Robert Russo 43 Vice President and Treasurer
Robert C. Hollenbeck 52 Vice President and Corporate Secretary
Frank Sannella, Jr. 60 President and Chief Executive Officer, TS Business Finance
</TABLE>
The principal occupation during the past five years of each director
and executive officer of the Bank is set forth below. All directors have held
their present positions for five years unless otherwise stated.
John B. Sill, Jr. is President of Ivins & Taylor, Inc., funeral
directors located in Trenton, New Jersey.
Wendell T. Breithaupt is President and Chief Executive Officer of the
Bank and serves also as a Director. He has served as President since 1981 and as
Chief Executive Officer since 1982. He has been a Director since 1979. He is a
Director, Chairman of the Executive Committee, and Chairman of the Mercer County
Chamber of Commerce. He is a member of the Mercer County Economic Development
Commission and serves as a trustee of the Drumthwacket Foundation, Inc. and
serves as a member of the Banking Advisory Board of the State of New Jersey. Mr.
Breithaupt serves as a director of RSI Retirement Systems, a New York
corporation.
Peter S. Longstreth is Managing Partner of Aegis Property Group, Ltd.,
a real estate development and project management company.
George A. Pruitt is President of Thomas A. Edison State College.
George W. Reinhard is President of Lester Fellows Co., Inc., an
interstate trucking firm.
Charles E. Stokes, III is the retired President of The Home Rubber
Company, which manufactures mechanical rubber goods, hoses, etc.
Raymond E. Trainer is Chairman of General Sullivan Group, which is an
industrial distribution holding company. He also is a director and secretary of
the TRAF Group which owns a medical collection agency.
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<PAGE>
Miles W. Truesdell, Jr. is a Director and Partner of Truetech Controls,
Inc., which operates as a specialty distributor that services the industrial
market with process control instrumentation.
Executive Officers Who Are Not Directors. Set forth below is a brief
description of the background of each person who serves as an executive officer
of the Bank and who is not a director of the Bank. Unless otherwise noted, all
executive officers who are not directors have held their present position for
five years.
Leo J. Bellarmino is Executive Vice President, responsible for the
Bank's Human Resources, Marketing, Branch Network, Project Planning, Information
Services, Loan Operations, Staff Services and Corporate Finance. He joined the
Bank in October of 1995 and has 27 years of banking experience. Prior to joining
the Bank, Mr. Bellarmino served as Senior Vice President and Retail Franchise
Manager for CoreStates New Jersey National Bank's 140 branch network. Mr.
Bellarmino also serves as a Director of the non-profit Trenton Roebling
Community Development Corporation.
Richard L. Gallaudet is Vice President and Senior Lending Officer,
responsible for the direct management of all the Bank's lending activities. He
joined the Bank in 1990, prior to which he held a number of management positions
with other banks, including three years of service (1986-1989) as President and
Chief Executive Officer of Cherry Hill National Bank and thirteen years of
service (1973-1986) as a Senior Vice President with MidLantic National
Bank/South (formerly Heritage Bank).
Dean H. Lippincott has been Vice President in charge of the Bank's
Mortgage Department since 1988 and has served the Bank in a number of other
capacities since joining it in 1970. His responsibilities include home mortgage
loan originations. He participates as a member of The West Ward Community
Partnership Corp.
Robert Russo is Vice President and Treasurer, responsible for all bank
operations, financial reporting, and accounting systems. He joined the Bank in
1985 as an Assistant Vice President. He has held other positions in the thrift
industry since 1978.
Robert C. Hollenbeck is Vice President and Corporate Secretary
responsible for investor relations, bank investments, budgeting and corporate
regulatory matters. He joined the Bank in November 1994. He has 28 years of
banking experience including 11 years as Executive Vice President and Director
of New Brunswick Savings Bank and five years as Executive Vice President of
Constellation Bank.
Frank Sannella, Jr. is President and Chief Executive Officer of
TSBusiness Finance Corporation, the wholly- owned subsidiary of the Bank. Mr.
Sannella previously held several senior management positions including Executive
Vice President and Senior Loan Officer of Midlantic Bank South and 1st National
Bank of Toms River, President of Heritage Commercial Finance Company and
Executive Vice President of Meridian Commercial Finance Corporation.
Directors Compensation
Fees. During 1997, each member of the Board of Directors of the Bank,
except Mr. Breithaupt, was paid a fee of $650 per Board meeting attended and
$500 for attending meetings of the Executive, Examining (Audit) and Emergency
Operations Committees. Directors attending Loan Committee meetings received $300
per meeting, directors attending Benefits and Compensation Committee meetings
received $250 per meeting. The Chairman of the Board received $900 per meeting
of the Board of Directors and Executive Committee, and the Chairman of the
Examining (Audit) Committee received $700 per meeting of the Examining (Audit)
Committee. In addition, non- officer directors other than the Chairman were paid
an annual retainer of $5,650, and the Chairman was paid an annual retainer of
$12,650.
1996 Option Plan. During 1996 the Bank and the Mutual Holding Company
adopted the Trenton Savings Bank and Peoples Bancorp, MHC 1996 Stock Option Plan
(the "1996 Option Plan"), which was approved by the Bank's stockholders. Under
the 1996 Option Plan, during 1996, Directors Sill, Stokes, Reinhard, Trainer,
Pruitt, Longstreth and Truesdell each received options to purchase 12,000 shares
of Bank Common Stock with an exercise price equal to the fair market value of
the Bank Common Stock on the date the option was granted, or $13.50 per
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share, of which 4,800 options for each Director vested during 1997 and 4,800
options will vest upon consummation of the Conversion. During 1997, each such
Director received additional options to purchase 3,500 shares of Bank Common
Stock with a exercise price equal to the fair market value of the stock on the
date of grant, or $21.00 per share, of which 1,400 options for each Director
vested in January 1998 and 1,400 will vest upon consummation of the Conversion.
The awards become fully vested upon a director's disability, death, retirement
or following termination of service in connection with a change in control of
the Bank or the Mutual Holding Company. All options granted under the 1996
Option Plan expire upon the earlier of ten years following the date of grant or,
generally, nine years following the date the optionee ceases to be a director.
1996 Recognition Plan. During 1996 the Bank adopted the Trenton Savings
Bank and Peoples Bancorp, MHC 1996 Recognition and Retention Plan (the "1996
Recognition Plan"), which was approved by the Bank's stockholders. During 1996,
9,364 shares of Bank Common Stock were awarded under the 1996 Recognition Plan
to Directors Sill, Stokes, Reinhard and Trainer, 7,491 shares were awarded to
Director Pruitt, and 7,257 shares were awarded to Directors Longstreth and
Truesdell. Such participants vested in 3,746, 2,996, and 2,903 of such shares of
Restricted Stock, respectively, during 1997 and will vest in a like amount upon
consummation of the Conversion. Awards become fully vested upon a director's
disability, death, retirement or following termination of service in connection
with a change in control of the Bank or the Mutual Holding Company. Unvested
shares of Restricted Stock are forfeited by a non-employee director upon failure
to seek reelection, failure to be reelected, or resignation from the Board.
Prior to vesting, recipients of awards under the 1996 Recognition Plan receive
dividends and may direct the voting of the shares of Restricted Stock allocated
to them.
Executive Compensation
Summary Compensation Table. The following table sets forth for the
years ended December 31, 1997, 1996 and 1995, certain information as to the
total remuneration paid by the Bank to the Chief Executive Officer and executive
officers whose salary and bonuses exceeded $100,000 in 1997 ("Named Executive
Officers").
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------
Annual Compensation Awards
------------------------------------ ----------------------
Year Other Restricted Shares All
Name and Ended Annual Stock Underlying LTIP Other
Principal Position (1) Dec. 31, Salary(2) Bonus(3) Compensation(4) Awards(5) Options(6) Payouts Compensation(7)
- ---------------------- -------- --------- ------------------------ --------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wendell T. Breithaupt.. 1997 196,796 $50,000 -- -- 25,000 -- $80,712
President and Chief 1996 187,425 50,000 -- 560,426 78,000 -- 80,712
Executive Officer 1995 178,500 50,000 -- -- -- -- 80,231
Leo J. Bellarmino...... 1997 $140,000 $10,273 -- -- 10,000 -- $ 8,151
1996 140,000 10,000 -- -- 34,000 -- 1,713
1995 25,846 -- -- -- -- -- --
Frank Sannella, Jr..... 1997 $120,000 -- -- -- -- -- $ 3,333
1996 47,077 -- -- -- -- -- 99
</TABLE>
(1) No other executive officer received salary and bonuses that in the
aggregate exceeded $100,000.
(2) Includes amounts deferred at the election of the named executive officer
pursuant to the Bank's 401(k) Plan.
(3) Includes amounts earned during the year and awarded pursuant to the Bank's
Profit Sharing Plan. Payments pursuant to the Profit Sharing Plan are
reflected in the year earned, rather than the year in which the payment is
received.
(4) The Bank provides certain members of senior management with the use of an
automobile and other personal benefits which have not been included in the
table. The aggregate amount of such other benefits did not exceed the
lesser of $50,000 or 10% of each Named Executive Officer's cash
compensation.
(5) Includes awards of 41,513 shares of restricted stock to Mr. Breithaupt,
16,605 shares of which vested during the year ended December 31, 1997 and
16,605 shares of which will vest upon consummation of the Conversion. The
value of the awards is based on the last sale price of the Bank Common
Stock on the date of the award. Dividends are paid to the holder of the
restricted stock. As of December 31, 1997, the fair market value of the
shares of restricted stock held by Mr. Breithaupt was $1.1 million.
(6) Of such options held by Mr. Breithaupt and Bellarmino, 31,200 and 13,600
options, respectively, vested during the year ended December 31, 1997, and
an equal amount will vest upon consummation of the Conversion.
(7) Includes the Bank's contribution to the 401(k) Plan and the Bank's
Supplemental Executive Retirement Plan, and insurance premiums paid by the
Bank on behalf of Named Executive Officers.
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<PAGE>
Benefit Plans
1996 Stock Option Plan. The Bank's 1996 Option Plan is available to
directors and officers and other employees of the Bank and its affiliates. The
plan is administered by a committee of outside directors. The plan authorizes
the grant of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 (the "Code"), "non-statutory options," which do
not qualify as incentive stock options, and certain "Limited Rights,"
exercisable only upon a change in control of the Bank or the Mutual Holding
Company. The Conversion does not represent a change in control of the Bank or
the Mutual Holding Company as described in the 1996 Stock Option Plan. The
following table sets forth certain information regarding awards under the 1996
Option Plan and information regarding the shares acquired and the value realized
during 1997 by Named Executive Officers upon exercise of options and the number
of shares of Bank Common Stock underlying options and the value of options held
by Named Executive Officers at December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
Individual Grants of Stock Price Appreciation
for Option Term
- ----------------------------------------------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted to
Underlying Employees in FY Exercise or Expiration
Name Options(1) 1997 Base Price Date 5 10
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wendell T. Breithaupt 25,000 47.2% $21.00 August 2006 $313,000 $711,000
Leo J. Bellarmino 10,000 18.9% $21.00 August 2006 $125,000 $285,000
</TABLE>
(1) Of such options, 10,000 and 4,000, respectively, vested in January 1998,
and 10,000 and 4,000 will vest upon consummation of the Conversion
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Shares Value Underlying Unexercised Value of Unexercised In-
Name Acquired Realized Options at The-Money Options at
Upon Exercise Fiscal Year-End Fiscal Year-End (1)
-----------------------------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wendell T. Breithaupt 7,407 108,327 23,793/71,800 $755,428/2,092,150
Leo J. Bellarmino 2,056 38,454 11,544/30,400 $366,522/890,200
</TABLE>
(1) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of Bank Common Stock that
would be received upon exercise, assuming such exercise occurred on
December 31, 1997, on which date the last sale of the Bank Common Stock was
at a price of $45.25.
Employment Memoranda. Mr. Breithaupt is a party to a memorandum
relating to compensation authorized by the Board of Directors and executed by
the then members of the Compensation Committee and Mr. Breithaupt dated August
27, 1994. The memorandum provides for employment by Mr. Breithaupt at the Bank
through December 31, 1999, with compensation continued through that date.
Pursuant to that memorandum, provided performance is satisfactory, Mr.
Breithaupt is guaranteed a base salary of at least $170,000 per annum during
this period plus an annual payment, intended to be invested by him to supplement
his retirement income, of $70,000 per annum payable prior to each January 30
following the completion of each year of service or, at his option, in monthly
installments. In addition, the memorandum also contemplates eligibility for an
annual bonus of up to $50,000 depending on obtaining strategic and operational
goals. Bonuses, if earned and awarded, are to be paid no later than ninety days
following conclusion of each fiscal year during this period. See "--Employment
Agreements."
84
<PAGE>
Retirement Plan. The Bank maintains a defined benefit pension plan
("Retirement Plan") for all employees who have attained the age of 21 and have
completed one year of service with the Bank. In general, the Retirement Plan
provides for annual benefits payable monthly upon retirement at age 65 in an
amount equal to 1.65% of the "Average Compensation" of the employee (which is
equal to the average of the total compensation paid to him or her during the 60
consecutive calendar months within the final 120 consecutive calendar months of
service affording the highest average), for each year of service, plus, if
applicable, 0.65% of Average Compensation in excess of an employee's average
social security taxable wage base for each year of the 35 year period ending
with the employee's social security retirement age, multiplied by his or her
years of service, not in excess of 25 years.
Under the Retirement Plan, an employee's benefits are unvested prior to
the completion of five years of service and are fully vested after five years of
service. A year of service is any year in which an employee works a minimum of
1,000 hours. The Retirement Plan provides for an early retirement option with
reduced benefits for participants who are age 55 and who have 15 years of
service. The Bank's contribution for the Retirement Plan for 1996 was $188,285,
1995 was $168,308, and for 1994 was $115,000.
The following table illustrates annual pension benefits for retirement
at age 65 under various levels of compensation and years of service. The figures
in the table assume that the Retirement Plan continues in its present form, that
the participants retire at age 65 and that the participants elect a straight
life annuity form of benefit.
Five Year
Average 10 Years of 15 Years of 20 Years of 25 Years of
Compensation Service Service Service Service
- ------------ ------- ------- ------- -------
$ 40,000 $ 7,295 $ 10,942 $ 14,590 $ 18,238
50,000 9,595 14,392 19,190 23,988
60,000 11,895 17,842 23,790 29,738
70,000 14,195 21,292 28,390 35,488
80,000 16,495 24,742 32,990 41,238
90,000 18,795 28,192 37,590 46,988
100,000 21,095 31,642 42,190 52,738
110,000 23,395 35,092 46,790 58,488
120,000 25,695 38,542 51,390 64,238
130,000 27,995 41,992 55,990 69,988
140,000 30,295 45,442 60,590 75,738
150,000 32,595 48,892 65,190 81,488
160,000 34,895 52,342 69,780 87,238
The maximum annual compensation which may be taken into account under
the Code (as adjusted from time to time by the IRS) for calculating
contributions under qualified defined benefit plans is currently $160,000, and
the maximum annual benefit permitted under such plan is currently $125,000.
At September 30, 1997, Mr. Breithaupt had 18 years of service under the
Retirement Plan, and his five-year average compensation was $160,000 (as limited
by the tax law requirements).
Employee Stock Ownership Plan and Trust. The Bank has established an
Employee Stock Ownership Plan and Related Trust ("ESOP") for eligible employees
in connection with the Offering. Messrs. Breithaupt , Bellarmino and three other
employees of the Bank's subsidiaries will not participate in the ESOP. The ESOP
is a tax-qualified plan subject to the requirements of the Employee Retirement
Income Security Act of 1974 ("ERISA") and the Code. Employees with a 12-month
period of employment with the Bank during which they worked at least 1,000 hours
and who have attained age 21 are eligible to participate. As part of the
Offering, the ESOP plans to borrow funds from the Company and use the funds to
purchase up to 4% of the Common Stock to be issued in the Offering. Collateral
for the loan will be the Common Stock purchased by the ESOP. The loan will be
repaid principally from the Bank's contributions to the ESOP over a period of at
least twelve years. The interest rate for the loan will be the prime rate.
85
<PAGE>
Shares purchased by the ESOP will be held in a suspense account for allocation
among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account
in an amount proportionate to the repayment of the ESOP loan will be allocated
among participants on the basis of compensation in the year of allocation, up to
an annual adjusted maximum level of compensation. Benefits generally become 100%
vested after five years of credited service or upon death, retirement, early
retirement, disability or in the event of a change in control of the Bank or the
Company. A participant will vest in 20% of his or her account balance after one
year of credited service and will vest in an additional 20% for each subsequent
year of credited service until a participant is 100% vested after five years.
Participants will receive credit under the ESOP service with the Bank prior to
adoption of the ESOP. A participant who terminates employment before becoming
fully vested will forfeit the nonvested portion of their account balance.
Forfeitures will be reallocated among remaining participating employees in the
same proportion as contributions. The Bank's contributions to the ESOP are
discretionary, subject to the loan terms and tax law limits and, therefore,
benefits payable under the ESOP cannot be estimated.
In connection with the establishment of the ESOP, a committee will be
selected by the Bank to administer the ESOP (the "ESOP Committee"). In addition,
a trustee for the ESOP will be appointed. The Bank will appoint Manchester Trust
as trustee of the ESOP. The ESOP trustee will vote all allocated shares held in
the ESOP in accordance with the instructions of the participating employees, and
unallocated shares and shares held in the suspense account in a manner
calculated to most accurately reflect the instructions the ESOP trustee has
received from participants regarding the allocated stock, subject to and in
accordance with the fiduciary duties under ERISA owed by the ESOP trustee to the
ESOP participants. Under ERISA, the Secretary of Labor is authorized to bring an
action against the ESOP trustee for the failure of the ESOP trustee to comply
with its fiduciary responsibilities. Such a suit could seek to enjoin the ESOP
trustee from violating its fiduciary responsibilities and could result in the
imposition of civil penalties or criminal penalties if the breach is found to be
willful.
1998 Stock Option Plan. At a meeting of the Company's shareholders to
be held at least six months after the completion of the Offering, the Board of
Directors intends to submit for shareholder approval the 1998 Stock Option Plan
for directors and officers of the Bank and of the Company. If approved by the
shareholders, Common Stock in an aggregate amount equal to 10% of the shares
sold in the Offering would be reserved for issuance by the Company upon the
exercise of the stock options granted under the 1998 Stock Option Plan. Ten
percent of the shares sold in the Offering would amount to 1,530,041 shares,
1,800,069 shares, 2,070,065 shares or 2,380,583 shares at the minimum, midpoint,
maximum and adjusted maximum of the Offering Range, respectively. No options
would be granted under the 1998 Stock Option Plan until the date on which
shareholder approval is received.
The exercise price of the options granted under the 1998 Stock Option
Plan will be equal to the fair market value of the shares on the date of grant
of the stock options. If the 1998 Stock Option Plan is adopted within one year
following the Offering, options will become exercisable at a rate of 20% at the
end of each twelve months of service with the Bank after the date of grant,
subject to early vesting in the event of death or disability. Options granted
under the 1998 Stock Option Plan would be adjusted for capital changes such as
stock splits and stock dividends. Notwithstanding the foregoing, awards will be
100% vested upon termination of employment due to death or disability, and if
the 1998 Stock Option Plan is adopted more than 12 months after the Offering,
awards would be 100% vested upon normal retirement or a change in control of the
Bank or the Company. Under OTS rules, if the 1998 Stock Option Plan is adopted
within the first 12 months after the Offering, no individual officer can receive
more than 25% of the awards under the plan, no non-employee director can receive
more than 5% of the awards under the plan, and all outside non-employee
directors as a group can receive no more than 30% of the awards under the plan
in the aggregate.
The 1998 Stock Option Plan would be administered by a Committee of
non-employee members of the Company's Board of Directors. Options granted under
the 1998 Stock Option Plan to employees could be "incentive" stock options
designed to result in a beneficial tax treatment to the employee but no tax
deduction to the Company. Non-qualified stock options could also be granted
under the 1998 Stock Option Plan, and will be granted to the non-employee
directors who receive grants of stock options. In the event an option recipient
terminated his employment or service as an employee or director, the options
would terminate during certain specified periods.
86
<PAGE>
1998 Recognition Plan. At a meeting of the Company's shareholders to be
held at least six months after the completion of the Offering, the Board of
Directors also intends to submit a Recognition and Retention Plan (the "1998
Recognition Plan") for shareholder approval. The 1998 Recognition Plan will
provide the Bank's directors and officers an ownership interest in the Company
in a manner designed to encourage them to continue his or her service with the
Bank. The Bank will contribute funds to the 1998 Recognition Plan from time to
time to enable it to acquire an aggregate amount of Common Stock equal to up to
4% of the shares of Common Stock sold in the Offering, either directly from the
Company or in open market purchases. Four percent of the shares sold in the
Offering would amount to 612,016 shares, 20,028 shares, 828,026 shares and
952,233 shares at the minimum, midpoint, maximum and adjusted maximum of the
Offering Range, respectively. In the event that additional authorized but
unissued shares would be acquired by the 1998 Recognition Plan after the
Offering, the interests of existing shareholders would be diluted. The executive
officers and directors will be awarded Common Stock under the 1998 Recognition
Plan without having to pay cash for the shares. No awards under the 1998
Recognition Plan would be made until the date the 1998 Recognition Plan is
approved by the Company's shareholders.
Awards under the 1998 Recognition Plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned by
him. If the 1998 Recognition Plan is adopted within one year following the
Offering, the shares which are subject to an award would vest and be earned by
the recipient at a rate of 20% of the shares awarded at the end of each full 12
months of service with the Bank after the date of grant of the award. Awards
would be adjusted for capital changes such as stock dividends and stock splits.
Notwithstanding the foregoing, awards would be 100% vested upon termination of
employment or service due to death or disability, and if the 1998 Recognition
Plan is adopted more than 12 months after the Offering, awards would be 100%
vested upon normal retirement or a change in control of the Bank or the Company.
If employment or service were to terminate for other reasons, the award
recipient would forfeit any nonvested award. If employment or service is
terminated for cause (as would be defined in the 1998 Recognition Plan), shares
not already delivered under the 1998 Recognition Plan would be forfeited. Under
OTS rules, if the 1998 Recognition Plan is adopted within the first 12 months
after the Offering, no individual officer can receive more than 25% of the
awards under the plan, no non-employee director can receive more than 5% of the
awards under the plan, and all non-employee directors as a group can receive no
more than 30% of the awards under the plan in the aggregate.
When shares become vested under the 1998 Recognition Plan, the
participant will recognize income equal to the fair market value of the Common
Stock earned, determined as of the date of vesting, unless the recipient makes
an election under ss. 83(b) of the Code to be taxed earlier. The amount of
income recognized by the participant would be a deductible expense for tax
purposes for the Company. If the 1998 Recognition Plan is adopted within one
year following the Offering, dividends and other earnings will accrue and be
payable to the award recipient when the shares vest. If the 1998 Recognition
Plan is adopted within one year following the Offering, shares not yet vested
under the 1998 Recognition Plan will be voted by the trustee of the 1998
Recognition Plan, taking into account the best interests of the recipients of
the 1998 Recognition Plan awards. If the 1998 Recognition Plan is adopted more
than one year following the Offering, dividends declared on unvested shares will
be distributed to the participant when paid, and the participant will be
entitled to vote the unvested shares.
Employment Agreements. Upon completion of the Offering, it is
anticipated that the Bank will enter into an employment agreement with Mr.
Bellarmino (the "Executive"). The agreement will have a term of 36 months. On
each anniversary date, the agreement may be extended for an additional twelve
months, so that the remaining term shall be 36 months. If the agreement is not
renewed, the agreement will expire 24 months following the anniversary date.
Under the agreement, the current Base Salary for Mr. Bellarmino will be
$140,000. The Base Salary may be increased but not decreased. In addition to the
Base Salary, the agreement provides for, among other things, participation in
retirement plans and other employee and fringe benefits applicable to executive
personnel. The agreement provides for termination by the Bank for cause at any
time. In the event the Bank terminates the Executive's employment for reasons
other than for cause, or in the event of the Executive's resignation from the
Bank upon (i) failure to re-elect the executive to his current offices, (ii) a
material change in the Executive's functions, duties or responsibilities, or
relocation of his principal place of employment by more than 30 miles, (iii)
liquidation or dissolution of the Bank, (iv) a breach of the agreement by the
Bank, or (v) following a change in control of the Bank or the Company, the
Executive, or in the event of death, his beneficiary, would be entitled to
severance pay in an amount equal to three times (or, in the event of a change in
control, 2.99 times) the average of the five
87
<PAGE>
preceding years Base Salary, including bonuses and any other taxable
compensation and the amount of any contributions made to any employee benefit
plan. The Bank would also continue the Executive's life, health, dental and
disability coverage for 36 months from the date of termination. In the event the
payments to the executive would include an "excess parachute payment" as defined
by Code Section 280G (relating to payments made in connection with a change in
control), the payments would be reduced by that amount necessary in order to
avoid having an excess parachute payment.
Upon the Executive's retirement, he will be entitled to all benefits
available to him under any retirement or other benefit plan maintained by the
Bank. In the event of the Executive's disability for a period of six months, the
Bank may terminate the agreement provided that the Bank will be obligated to pay
him his Base Salary, including bonuses and other cash compensation paid to the
Executive during such period, for the remaining term of the agreement or one
year, whichever is longer, reduced by any benefits paid to the executive
pursuant to any disability insurance policy or similar arrangement maintained by
the Bank. In the event of the Executive's death, the Bank will pay his Base
Salary to his named beneficiaries for one year following his death, and will
also continue medical, dental, and other benefits to his family for one year.
The employment agreement provides that, following his termination of employment
for reasons unrelated to a change in control, the Executive will not compete
with the Bank for a period of one year.
Severance Agreements. Upon completion of the Offering, it is
anticipated that the Bank will enter into Severance Agreements (the "Severance
Agreements") with certain executives of the Bank which would provide certain
benefits in the event of a change in control of the Bank or the Company. The
Severance Agreements would provide for up to an 18 month term. Commencing on
each anniversary date, the Board of Directors may extend any Severance Agreement
for an additional 18 months. The Severance Agreements would enable the Bank to
offer to designated officers certain protections against termination without
cause in the event of a change in control. These protections against termination
without cause in the event of a change in control are frequently offered by
other financial institutions, and the Bank may be at a competitive disadvantage
in attracting and retaining key employees if it does not offer similar
protections. Although the Severance Agreements may have the effect of making a
takeover more expensive to an acquiror, the Bank believes that the benefits of
enhancing the Bank's ability to attract and retain qualified management persons
by offering the Severance Agreements outweighs any disadvantage of such
agreements.
Following a change in control of the Company or the Bank, an officer
would be entitled to a payment under the Severance Agreement if the officer
voluntarily or involuntarily terminates employment during the term of such
agreement, other than for cause, as defined. In the event that an officer who is
a party to a Severance Agreement is entitled to receive payments pursuant to the
Severance Agreement, he would receive a cash payment up to a maximum of three
times the average of the three preceding years' annual base salary and bonuses.
In addition to the severance payment, each covered officer would be entitled to
receive life, health, dental and disability coverage for a period of up to 18
months from the date of termination. Notwithstanding any provision to the
contrary in the Severance Agreement, payments under the Severance Agreements are
limited so that they will not constitute an excess parachute payment under
Section 280G of the Internal Revenue Code.
Indebtedness of Management
All loans made by the Bank to the Bank's directors, executive officers,
and members of such persons' families were made in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than the normal risk of collectibility or
present other unfavorable factors. All such loans comply with federal
regulations relating to loans to such persons.
BENEFICIAL OWNERSHIP OF COMMON STOCK
Beneficial Ownership of Mid-Tier Common Stock
The following table includes, as of December 1, 1997, certain
information as to the Mid-Tier Common Stock beneficially owned by (i) the only
persons or entities, including any "group" as that term issued in Section
13(d)(3)
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<PAGE>
of the Exchange Act, who or which was known to the Mid-Tier Holding Company to
be the beneficial owner of more than 5% of the issued and outstanding Mid-Tier
Common Stock, (ii) the directors of the Mid-Tier Holding Company and the Bank,
(iii) certain executive officers of the Mid-Tier Holding Company and the Bank,
and (iv) all directors and executive officers of the Bank as a group. For
information concerning proposed subscriptions by directors and executive
officers and the anticipated ownership of Common Stock by such persons upon
consummation of the Conversion, see "--Subscriptions by Executive Officers and
Directors."
Name of Beneficial Amount and Nature Percent of
Ownership or Number of Beneficial Ownership Mid-Tier
------------------- ----------------------- --------
of Persons in Group (1)(2)(3)(4)(5) Common Stock
Peoples Bancorp, MHC.................. 5,796,000 64.1%
134 Franklin Corner Road
Trenton, New Jersey
John B. Sill, Jr...................... 21,664 *
Wendell T. Breithaupt................. 72,389 *
Peter S. Longstreth................... 35,057 *
George A. Pruitt...................... 12,547 *
George W. Reinhard.................... 120,864 1.3
Charles E. Stokes, III................ 18,164 *
Raymond E. Trainer.................... 44,770 *
Miles W. Truesdell, Jr................ 32,057 *
Leo J. Bellarmino..................... 13,870 *
Richard L. Gallaudet.................. 15,146 *
Dean H. Lippincott.................... 16,169 *
Robert Russo.......................... 9,094 *
Robert C. Hollenbeck.................. 10,532 *
Frank Sannella, Jr.................... 75 *
All directors and executive officers
as a group (13 persons) 422,398 4.7%
* Less than 1%
(1) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals. In accordance with Rule 13d-3
under the Exchange Act, a person is deemed to be the beneficial owner for
purposes of this table, of any shares of common stock if he has shared
voting or investment power with respect to such security, or has a right to
acquire beneficial ownership at any time within 60 days from the date as to
which beneficial ownership is being determined. As used herein, "voting
power" is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of shares.
Includes all shares held directly as well as by spouses and minor children,
in trust and other indirect ownership, over which shares the named
individuals effectively exercise sole or shared voting and investment
power.
(2) The executive officers and directors of the Bank and the Mid-Tier Holding
Company are also executive officers and directors of Peoples Bancorp,
M.H.C.
(3) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of Mid-Tier Common Stock which may be acquired
within 60 days of the date as of which beneficial ownership is being
determined pursuant to the exercise of outstanding stock options. Shares of
Mid-Tier Common Stock which are subject to stock options are deemed to be
outstanding for the purpose of computing the percentage of outstanding
Mid-Tier Common Stock owned by such person or group but not deemed
outstanding for the purpose of computing the percentage of Mid-Tier Common
Stock owned by any other person or group.
(4) Includes the following amounts of unvested shares of restricted stock
awarded under the 1996 Recognition Plan which may be voted by the recipient
pending vesting and distribution: Mr. Sill 5,618 shares; Mr. Breithaupt
24,907 shares; Mr. Longstreth 4,353 shares; Mr. Pruitt 4,494 shares; Mr.
Reinhard 5,618 shares; Mr. Stokes 5,618 shares; Mr. Trainer 5,618 shares;
Mr. Truesdell 4,353 shares; Mr. Gallaudet 2,931 shares; Mr. Lippincott
3,019 shares; Mr. Russo 2,664 shares; and Mr. Hollenbeck 2,399 shares.
Includes the following number of shares of Mid-Tier Common Stock underlying
options that are exercisable within 60 days of the date of which beneficial
ownership is being determined: Mr. Sill 4,800 shares; Mr. Breithaupt 23,793
shares; Mr. Longstreth 4,800 shares; Mr. Pruitt 4,800 shares; Mr. Reinhard
4,800 shares; Mr. Stokes 4,800 shares; Mr. Trainer 4,800 shares; Mr.
Truesdell 4,800 shares; Mr. Bellarmino 11,544 shares; Mr. Gallaudet 4,000
shares; and Mr. Russo 3,200 shares.
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Subscriptions by Executive Officers and Directors
The following table sets forth, for each of the Company's directors and
executive officers and for all of the directors and executive officers as a
group, (i) the number of Exchange Shares to be held upon consummation of the
Conversion, based upon their beneficial ownership of the Mid-Tier Common Stock
as of December 31, 1997, (ii) the proposed purchases of Subscription Shares,
assuming sufficient shares are available to satisfy their subscriptions, and
(iii) the total amount of Common Stock to be held upon consummation of the
Conversion in each case assuming that Subscription Shares are sold at the
midpoint of the Offering Range.
<TABLE>
<CAPTION>
Proposed Purchases of Total Common Stock
Conversion Stock (1) To Be Held
Number of -------------------- ----------
Exchange Shares Number Number Percentage
To be Held (2)(3) Amount of Shares of Shares of Total
----------------- ------ --------- --------- --------
<S> <C> <C> <C> <C> <C>
John B. Sill, Jr............... 62,646 $ 60,000 6,000 68,646 0.3%
Wendell T. Breithaupt.......... 209,327 -- -- 209,327 0.8
Peter S. Longstreth............ 101,374 -- -- 101,374 0.4
George A. Pruitt............... 36,282 -- -- 36,282 0.1
George W. Reinhard............. 349,502 400,000 50,000 389,502 1.4
Charles E. Stokes, III......... 52,525 -- -- 52,525 0.2
Raymond E. Trainer............. 129,461 180,000 18,000 147,461 0.6
Miles W. Truesdell, Jr......... 92,699 100,000 10,000 102,699 0.4
Leo J. Bellarmino.............. 40,108 -- -- 40,108 0.2
Richard L. Gallaudet........... 43,798 10,000 1,000 44,798 0.2
Dean H. Lippincott............. 46,756 -- -- 46,756 0.2
Robert Russo................... 26,297 10,000 1,000 27,297 0.1
Robert C. Hollenbeck........... 30,455 -- -- 30,455 0.1
Frank Sannella, Jr............. 217 -- -- 217 0.0
Total..................... 1,221,447 $760,000 76,000 1,297,447 4.8%
</TABLE>
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription order by the ESOP. Intended purchases by the ESOP are expected
to be 4% of the shares issued in the Offering. P
(2) Includes shares underlying options that may be exercised within 60 days of
the date as of which ownership is being determined, and vested and unvested
shares of restricted stock. See "--Beneficial Ownership of Mid-Tier Common
Stock."
(3) Does not include stock options and awards that may be granted under the
Company's 1998 Stock Option Plan and 1998 Recognition Plan if such plans
are approved by stockholders at an annual meeting or special meeting of
shareholders at least six months following the Conversion. See "Management
of the Bank--New Benefits Plans."
THE CONVERSION
THE BOARD OF DIRECTORS OF THE MUTUAL HOLDING COMPANY, AND THE OTS, HAVE
APPROVED THE PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE
MUTUAL HOLDING COMPANY ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF
CERTAIN OTHER CONDITIONS. SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH AGENCY.
General
On September 24, 1997, the Board of Directors of the Mutual Holding
Company adopted the Plan of Conversion, pursuant to which the Mutual Holding
Company will be converted from a federally chartered mutual holding company to
the Company, a Delaware stock corporation. It is currently intended that all of
the capital stock of the Bank will be held by the Company. The Plan was approved
by the OTS, subject to, among other things, approval of the Plan by the Mutual
Holding Company's members. The Special Meeting of Members has been called for
this purpose.
As part of the Conversion each of the Minority Shares shall
automatically, without further action by the holder thereof, be converted into
and become a right to receive a number of shares of Common Stock determined
pursuant
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to the Exchange Ratio described herein. See "--Share Exchange Ratio." Pursuant
to the Plan of Conversion, the Conversion will be effected as follows or in any
other manner that is consistent with applicable federal law and regulations and
the intent of the Plan of Conversion. Except for step (i), each of the following
steps in the Conversion will be completed contemporaneously on the Effective
Date.
(i) The Bank will establish the Company as a first-tier Delaware chartered
stock holding company subsidiary.
(ii) The Company will charter an interim federal association ("Interim I").
(iii)The Mutual Holding Company will merge with and into the Mid-Tier
Holding Company (the "MHC Merger"), shares of Mid-Tier Common Stock
held by the Mutual Holding Company will be canceled and each Eligible
Account Holder and Supplemental Eligible Account Holder will receive
an interest in a Liquidation Account of the Mid-Tier Holding Company
in exchange for such person's interest in the Mutual Holding Company.
(iv) The Mid-Tier Holding Company will convert into an interim federal
association, which will then merge with and into the Bank (the
"Mid-Tier Merger") with the Bank as the resulting entity and (i)
Minority Stockholders will constructively receive shares of Bank
Common Stock in exchange for their Mid-Tier Common Stock and (ii) each
Eligible Account Holder and Supplemental Eligible Account Holder will
receive an interest in a Liquidation Account of the Bank in exchange
for such person's interest in the Mid-Tier Holding Company.
(v) Contemporaneously with the Mid-Tier Merger, Interim I will merge with
and into the Bank with the Bank as the surviving entity (the "Bank
Merger"). Constructive shareholders of the Bank (i.e., Minority
Stockholders immediately prior to the Conversion) will exchange the
shares of Bank Common Stock that they constructively received in the
Mid-Tier Merger for Common Stock pursuant to the Exchange Ratio.
(vi) Contemporaneously with the Bank Merger, the Company will sell the
Subscription Shares in the Offering.
The Company expects to receive the approval of the OTS to become a
savings and loan holding company and to own all of the common stock of the Bank.
The Company intends to contribute at least 50% of the net proceeds of the
Offering to the Bank. The Conversion will be effected only upon completion of
the sale of all of the shares of Common Stock to be issued pursuant to the Plan.
The Plan provides generally for consummation of the Conversion in
accordance with the steps set forth above. As part of the Conversion the Company
will offer shares of Common Stock for sale in the Subscription Offering to
Eligible Account Holders, the Bank's ESOP and 401(k) Plan. Supplemental Eligible
Account Holders and Other Members. Subject to the prior rights of these holders
of subscription rights, the Company will offer Common Stock for sale in a
concurrent Community Offering to certain members of the general public, with a
preference given to Minority Stockholders and then to natural persons residing
in the Community. The Bank has the right to accept or reject, in whole or in
part, any orders to purchase shares of the Common Stock received in the
Community Offering. The Community Offering must be completed within 45 days
after the completion of the Subscription Offering unless otherwise extended by
the OTS. See "--Community Offering."
The number of shares of Common Stock to be issued in the Offering will
be determined based upon an independent appraisal of the estimated pro forma
market value of the Common Stock of the Company. All shares of Common Stock to
be issued and sold in the Offering will be sold at the same price. The
Independent Valuation will be updated and the final number of the shares to be
issued in the Offering will be determined at the completion of the Offering. See
"--Stock Pricing and Number of Shares to be Issued" for more information as to
the determination of the estimated pro forma market value of the Common Stock.
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This summary of the Conversion is qualified in its entirety by
reference to the provisions of the Plan of Conversion. A copy of the Plan of
Conversion is available for inspection at each branch of the Bank and at the
Northeast Region and Washington, D.C. offices of the OTS. The Plan of Conversion
is also filed as an Exhibit to the Application to Convert from Mutual to Stock
Form of which this Prospectus is a part, copies of which may be obtained from
the OTS. See "Additional Information."
Purposes of Conversion
The Board of Directors unanimously determined to conduct the Conversion
because it believed that the market for equity securities in financial services
companies was at an unprecedented level and that the Bank (together with the
Company, the "Converted Institution") could raise substantial funds from such a
transaction. The Board of Directors believed that maximizing such proceeds is in
the best interests of the Converted Institution because such proceeds can be
used to increase the net income of the Converted Institution though investment
and eventual leveraging of the proceeds, and support the possible expansion of
the Bank's existing franchise through internal growth or the acquisition of
branch offices or other financial institutions. Management believed that
acquisition opportunities would increase as a result of the Conversion because
the Converted Institution would have substantially more capital following the
Conversion. The Bank has acquired two financial institutions since September 30,
1996, and the Company and the Bank intend to actively explore additional
acquisitions, although neither the Company nor the Bank has any specific plans,
arrangements or understandings regarding any additional expansions or
acquisitions at this time, nor have criteria been established to identify
potential candidates for acquisition. In addition, the Board considered that
there was no assurance that the pricing for financial services stocks would
continue at such favorable levels, and that if the market were to become less
favorable, the amount of capital that could be raised in the Conversion might be
substantially reduced. See "Risk Factors--Potential Low Return on Equity" and
"Uncertainty as to Future Growth Opportunities."
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and regulatory approval of an offering, to
raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present time,
the Company has no plans with respect to additional offerings of securities,
other than the issuance of additional shares upon exercise of stock options.
Following the Conversion, the Company will also be able to use stock-related
incentive programs to attract and retain executive and other personnel for
itself and its subsidiaries.
Approvals Required
The affirmative vote of a majority of the total eligible votes of the
members of the Mutual Holding Company at the Special Meeting of Members is
required to approve the Plan of Conversion. By their approval of the Plan of
Conversion the members of the Mutual Holding Company will also be deemed to
approve the mergers that are incident to the Conversion. The affirmative vote of
the holders of (i) at least two-thirds of the outstanding common stock of the
Mid-Tier Holding Company and (ii) a majority of the Minority Shares voting at
the Special Meeting of Stockholders is required to approve the Plan of
Conversion. Consummation of the Conversion is also subject to the approval of
the OTS.
Share Exchange Ratio
OTS regulations and policy provide that in a conversion of a mutual
holding company to stock form, stockholders other than the mutual holding
company will be entitled to exchange their shares of subsidiary savings bank (or
mid-tier holding company) common stock for common stock of the converted holding
company, provided that the bank and the mutual holding company demonstrate to
the satisfaction of the OTS that the basis for the exchange is fair and
reasonable. The Boards of Directors of the Bank and the Company have determined
that each Minority Share will on the Effective Date be automatically converted
into and become the right to receive a number of Exchange Shares determined
pursuant an exchange ratio (the "Exchange Ratio") which was established as the
ratio that ensures that after the Conversion, subject to the Dividend Waiver
Adjustment described below and a slight adjustment to reflect the receipt of
cash in lieu of fractional shares (both of which will slightly decrease the
percentage of shares to be issued
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to Minority Stockholders), the percentage of the to-be outstanding shares of
Common Stock issued to Minority Stockholders in exchange for their Minority
Shares will be equal to the percentage of the Mid-Tier Common Stock held by
Minority Stockholders immediately prior to the Conversion. The total number of
shares held by Minority Stockholders after the Conversion would also be affected
by any purchases by such persons in the Offering.
The Dividend Waiver Adjustment affects the percentage of the to-be
outstanding shares of Common Stock issued in exchange for Minority Shares to
reflect (i) the aggregate amount of dividends waived by the Mutual Holding
Company and (ii) assets other than Mid-Tier Common Stock held by the Mutual
Holding Company. Pursuant to the Dividend Waiver Adjustment, the percentage of
the to-be outstanding shares of Common Stock issued to Minority Stockholders in
exchange for their Minority Shares (the "Adjusted Minority Ownership
Percentage") is equal to the percentage of the Mid-Tier Common Stock held by
Minority Stockholders multiplied by the Dividend Waiver Fraction. Thepercentage
of the to-be outstanding shares of Common Stock that are sold in the Offering is
referred to herein as the "Adjusted Majority Ownership Percentage ." The
Dividend Waiver Fraction is equal to the product of (a) a fraction, of which the
numerator is equal to the Mid-Tier Holding Company's stockholders' equity at the
time of the Conversion less the aggregate amount of dividends waived by the
Mutual Holding Company and the denominator is equal to the Mid-Tier Holding
Company's stockholders' equity at the time of the Conversion, and (b) a
fraction, of which the numerator is equal to the appraised pro forma market
value of the Common Stock minus the value of the Mutual Holding Company's assets
other than Mid-Tier Common Stock and the denominator is equal to the pro forma
market value of the Common Stock. FinPro determined the value of the Mutual
Holding Company's assets other Mid- Tier Common Stock to be insignificant and
not to require an adjustment.
Based on the 35.9% of the outstanding shares of the Mid-Tier Common
Stock held by Minority Stockholders as of December 1, 1997, the $4.9 million of
dividends waived and projected to be waived by the Mutual Holding Company
through the Effective Date, the $21,000 of assets other than Mid-Tier Common
Stock held by the Mutual Holding Company as of December 1, 1997, and the
Independent Valuation, the following table sets forth, at the minimum, midpoint,
maximum, and adjusted maximum of the Offering Range, the following: (i) the
total number of Subscription Shares and Exchange Shares to be issued in the
Conversion, (ii) the percentage of Common Stock outstanding after the Conversion
that will be sold in the Offering and issued in the Share Exchange, and (iii)
the Exchange Ratio.
<TABLE>
<CAPTION>
Subscription Shares Exchange Shares Total Shares
to be Issued to be Issued of Common
---------------------- ---------------------- Stock to be Exchange
Amount Percent Amount Percent Outstanding Ratio
------ ------- ------ ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Minimum ................. 15,300,408 65.7% 7,989,592 34.3% 23,290,000 2.4580
Midpoint................. 18,000,691 65.7% 9,399,309 34.3% 27,400,000 2.8917
Maximum.................. 20,700,648 65.7% 10,809,352 34.3% 31,510,000 3.3255
Adjusted maximum ........ 23,805,827 65.7% 12,430,673 34.3% 36,236,500 3.8243
</TABLE>
Options to purchase Minority Shares will also be converted into and
become options to purchase Common Stock. As of December 1, 1997, there were
outstanding options to purchase 294,637 Minority Shares. The number of shares of
Common Stock to be received upon exercise of such options will be determined
pursuant to the Exchange Ratio. The aggregate exercise price, duration, and
vesting schedule of such options will not be affected. If all such options to
purchase Minority Shares are exercised prior to the Effective Date, then there
will be an increase in the number of shares of Common Stock issued to Minority
Stockholders in the Share Exchange, and a decrease in the Exchange Ratio.
Executive officers and directors of the Bank do not intend to exercise options
prior to the Effective Date. The Bank has no plans to grant additional stock
options prior to the Effective Date.
The final Exchange Ratio will be calculated at the conclusion of the
Conversion and will be affected by any additional waivers of dividends by the
Mutual Holding Company, any change in the Mutual Holding Company's assets other
than Mid-Tier Common Stock, and any options exercised subsequent to December 1,
1997.
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Effect of the Conversion on Minority Stockholders
Effect on Stockholders' Equity per Share of the Shares Exchanged. The
Conversion will increase the stockholders' equity of Minority Stockholders. At
September 30, 1997, the stockholders' equity per share was $11.97 for each share
of the Mid-Tier Common Stock outstanding, including shares held by the Mutual
Holding Company. 7 Based on the pro forma information set forth in "Pro Forma
Data," assuming the sale of 18,000,691 shares of 7 Common Stock at the midpoint
of the Offering Range, the pro forma stockholders' equity per share of Common
Stock 7 was $9.93, and the aggregate pro forma stockholders' equity for the
Exchange Shares to be received for each 7 Minority Share was $28.71. The pro
forma stockholders' equity for the aggregate number of Exchange Shares to 7 be
received for each Minority Share was $26.10, $31.36 and $34.38 at the minimum,
maximum, and adjusted maximum of the Offering Range. 7
Effect on Earnings per Share of the Shares Exchanged. The Conversion
will also affect Minority 7 Stockholders' pro forma earnings per share. For the
nine months ended September 30, 1997, and the fiscal year ended7 December 31,
1996, the earnings per share were $.65 and $.94, respectively, for each share of
Mid-Tier Common Stock outstanding, including shares held by the Mutual Holding
Company. Based on the pro forma information set forth in "Pro Forma Data,"
assuming the sale of 18,000,691 shares of Common Stock at the midpoint of the
Offering Range, the pro forma earnings per share of Common Stock were $.34 and
$.49, respectively, for such periods, and the aggregate pro forma earnings for
the number of Exchange Shares to be received for each Minority Share were $.98
and $1.42, respectively. For the nine months ended September 30, 1997, the
aggregate pro forma earnings for the number of Exchange Shares to be received
for each Minority Share were $0.93, $1.03 and $1.11 at the minimum, maximum, and
adjusted maximum of the Offering Range. For the fiscal year ended December 31,
1996, the aggregate pro forma earnings for the number of Exchange Shares to be
received for each Minority Share were $1.35, $1.50 and $1.61 at the minimum,
maximum, and adjusted maximum of the Offering Range.
Effect on Dividends per Share. The Company's Board of Directors
anticipates declaring and paying quarterly cash dividends of $.025, or $.10 per
share of Common Stock on an annual basis, or an aggregate annual dividend of
$.25, $.29, $.34 and $.38 for the number of Exchange Shares received for each
Minority Share, at the minimum, midpoint, maximum and adjusted maximum of the
Offering Range, respectively. The Bank, or the Mid-Tier Holding Company, have
paid quarterly cash dividends of $.0875 per Minority Share, or $.35 per Minority
Share on an annual basis, for each of the full fiscal quarters since the
Minority Stock Offering in August 1995. See "Market for Common Stock." The
Mid-Tier Holding Company intends to continue to pay a quarterly cash dividend of
$.0875 per share through the fiscal quarter ended March 31, 1998. Dividends,
when and if paid, will be subject to determination and declaration by the Board
of Directors in its discretion, which will take into account the Company's
consolidated financial condition and results of operations, tax considerations,
industry standards, economic conditions, regulatory restrictions on dividend
payments by the Bank to the Company, general business practices and other
factors. See "Dividend Policy."
Effect on the Market and Appraised Value of the Shares Exchanged. The
aggregate Subscription Price of the shares of Common Stock received in exchange
for each Minority Share is $24.58, $28.92, $33.26, and $38.24 at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range. The last trade of
the Bank's common stock on August 7, 1997, the day preceding the announcement of
the Conversion, was $22 per share, and the price at which the Common Stock last
traded on February __, 1998, was $__________ per share.
Dissenters' and Appraisal Rights. Under OTS regulations, Minority
Stockholders will not have dissenters' rights or appraisal rights in connection
with the exchange of Minority Shares for shares of Common Stock of the Company.
Effects of Conversion on Depositors, Borrowers and Members
General. Each depositor in the Bank has both a deposit account in the
Bank and a pro rata ownership interest in the net worth of the Mutual Holding
Company based upon the balance in his or her account, which interest may only be
realized in the event of a liquidation of the Mutual Holding Company and the
Bank. However, this ownership interest is tied to the depositor's account and
has no tangible market value separate from such deposit account. Any
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<PAGE>
depositor who opens a deposit account obtains a pro rata ownership interest in
the Mutual Holding Company which owns a majority of the common stock of the Bank
without any additional payment beyond the amount of the deposit. A depositor who
reduces or closes his account receives a portion or all of the balance in the
account but nothing for his ownership interest in the net worth of the Mutual
Holding Company, which is lost to the extent that the balance in the account is
reduced or closed.
Consequently, depositors in a stock subsidiary of a mutual holding
company normally have no way of realizing the value of their ownership interest,
which has realizable value only in the unlikely event that the Mutual Holding
Company and the Bank are liquidated. In such event, the depositors of record at
that time, as owners, would share pro rata in any residual surplus and reserves
of the Mutual Holding Company after other claims, including claims of depositors
to the amounts of their deposits, are paid.
When a mutual holding company converts to stock form, permanent
nonwithdrawable capital stock is created in the stock holding company to
represent the ownership of the subsidiary institution's net worth. The Common
Stock is separate and apart from deposit accounts and cannot be and is not
insured by the FDIC or any other governmental agency. Certificates are issued to
evidence ownership of the capital stock. The stock certificates are
transferable, and therefore the stock may be sold or traded if a purchaser is
available with no effect on any account the seller may hold in the Bank.
Continuity. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by the
OTS and the FDIC. After the Conversion, the Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff. The Directors serving the Bank at the time of the
Conversion will serve as Directors of the Bank after the Conversion. The
Directors of the Company will consist of individuals currently serving on the
Board of Directors of the Mid-Tier Holding Company.
Effect on Deposit Accounts. Under the Plan of Conversion, each
depositor in the Bank at the time of the Conversion will automatically continue
as a depositor after the Conversion, and each such deposit account will remain
the same with respect to deposit balance, interest rate and other terms. Each
such account will be insured by the FDIC to the same extent as before the
Conversion. Depositors will continue to hold their existing certificates,
passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by
the Conversion, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Conversion.
Effect on Voting Rights of Members. At present, all depositors of the
Bank are members of, and have voting rights in, the Mutual Holding Company as to
all matters requiring membership action. Upon completion of the Conversion,
depositors will cease to be members of the Mutual Holding Company and will no
longer be entitled to vote at meetings of the Mutual Holding Company. Upon
completion of the Conversion, all voting rights in the Bank will be vested in
the Company as the sole shareholder of the Bank. Exclusive voting rights with
respect to the Company will be vested in the holders of Common Stock. Depositors
of the Bank will not have voting rights after the Conversion except to the
extent that they become stockholders of the Company through the purchase of
Common Stock.
Tax Effects. The Bank will receive an opinion of counsel with regard to
federal and state income taxation to the effect that the adoption and
implementation of the Plan of Conversion will not be taxable for federal or
state income tax purposes to the Bank, the Mid-Tier Holding Company, the Mutual
Holding Company, the Minority Stockholders, members of the Mutual Holding
Company, eligible account holders or the Company. See "--Tax Aspects."
Effect on Liquidation Rights. Were the Bank to liquidate prior to the
Conversion, all claims of creditors of the Bank, including those of depositors
to the extent of their deposit balances, would be paid first. Thereafter, if
there were any assets of the Bank remaining, such assets would be distributed to
the Mid-Tier Holding Company, to the extent of its stock ownership interest in
the Bank. Were the Mutual Holding Company to liquidate, all claims of
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<PAGE>
creditors would be paid first. Thereafter, if there were any assets of the
Mutual Holding Company remaining, members of the Mutual Holding Company would
receive such remaining assets, pro rata, based upon the deposit balances in
their deposit account in the Bank immediately prior to liquidation. In the
unlikely event that the Bank were to liquidate after Conversion, all claims of
creditors (including those of depositors, to the extent of their deposit
balances) would also be paid first, followed by distribution of the "liquidation
account" to certain depositors (see, "Liquidation Rights"), with any assets
remaining thereafter distributed to the Company as the holder of the Bank's
capital stock. Pursuant to the rules and regulations of the OTS, a
post-conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation and, in such a transaction, the liquidation account
would be assumed by the surviving institution.
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion and Federal regulations require that the
aggregate purchase price of the Common Stock in the Offering must be based on
the appraised pro forma market value of the Common Stock, as determined by an
independent valuation (the "Independent Valuation"). The Bank and the Company
have retained FinPro, Inc. ("FinPro") to make such valuation. For its services
in making such appraisal, FinPro will receive a fee of $13,500 (which amount
does not include a fee of $11,000 to be paid to FinPro for assistance in
preparation of a business plan). The Bank, the Mid-Tier Holding Company, the
Mutual Holding Company and the Company have agreed to indemnify FinPro and its
employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where FinPro's liability results from its
negligence or bad faith.
The Independent Valuation was prepared by FinPro in reliance upon the
information contained in the Prospectus, including the Consolidated Financial
Statements. FinPro also considered the following factors, among others: the
present and projected operating results and financial condition of the Company
and the Bank and the economic and demographic conditions in the Bank's existing
marketing area; certain historical, financial and other information relating to
the Bank; a comparative evaluation of the operating and financial statistics of
the Bank with those of other publicly traded savings institutions located in the
mid-Atlantic region and on a national basis; the aggregate size of the Offering;
the impact of the Conversion on the consolidated stockholders' equity and
earnings potential; the proposed dividend policy of the Company; and the trading
market for securities of comparable institutions and general conditions in the
market for such securities.
The Independent Valuation was prepared based on the assumption that the
aggregate amount of Common Stock sold in the Offering would be equal to the
estimated pro forma market value of the Company multiplied by the Adjusted
Majority Ownership Percentage. The Independent Valuation states that as of
December 17, 1997, the estimated pro forma market value of the Company ranged
from a minimum of $232,9000,000 to a maximum of $315,100,000 with a midpoint of
$274,000,000 (the "Valuation Range"). The Board of Directors determined to offer
the Subscription Shares for $10.00 per share (the "Subscription Price"). The
aggregate offering price of the Subscription Shares offered in the Offering will
be equal to the Valuation Range multiplied by the Adjusted Majority Ownership
Percentage. The number of Subscription Shares offered in the Offering will be
equal to the aggregate offering price of the Subscription Shares divided by the
Subscription Price. The number of Subscription Shares offered in the Offering
and/or the aggregate of the offering price of the Subscription Shares are
referred to herein as the "Offering Range." Based on the Valuation Range, the
Adjusted Majority Ownership Percentage and the Subscription Price, the minimum
of the Offering Range will be 15,300,408 Subscription Shares, the midpoint of
the Offering Range will be 18,000,691 Subscription Shares, and the maximum of
the Offering Range will be 20,700,648 Subscription Shares.
The Board of Directors reviewed the Independent Valuation and, in
particular, considered (i) the Mid-Tier Holding Company financial condition and
results of operations for the months ended September 30, 1997, and the year
ended December 31, 1996, (ii) financial comparisons of the Mid-Tier Holding
Company in relation to financial institutions of similar size and asset quality,
(iii) stock market conditions generally and in particular for financial
institutions, and (iv) the historical trading price of the Minority Shares, all
of which are set forth in the Independent Valuation. The Board also reviewed the
methodology and the assumptions used by FinPro in preparing the Independent
Valuation. The Valuation Range may be amended with the approval of the OTS (if
required), if
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<PAGE>
necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally. In the event the Independent
Valuation is updated to amend the pro forma market value of the Company to less
than $232,900,000 or more than $362,365,000, such appraisal will be filed with
the Securities and Exchange Commission by post-effective amendment.
The Independent Valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. FinPro did not independently verify the Consolidated Financial
Statements and other information provided by the Bank, nor did FinPro value
independently the assets or liabilities of the Bank. The Independent Valuation
considers the Bank as a going concern and should not be considered as an
indication of the liquidation value of the Bank. Moreover, because such
valuation is necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, no assurance can
be given that persons purchasing such shares in the Offering will thereafter be
able to sell such shares at prices at or above the Subscription Price.
Following commencement of the Subscription Offering, the maximum of the
Valuation Range may be increased by up to 15% to up to $362,365,000, which will
result in a corresponding increase of up to 15% in the maximum of the Offering
Range to 23,805,827 shares, to reflect changes in the market and financial
conditions, without the resolicitation of subscribers. The minimum of the
Valuation Range and the minimum of the Offering Range may not be decreased
without a resolicitation of subscribers. The Subscription Price of $10.00 per
share will remain fixed. See "--Limitations on Common Stock Purchases" as to the
method of distribution and allocation of additional shares that may be issued in
the event of an increase in the Offering Range to fill unfilled orders in the
Subscription and Community Offerings.
If the update to the Independent Valuation at the conclusion of the
Offering results in an increase in the maximum of the Valuation Range to more
than $362,365,000 and a corresponding increase in the Offering Range tomore than
23,805,827 shares, or a decrease in the minimum of the Valuation Range to less
than $232,900,000 and a corresponding decrease in the Offering Range to fewer
than 15,300,408 shares, then the Company, after consulting with the OTS, may
terminate the Plan of Conversion and return all funds promptly with interest at
the Bank's passbook rate of interest on payments made by check, certified or
teller's check, bank draft or money order, extend or hold a new Subscription
Offering, Community Offering, or both, establish a new Offering Range, commence
a resolicitation of subscribers or take such other actions as permitted by the
OTS in order to complete the Conversion. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable period
of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the OTS
for periods of up to 90 days not to extend beyond March __, 2000.
An increase in the number of shares to be issued in the Offering would
decrease both a subscriber's ownership interest and the Company's pro forma
earnings and stockholders equity on a per share basis while increasing pro forma
earnings and stockholder's equity on an aggregate basis. A decrease in the
number of shares to be issued in the Offering would increase both a subscriber's
ownership interest and the Company's pro forma earnings and stockholder's equity
on a per share basis while decreasing pro forma net income and stockholder's
equity on an aggregate basis. For a presentation of the effects of such changes,
see "Pro Forma Data."
Copies of the appraisal report of FinPro and the detailed memorandum of
the appraiser setting forth the method and assumptions for such appraisal are
available for inspection at the main office of the Bank and the other locations
specified under "Additional Information."
Exchange of Stock Certificates
Until the Effective Date, Minority Shares will continue to be available
for trading on the Nasdaq National Market. The conversion of the Mid-Tier Common
Stock into Common Stock will occur automatically on the Effective Date. After
the Effective Date, former holders of the Mid-Tier Common Stock will have no
further equity interest in the Mid-Tier Holding Company or the Bank (other than
as stockholders of the Company) and there
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will be no further transfers of the Mid-Tier Common Stock on the stock transfer
records of the Mid-Tier Holding Company.
As soon as practicable after the Effective Date, the Company, or a bank
or trust company designated by the Company, in the capacity of exchange agent
(the "Exchange Agent"), will send a transmittal form to each Minority
Stockholder. The transmittal forms are expected to be mailed within five
business days after the Effective Date and will contain instructions with
respect to the surrender of certificates representing the Mid-Tier Common Stock,
or Certificates formerly representing shares of Bank Common Stock that were not
replaced with Certificates representing the Mid-Tier Common Stock into which
such shares were converted in the Two-Tier Reorganization ("Converted Bank
Common Stock Certificates"). It is expected that certificates for shares of the
Company's Common Stock will be distributed within five business days after the
receipt of properly executed transmittal forms and other required documents.
THE MID-TIER HOLDING COMPANY'S STOCKHOLDERS SHOULD NOT FORWARD STOCK
CERTIFICATES TO THE BANK OR THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED
TRANSMITTAL FORMS.
Until the certificates representing the Mid-Tier Common Stock and/or
Converted Bank Common Stock Certificates are surrendered for exchange after
consummation of the Conversion, upon compliance with the terms of the
transmittal form, holders of such certificates will not receive the shares of
the Company's Common Stock and will not be paid dividends on the Common Stock
into which such shares have been converted. When such certificates are
surrendered, any unpaid dividends will be paid without interest. For all other
purposes, however, each certificate which represents shares of the Mid-Tier
Common Stock outstanding at the Effective Date and/or Converted Bank Common
Stock Certificates will be deemed to evidence ownership of the shares of the
Company's Common Stock into which those shares have been converted by virtue of
the Conversion.
All shares of Common Stock issued upon conversion of shares of the
Mid-Tier Common Stock shall be deemed to have been issued in full satisfaction
of all rights pertaining to Common Stock, subject, however, to the Company's
obligation to pay any dividends or make any other distributions with a record
date prior to the Effective Date which may have been declared or made by the
Mid-Tier Holding Company on or prior to the Effective Date and which remain
unpaid at the Effective Date.
No fractional shares of the Common Stock will be issued to any Minority
Stockholder upon consummation of the Conversion. For each fractional share that
would otherwise be issued, the Company will pay by check an amount equal to the
product obtained by multiplying the fractional share interest to which such
holder would otherwise be entitled by the Subscription Price. Payment for
fractional shares will be made as soon as practicable after the receipt by the
Exchange Agent of surrendered stock certificates.
If a certificate for the Mid-Tier Common Stock and/or Converted Bank
Common Stock Certificates has been lost, stolen or destroyed, the Exchange Agent
will issue the consideration properly payable upon receipt of appropriate
evidence as to such loss, theft or destruction, appropriate evidence as to the
ownership of such certificate by the claimant, and appropriate and customary
indemnification.
Subscription Offering and Subscription Rights
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock in the Subscription Offering have been granted under
the Plan of Conversion in the following order of descending priority. All
subscriptions received will be subject to the availability of Common Stock after
satisfaction of all subscriptions of all persons having prior rights in the
Subscription Offering and to the maximum, minimum, and overall purchase
limitations set forth in the Plan of Conversion and as described below under
"--Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each depositor with aggregate
savings account balances of $50 or more (a "Qualifying Deposit") as of August
31, 1996 (the "Eligibility Record Date," and such account holders, "Eligible
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Account Holders") will receive, without payment therefor, nontransferable
subscription rights to subscribe in the Subscription Offering for a number of
Subscription Shares equal to up to the greater of 100,000 shares, .10% of the
total offering of shares, or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the aggregate number of Exchange Shares
and Subscription Shares issued in the Conversion by a fraction of which the
numerator is the amount of the Eligible Account Holder's Qualifying Deposit and
the denominator is the total amount of Qualifying Deposits of all Eligible
Account Holders, in each case on the Eligibility Record Date, subject to the
overall purchase limitation and exclusive of shares purchased by the ESOP from
any increase in the shares offered pursuant to an increase in the maximum of the
Offering Range. See "--Limitations on Common Stock Purchases." If there are not
sufficient shares available to satisfy all subscriptions, shares first will be
allocated so as to permit each subscribing Eligible Account Holder to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
100 shares or the number of shares for which he subscribed. Thereafter,
unallocated shares (except for additional shares issued to the ESOP upon an
increase in the maximum of the Offering Range) will be allocated to each
subscribing Eligible Account Holder whose subscription remains unfilled in the
proportion that the amount of his aggregate Qualifying Deposit bears to the
total amount of Qualifying Deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled. If an amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated among those Eligible Account Holders whose subscriptions
are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his Order Form all deposit accounts in which he has an ownership
interest on the Eligibility Record Date. Failure to list an account could result
in fewer shares being allocated than if all accounts had been disclosed. The
subscription rights of Eligible Account Holders who are also directors or
officers of the Bank or their associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the twelve months preceding the Eligibility Record
Date.
Priority 2: Employee Plans. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the ESOP and 401(K) Plan will receive, without payment therefor,
nontransferable subscription rights to purchase Common Stock in the Offering on
behalf of ESOP and 401(K) participants subject to the purchase limitations
described herein. The ESOP intends to subscribe for up to 4% of the Common Stock
issued in the Offering, including 4% of the total number of shares, if any,
issued if the maximum of the Offering Range is increased. The 401(K) Plan may
purchase up to 200,000 shares of the Common Stock issued in the Offering. The
401(k) will purchase shares only at the direction of individual Participants.
Additional shares issued in the event the maximum of the Offering Range is
increased will be sold first to the ESOP and the 401(K) Plan.
Priority 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders and the ESOP, each depositor with a Qualifying Deposit
as of December 31, 1997 (the "Supplemental Eligibility Record Date") who is not
an Eligible Account Holder ("Supplemental Eligible Account Holder") will
receive, without payment therefor, nontransferable subscription rights to
subscribe in the Subscription Offering for a number of Subscription Shares equal
to the greater of 100,000 shares, .10% of the total offering of shares, or
fifteen times the product (rounded down to the next whole number) obtained by
multiplying the aggregate number of Exchange Shares and Subscription Shares
issued in the Conversion, by a fraction of which the numerator is the amount of
the Supplemental Eligible Account Holder's Qualifying Deposit and the
denominator is the total amount of Qualifying Deposits of all Supplemental
Eligible Account Holders, in each case on the Supplemental Eligibility Record
Date, subject to the overall purchase limitation. See "--Limitations on Common
Stock Purchases." If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated so as to permit each subscribing
Supplemental Eligible Account Holder to purchase a number of shares sufficient
to make his total allocation equal to the lesser of 100 shares or the number of
shares for which he subscribed. Thereafter, unallocated shares will be allocated
to each subscribing Supplemental Eligible Account Holder and whose subscription
remains unfilled in the proportion that the amount of his Qualifying Deposit
bears to the total amount of Qualifying Deposits of all subscribing Supplemental
Eligible Account Holders whose subscriptions remain unfilled.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his Order Form all deposit accounts in which he has
an ownership interest on the Supplemental Eligibility Record Date. Failure to
list an account could result in less shares being allocated than if all accounts
had been disclosed.
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Priority 4: Other Members. To the extent that there are shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
Employee Plans, and Supplemental Eligible Account Holders, each depositor with s
a Qualifying Deposit on the Voting Record Date ("Other Members") will receive,
without payment therefor, s nontransferable subscription rights to subscribe in
the Subscription Offering for a number of Subscription Shares equal to up to the
greater of 100,000 shares, or .10% of the total offering of shares, subject to
the overall purchase limitation. See "--Limitations on Stock Purchases." If
there are not sufficient shares available to satisfy all subscriptions,
available shares will be allocated in proportion to the amounts of the
subscriptions.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire on March __, 1998, unless extended for up to 45 days or
such additional periods by the Bank (as extended, the "Expiration Date") with
the approval of the OTS, if necessary. The Bank and the Company may determine to
extend the Subscription Offering and/or the Community Offering for any reason,
whether or not subscriptions have been received for shares at the minimum,
midpoint, or maximum of the Offering Range, and are not required to give
subscribers notice of any such extension. Subscription rights which have not
been exercised prior to the Expiration Date will become void.
The Company will not execute orders until all shares of Common Stock
have been subscribed for or otherwise sold. If 14,961,058 shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the Bank
pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be canceled. If
an extension beyond the 45 day period following the Expiration Date is granted,
the Bank will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions. Such extensions may not go
beyond March __, 2000.
Persons in Nonqualified States or Foreign Countries. The Company will
make reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
Plan of Conversion reside. However, the Company is not required to offer stock
in the Offering to any person who resides in a foreign country or resides in a
state of the United States with respect to which (i) a small number of persons
otherwise eligible to subscribe for shares of Common Stock reside in such state;
or (ii) the Company determines that compliance with the securities laws of such
state would be impracticable for reasons of cost or otherwise, including but not
limited to a request that the Company or its officers or directors, under the
securities laws of such state, register as a broker, dealer, salesman or selling
agent or to register or otherwise qualify the subscription rights or Common
Stock for sale or subject any filing with respect thereto in such state. Where
the number of persons eligible to subscribe for shares in one state is small,
the Company will base its decision as to whether or not to offer the Common
Stock in such state on a number of factors, including the size of accounts being
held by account holders in the state, the cost of registering or qualifying the
shares or the need to register the Company, its officers, directors or employees
as brokers, dealers or salesmen.
Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders and Other Members, the Company has
determined to offer shares pursuant to the Plan of Conversion to certain members
of the general public in a direct community offering (the "Community Offering")
with preference given first to Minority Stockholders and then to natural persons
residing in the Community (such natural persons referred to as "Preferred
Subscribers"). Such persons, together with associates of and persons acting in
concert with such persons, may purchase up to 100,000 Subscription Shares,
subject to the overall purchase limitation. See "--Limitations on Common Stock
Purchases." The opportunity to subscribe for shares of Common Stock in the
Community Offering category is subject to the right of the Company, in its sole
discretion, to accept or reject any such orders in whole or in part either at
the time of receipt of an order or as soon as practicable following the
Expiration Date.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of Preferred Subscribers, such stock will be
allocated among the Preferred Subscribers in the manner that first permits each
Minority Stockholder, to the extent possible, to purchase the number of shares
necessary to make his total allocation of Common Stock equal to the lesser of 2%
of the shares offered in the Offering or the number of shares subscribed
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for by each such Minority Stockholder; provided that if there are insufficient
shares available for such allocation, then shares will be allocated among
Minority Stockholders whose orders remain unsatisfied in the proportion that the
unfilled subscription of each bears to the total unfilled subscriptions of all
Minority Stockholders whose subscription remain unsatisfied. Remaining shares
will be allocated on an equal number of shares basis up to an aggregate of
100,000 shares, subject to the overall purchase limitation. If all orders of
Minority Stockholders are filled, any shares remaining will be allocated to
natural persons residing in the Community in the Community Offering applying the
same allocation described above for Minority Stockholders, and then to other
members of the general public.
The Community Offering will terminate no more than 45 days following
the Expiration Date, unless extended by the Bank and the Company with the
approval of the OTS if necessary. The Bank and the Company may determine to
extend the Community Offering for any reason, whether or not subscriptions have
been received for shares at the minimum, midpoint, or maximum of the Offering
Range, and are not required to give subscribers notice of any such extension.
The Company will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If 14,961,058 shares have not been subscribed
for or sold within 45 days after the Expiration Date, unless such period is
extended with the consent of the OTS, all funds delivered to the Bank pursuant
to the Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be canceled. If an extension
beyond the 45 day period following the Expiration Date is granted, the Bank will
notify subscribers of the extension of time and of any rights of subscribers to
modify or rescind their subscriptions. Such extensions may not go beyond March
__, 2000.
The term "resided" or "residing" as used herein shall mean any person
who occupies a dwelling within the Community, has a present intent to remain
within the Community for a period of time, and manifests the genuineness of that
intent by establishing an ongoing physical presence within the Community
together with an indication that such presence within the Community is something
other than merely transitory in nature. To the extent the person is a
corporation or other business entity, the principal place of business or
headquarters shall be in the Community. To the extent a person is a personal
benefit plan, the circumstances of the beneficiary shall apply with respect to
this definition. In the case of all other benefit plans, circumstances of the
trustee shall be examined for purposes of this definition. The Bank may utilize
deposit or loan records or such other evidence provided to it to make a
determination as to whether a person is a resident. In all cases, however, such
a determination shall be in the sole discretion of the Bank.
The Board of Directors has the right to reject any order submitted in
the Offering by a person whose representations the Board of Directors believes
to be false or who it otherwise believes, either alone or acting in concert with
others, is violating, evading, circumventing, or intends to violate, evade or
circumvent the terms and conditions of the Plan of Conversion.
Plan of Distribution and Selling Commissions
Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at the Bank's
office and from FBR. All prospective purchasers are to send payment along with a
completed Order Form directly to the Bank, where such funds will be held in a
segregated special escrow account and not released until the Offering is
completed or terminated.
To assist in the marketing of the Common Stock, the Bank has retained
FBR, a broker-dealer registered with the National Association of Securities
Dealers, Inc. (the "NASD"). FBR will assist the Bank in the Offering as follows:
(i) in training and educating the Bank's employees regarding the mechanics and
regulatory requirements of the Conversion; (ii) in conducting any informational
meetings for employees, customers and the general public; (iii) in coordinating
the selling efforts in the Bank's local communities; and (iv) keeping records of
all orders for Common Stock. For these services, the Agent will receive (i) a
management fee of $50,000; and (ii) a marketing fee of .75% of the total dollar
amount of the Common Stock sold in the Subscription and Community Offerings,
reduced by the management fee, not to exceed $1.0 million. No fee shall be
payable by the Bank in connection with the sale of Common Stock to the ESOP or
the 401(k) Plan, or to the Bank's directors, officers, employees, and such
persons' immediate family members.
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The Bank also will reimburse the Agent for its reasonable out-of-pocket
expenses associated with its marketing effort, the estimated maximum of which
are $70,000. The Bank has made an advance payment to the Agent in the amount of
$50,000. The Bank will indemnify FBR against liabilities and expenses (including
legal fees) incurred in connection with certain claims or litigation arising out
of or based upon untrue statements or omissions contained in the offering
material for the Common Stock, including liabilities under the Securities Act of
1933.
Certain directors and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Such persons
will be reimbursed by the Mutual Holding Company and/or the Bank for their
reasonable out-of-pocket expenses, including, but not limited to, de minimis
telephone and postage expenses, incurred in connection with such solicitation.
Other regular, full-time employees of the Bank may participate in the Offering
but only in ministerial capacities, providing clerical work in effecting a sales
transaction or answering questions of a potential purchaser provided that the
content of the employee's responses is limited to information contained in the
Prospectus or other offering documents, and no offers or sales may be made by
tellers or at the teller counter. All sales activity will be conducted in a
segregated or separately identifiable area of the Bank's offices apart from the
area accessible to the general public for the purpose of making deposits or
withdrawals. Other questions of prospective purchasers will be directed to
executive officers or registered representatives. Such other employees have been
instructed not to solicit offers to purchase Common Stock or provide advice
regarding the purchase of Common Stock. The Company will rely on Rule 3a4-1
under the Securities Exchange Act of 1934 (the "Exchange Act"), and sales of
Common Stock will be conducted within the requirements of Rule 3a4-1, so as to
permit officers, directors and employees to participate in the sale of Common
Stock. No officer, director or employee of the Company or the Bank will be
compensated in connection with his participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions in
the Common Stock.
Procedure for Purchasing Shares
Expiration Date. The Offering will terminate at _____ p.m., local time,
on March __, 1998, unless extended by the Company, with prior approval of the
OTS, if required, for up to an additional 45 days (as so extended, the "
Expiration Date). Such extension may be granted by the Company, in its sole
discretion, without further approval or additional notice to purchasers in the
Offering. Any extension of the Offering beyond the Expiration Date would be
subject to OTS approval and potential purchasers would be given the right to
increase, decrease, or rescind their orders for Common Stock. If the minimum
number of shares offered in the Offering is not sold by the Expiration Date the
Company may terminate the Offering and promptly refund all orders for Common
Stock. A reduction in the number of shares to the minimum of the Offering Range
will not require the approval of the Mutual Holding Company's members or the
Mid-Tier Holding Company's stockholders, or an amendment to the Independent
Valuation. If the number of shares is reduced below the minimum of the Offering
Range, purchasers will be given an opportunity to increase, decrease, or rescind
their orders.
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of an Order Form
will confirm receipt or delivery in accordance with Rule 15c2-8. Order Forms
will be distributed only with a Prospectus.
The Company reserves the right in its sole discretion to terminate the
Offering at any time and for any reason, in which case the Company will return
all purchase orders, plus interest at its current passbook rate from the date of
receipt.
Use of Order Forms. In order to purchase the Common Stock, each
purchaser must complete an Order Form. Incomplete Order Forms will not be
accepted. Any person receiving an Order Form who desires to purchase Common
Stock must do so prior to the Expiration Date by delivering (by mail or in
person) to the Company a properly executed and completed Order Form, together
with full payment for the shares purchased. Once tendered, an Order Form cannot
be modified or revoked without the consent of the Company. The Company reserves
the absolute right, in its sole discretion, to reject orders received in the
Community Offering, in whole or in part, at the time of receipt or at any time
prior to completion of the Offering. Each person ordering shares is required to
represent that he is purchasing such shares for his own account and that he has
no agreement or understanding with any person for the sale
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or transfer of such shares. The interpretation by the Company of the terms and
conditions of the Plan of Conversion and of the acceptability of the Order Forms
will be final.
Payment for Shares. Payment for all shares will be required to
accompany all completed Order Forms for the purchase to be valid. Payment for
shares may be made by (i) cash, (ii) check or money order made payable to
Peoples Bancorp, Inc., or (iii) authorization of withdrawal from savings
accounts (including certificates of deposit) maintained with the Bank.
Appropriate means by which such withdrawals may be authorized are provided in
the Order Forms. Once such a withdrawal amount has been authorized, a hold will
be placed on such funds, making them unavailable to the depositor until the
Offering has been completed or terminated. In the case of payments authorized to
be made through withdrawal from deposit accounts, all funds authorized for
withdrawal will continue to earn interest at the contract rate until the
Offering is completed or terminated. Interest penalties for early withdrawal
applicable to certificate accounts will not apply to withdrawals authorized for
the purchase of shares; however, if a withdrawal results in a certificate
account with a balance less than the applicable minimum balance requirement, the
certificate shall be canceled at the time of withdrawal without penalty, and the
remaining balance will earn interest at the passbook rate subsequent to the
withdrawal. In the case of payments made by cash, check or money order, such
funds will be placed in a segregated savings account and interest will be paid
by the Bank at the current passbook rate per annum from the date payment is
received until the Offering is completed or terminated. An executed Order Form,
once received by the Bank, may not be modified, amended or rescinded without the
consent of the Bank, unless the Offering is not completed by the Expiration
Date, in which event purchasers may be given the opportunity to increase,
decrease, or rescind their orders for a specified period of time.
Tax-qualified employee stock benefit plans may order shares by
submitting an Order Form, along with evidence, if applicable, of a loan
commitment from a financial institution (or the Company) for the purchase of
shares of Common Stock during the Offering and by making payment for shares of
Common Stock on the date of the closing of the Offering.
A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since the Bank does not offer such
accounts, it will allow a depositor to make a trustee-to-trustee transfer of the
IRA funds to a trustee offering a self-directed IRA program with the agreement
that such funds will be used to purchase the Common Stock in the Offering. There
will be no early withdrawal or IRS interest penalties for such transfers. The
new trustee would hold the Common Stock in a self-directed account in the same
manner as the Bank now holds the depositor's IRS funds. An annual administrative
fee may be payable to the new trustee. Depositors interested in using funds in a
Bank IRA to purchase Common Stock should contact the Stock Center at the Bank no
later than __________________, 1998 so that the necessary forms may be forwarded
for execution and returned prior to the Expiration Date.
Individuals who are participants in self-directed tax qualified plans
maintained by self-employed individuals ("Keogh Plans") at the Bank may use the
assets in their self-directed Keogh Plan accounts to purchase shares of Common
Stock in the Offering, provided that such Keogh Plans maintained at the Bank
must have their accounts transferred to an unaffiliated institution or broker to
purchase shares of Common Stock in the Offering.
In addition, the provisions of ERISA and IRS regulations require that
executive officers, directors and 10% stockholders who use self-directed IRA
funds and/or Keogh Plan accounts to purchase shares of Common Stock in the
Offering, make such purchase for the exclusive benefit of the IRA and/or Keogh
Plan participant.
The ESOP will not be required to pay for shares purchased until
consummation of the Offering, provided that there is in force from the time the
order is received a loan commitment from an unrelated financial institution or
the Company to lend to the ESOP the necessary amount to fund the purchase.
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Offering and Bank checks representing interest paid on
subscriptions made by cash, check, or money order will be mailed by the Bank to
the persons entitled thereto at the address noted on the Order Form, as soon as
practicable following consummation of the Offering and receipt of all necessary
regulatory approvals. Any certificates returned as undeliverable will be held by
the Bank until claimed by persons legally entitled thereto or otherwise disposed
of in accordance with
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applicable law. Until certificates for the Common Stock are available and
delivered to purchasers, purchasers may not be able to sell the shares of stock
which they ordered. Regulations prohibit the Bank from lending funds or
extending credit to any persons to purchase Common Stock in the Offering.
Other Restrictions. Notwithstanding any other provision of the Plan of
Conversion, no person is entitled to purchase any Common Stock to the extent
such purchase would be illegal under any federal or state law or regulation
(including state "blue-sky" registrations), or would violate regulations or
policies of the NASD, particularly those regarding free riding and withholding.
The Bank and/or its agents may require any subscriber to obtain and submit to
the Bank an acceptable legal opinion as to the legality of such person's
purchase and may refuse to honor any such purchase order if the legal opinion is
not timely furnished.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights from transferring or
entering into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan of Conversion or the
shares of Common Stock to be issued upon their exercise. Such rights may be
exercised only by the person to whom they are granted and only for his account.
Each person exercising such subscription rights will be required to certify that
he is purchasing shares solely for his own account and that he has no agreement
or understanding regarding the sale or transfer of such shares. The regulations
also prohibit any person from offering or making an announcement of an offer or
intent to make an offer to purchase such subscription rights or shares of Common
Stock prior to the completion of the Conversion.
The Bank and the Company will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
Limitations on Common Stock Purchases
The Plan includes the following limitations, which are in addition to
other limitations described herein, on the number of shares of Common Stock
which may be purchased in the Offering:
(1) No person may purchase less than 25 shares of Common Stock;
(2) The ESOP may purchase in the aggregate up to 4% of the Subscription
Shares issued in the Offering and the 401(K) Plan may purchase up to
150,000 of the Subscription Shares issued in the Offering, including
shares issued in the event of an increase in the Offering Range of
15%;
(3) No person, together with associates of and groups of persons acting in
concert with such person, may purchase in the Offering a number of
Subscription Shares that when combined with Exchange Shares received
by any such person, together with associates of and persons acting in
concert with such person exceeds 1.5% of the shares of Conversion
Stock issued in the Conversion issued in the Offering provided that
Minority Stockholders who receive more than 1.5% of the shares issued
in the Conversion shall not be requires to divest any shares;
(4) Directors and officers of the Bank and their associates may not
purchase Subscription Shares in an amount that when combined with
Exchange Shares received by such directors and officers and their
associates exceeds 25% of the aggregate number of Subscription Shares
and Exchange Shares issued in the Conversion, excluding purchases by
the ESOP.
Depending upon market or financial conditions, the Board of Directors
of the Bank and Company, with the approval of the OTS and without further
approval of the Mid-Tier Holding Company's stockholders or the Mutual Holding
Company's members, may increase or decrease the purchase limitations. Subject to
any required regulatory approval and the requirements of applicable laws and
regulations, but without further approval of the members of the Company, both
the individual amount permitted to be subscribed for and the overall purchase
limitation in the
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Subscription Offering and the Community Offering may be increased to up to a
maximum of 5% of the shares issued in the Conversion at the sole discretion of
the Company and the Bank. If such amount is increased, subscribers for the
maximum amount will be, and certain other large subscribers who through their
subscriptions evidence a desire to purchase the maximum allowable number of
shares in the sole discretion of the Bank may be, given the opportunity to
increase their subscriptions up to the then applicable limit. The effect of such
a resolicitation will be an increase in the number of shares owned by
subscribers who choose to increase their subscriptions. In addition, the Boards
of Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares issued in the Conversion shall not
exceed, in the aggregate, 10% of the total. Requests to purchase additional
shares under this provision will be determined by the respective Boards of
Directors in their sole discretion. Notice of an increase in the maximum
limitations may be given orally or in writing. If given in writing, notice may
be mailed to the address on a deposit account or the stock order form.
Subscribers will not receive notice if the maximum purchase limitations are
decreased. The factors that may be considered in determining whether to change
the maximum purchase limitations include the amount of stock for which
subscriptions are received, the results of the Offering, and market conditions
at the time of the consummation of the Conversion.
In the event of an increase in the total number of shares offered in
the Offering due to an increase in the Offering Range of up to 15%, the maximum
number of shares that may be purchased as restricted by the purchase limitations
shall not be increased proportionately (except for the ESOP), and the additional
shares sold will be allocated in the following order of priority in accordance
with the Plan: (i) to fill the ESOP's subscription for 4% of the total number of
shares sold; (ii) in the event that there is an oversubscription at the Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member category,
to fill unfulfilled subscriptions of such subscribers according to such
respective priorities; and (iii) to fill unfulfilled subscriptions in the
Community Offering with preference given first to Minority Stockholders and then
to natural persons residing in the Community.
The term "associate" of a person is defined to mean: (i) any
corporation (other than the Bank or a majority-owned subsidiary of the Bank) of
which such person is an officer, partner or 10% stockholder; (ii) any trust or
other estate in which such person has a substantial beneficial interest or
serves as a director or in a similar fiduciary capacity; provided, however, such
term shall not include any employee stock benefit plan of the Bank in which such
person serves as director or in a similar fiduciary capacity; and (iii) any
relative or spouse of such persons, or any relative of such spouse, who either
has the same home as such person or who is a director or officer of the Bank.
Directors are not treated as associates solely because of their Board
membership. For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion, see
"Management of the Bank--Subscriptions by Management and Directors," and "The
Conversion--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."
Liquidation Rights
In the unlikely event of a complete liquidation of the Bank prior to
the Conversion, all claims of creditors of the Bank, including those of
depositors to the extent of their deposit balances, would be paid first.
Thereafter, if there were any assets of the Bank remaining, such assets would be
distributed to stockholders, including the Mutual Holding Company. Were the
Mutual Holding Company and the Bank to liquidate prior to the Conversion, all
claims of creditors would be paid first. Thereafter, if there were any assets of
the Mutual Holding Company remaining, members of the Mutual Holding Company
would receive such remaining assets, pro rata, based upon the deposit balances
in their deposit account in the Bank immediately prior to liquidation. In the
unlikely event that the Bank were to liquidate after Conversion, all claims of
creditors (including those of depositors, to the extent of their deposit
balances) would also be paid first, followed by distribution of the "liquidation
account" to certain depositors, with any assets remaining thereafter distributed
to the Company as the holder of the Bank's capital stock. Pursuant to the rules
and regulations of the OTS, a post-conversion merger, consolidation, sale of
bulk assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
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The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the greater of: (a) the sum of: (i) the Mutual Holding Company's ownership
interest in the surplus and reserves of the Bank as of the date of its latest
balance sheet contained in the final Prospectus used in connection with
Conversion, and (ii) the restricted retained income account that reflects
certain dividends waived by the Mutual Holding Company; or (b) the retained
earnings of the Bank at the time that the Bank reorganized into the Mutual
Holding Company on August 3, 1995. The purpose of the liquidation account is to
provide Eligible Account Holders and Supplemental Eligible Account Holders who
maintain their deposit accounts with the Bank after the conversion with a
distribution upon complete liquidation of the Bank after Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if he were to
continue to maintain his deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after Conversion to an interest in the
liquidation account prior to any payment to the stockholders of the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
regular accounts, transaction accounts such as NOW accounts, money market
deposit accounts, and certificates of deposit, with a balance of $50 or more
held in the Bank on the Eligibility Record Date, or Supplemental Eligibility
Record Date, respectively ("Deposit Accounts"). Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the total
liquidation account for each of his Deposit Accounts based on the proportion
that the balance of each such Deposit Account on the Eligibility Record Date, or
Supplemental Eligibility Record Date, respectively, bore to the balance of all
Deposit Accounts in the Bank on such dates.
If, however, on any December 31, annual closing date of the Bank,
commencing after December 31, 1998, the amount in any Deposit Account is less
than the amount in such Deposit Account on the Eligibility Record Date, or
Supplemental Eligibility Record Date, respectively, or any other annual closing
date, then the interest in the liquidation account relating to such Deposit
Account would be reduced from time to time by the proportion of any such
reduction, and such interest will cease to exist if such Deposit Account is
closed. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related Deposit Account.
Payment pursuant to liquidation rights of Eligible Account Holders and
Supplemental Eligible Account Holders would be separate and apart from any
insured deposit accounts to such depositor. Any assets remaining after the above
liquidation rights of Eligible Account Holders and Supplemental Eligible Account
Holders are satisfied would be distributed to the Company as the sole
shareholder of the Bank.
Tax Aspects
The Conversion will be effected as: (i) a merger of the Mutual Holding
Company into the Mid-Tier Holding Company in a tax-free reorganization under
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"); and (ii) an exchange of the Mid-Tier Holding Company's Charter for
interim stock charter and simultaneous merger of the Mid-Tier Holding Company
into the Bank in a tax-free reorganization under Section 368(a)(1)(A) of the
Code; and (iii) a merger of the Interim Savings Bank into the Bank with the
Bank's shareholders exchanging their Bank common stock for Common Stock of the
Company in a tax-free reorganization under Code Section 368(a)(1)(A) by reason
of Code Section 368(a)(2)(E). Consummation of the Conversion is expressly
conditioned upon the prior receipt of an opinion of counsel with respect to
federal income taxation, and an opinion or letter of advice from counsel or tax
advisor with respect to New Jersey income taxation, that indicates that the
Conversion will not be a taxable transaction to the Mutual Holding Company, the
Mid-Tier Holding Company, the Bank, the Company, Interim Savings Bank, Eligible
Account Holders, Supplemental Eligible Account Holders, or Members of the Mutual
Holding Company. Unlike private letter rulings, opinions of counsel or tax
advisors are not binding on the IRS or the New Jersey Department of Treasury,
and either agency could disagree with such opinions. In the event of such
disagreement, there can be no assurance that the Company or Bank would prevail
in a judicial proceeding.
Pursuant to Revenue Procedure 94-3, the IRS has stated that it will not
rule on whether a transaction qualifies as a tax-free reorganization under Code
Section 368(a)(1)(A), including a transaction that qualifies under Code Section
368(a)(1)(A) by reason of Code Section 368(a)(2)(E), or whether the taxpayer is
subject to the consequences of qualification under that section (such as
nonrecognition and basis issues) but that it would rule on significant
sub-issues that must be resolved to determine whether the transaction qualifies
under the above sections. In several instances over
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the last two years, the IRS ruled favorably on certain significant sub-issues
associated with downstream mergers of mutual holding companies into their less
than 80 percent owned subsidiary savings associations. In such cases, the IRS
has ruled that (i) the exchange of the member's equity interests in the mutual
holding company for interests in a liquidation account established at the
savings association will satisfy the continuity of interest requirement with
respect to the merger of mutual holding company into the savings association;
(ii) pursuant to the merger of an interim savings association into the savings
association, the stock holding company will acquire control of the savings
association (as defined in Code Section 368(c)) as the interests in the
liquidation account and the shares of savings association stock previously held
by the mutual holding company will be disregarded; and (iii) the continuity of
interest requirement will not be violated by the exchange of stock holding
company stock for savings association stock in the merger of an interim savings
association into the savings association.
In December 1996, the IRS issued Revenue Procedure 94-76 which states
that the IRS will not issue private letter rulings with respect to downstream
mergers of a corporation into a "less than 80 percent distributee", i.e., a
corporation, such as the Mid-Tier Holding Company, in which the merging
corporation (i.e., the Mutual Holding Company) possesses less than 80 percent of
the total voting power of the stock of such corporation and less than 80 percent
of the total value of the stock of such corporation. The IRS has assumed this
"no-rule" position to study whether such downstream mergers circumvent the
purpose behind the repeal of General Utilities & Operating Co. v. Helvering, 296
U.S. 200 (1935). Counsel to the Company is of a view that the downstream merger
to effect the Conversion of the Mutual Holding Company to stock form, where
after consummation of the Conversion, the Company holds 100% of the shares of
the Bank and the untaxed appreciation of the Bank remains in corporate solution,
is not the type of downstream merger which can be considered as circumventing
the repeal of General Utilities. If, however, the IRS were to conclude that such
mergers circumvent the repeal of General Utilities, the IRS could issue
correcting regulations which could have the effect of taxing to the merging
corporation, as of the effective time of the merger, the fair market value of
the assets of such corporation over its basis in such assets. If such
regulations are issued, it is expected that they would apply on a prospective
basis and would have no effect on transactions consummated before their
issuance. The Company will receive an opinion of counsel that, in the absence of
a change in the regulations, and based on current law and regulations, the
merger of the Mutual Holding Company into the Mid-Tier Holding Company will
qualify as a tax-free merger under Code Section 368(a)(1)(A), as more fully
discussed below.
On the Effective Date, the Mutual Holding Company, the Mid-Tier Holding
Company and the Bank will receive an opinion of counsel, Luse Lehman Gorman
Pomerenk & Schick, A Professional Corporation, which will indicate that the
federal income tax consequences of the Conversion will be as follows: (i) the
merger of the Mutual Holding Company with and into the Mid-Tier Holding Company
will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of
the Code, (ii) the exchange of the members' equity interests in the Mutual
Holding Company for interests in a liquidation account established at the
Mid-Tier Holding Company will satisfy the continuity of interest requirement
with respect to the merger of the Mutual Holding Company into the Mid-Tier
Holding Company; (iii) the Mutual Holding Company will not recognize any gain or
loss on the transfer of its assets to the Mid-Tier Holding Company in exchange
for a liquidation account in the Mid-Tier Holding Company, and the Mid-Tier
Holding Company's assumption of the liabilities of Mutual Holding Company, if
any; (iv) no gain or loss will be recognized by the Mid-Tier Holding Company
upon the receipt of the assets of the Mutual Holding Company in exchange for a
liquidation account in the Mid-Tier Holding Company; (v) the basis of the assets
of Mutual Holding Company to be received by the Mid-Tier Holding Company will be
the same as the basis of such assets in the hands ofthe Mutual Holding Company
immediately prior to the transfer; (vi) the holding period of the assets of the
Mutual Holding Company to be received by the Mid-Tier Holding Company will
include the holding period of those assets in the hands of the Mutual Holding
Company immediately prior to the transfer; (vii) Mutual Holding Company members
will recognize no gain or loss upon the receipt of an interest in the
liquidation account in the Bank in exchange for their membership interest in the
Mutual Holding Company; (viii) the merger of the Mid-Tier Holding Company with
and into the Bank will qualify as a reorganization within the meaning of Section
368(a)(1)(A) of the Code, (ix) the exchange of the members' equity interests in
the Mid-Tier Holding Company for interests in a liquidation account established
at the Bank will satisfy the continuity of interest requirement with respect to
the merger of the Mid-Tier Holding Company into the Bank; (x) the Mid-Tier
Holding Company will not recognize any gain or loss on the transfer of its
assets to the Bank in exchange for a liquidation account in Bank, and the Bank's
assumption of the liabilities of Mid-Tier Holding Company, if any; (xi) no gain
or loss will be recognized by the Bank upon the
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receipt of the assets of the Mid-Tier Holding Company in exchange for a
liquidation account in Bank; (xii) the basis of the assets of Mid-Tier Holding
Company to be received by Bank will be the same as the basis of such assets in
the hands of the Mid-Tier Holding Company immediately prior to the transfer;
(xiii) the holding period of the assets of the Mid-Tier Holding Company to be
received by the Bank will include the holding period of those assets in the
hands of the Mid-Tier Holding Company immediately prior to the transfer; (xiv)
persons who have an interest in the liquidation account established in the
Mid-Tier Holding Company (i.e., former members of the Mutual Holding Company)
will recognize no gain or loss upon the receipt of an interest in the
liquidation account in the Bank in exchange for their interest in the Mid-Tier
Holding Company liquidation account; (xv) the Mid-Tier Holding Company
shareholders will not recognize any gain or loss upon their constructive
exchange of Mid-Tier Holding Company Common Stock for Bank Common Stock; (xvi)
the merger of Interim Savings Bank into Bank with Bank as the surviving
institution qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code, pursuant to Section 368(a)(2)(E) of the Code; (xvii)
interests in the liquidation account established at the Bank, and the shares of
Bank common stock held by the Mid-Tier Holding Company prior to consummation of
the merger of Mid-Tier Holding Company and Bank, will be disregarded for the
purposes of determining that an amount of stock in the Bank which constitutes
"control" was acquired by the Company pursuant to the merger of the Interim
Savings Bank into Bank; (xviii) the exchange of shares of Company Common Stock
for common stock of the Bank in the merger of Interim Savings Bank into the
Bank, following the merger of the Mid-Tier Holding Company into the Bank, will
not violate the continuity of interest requirement of the income tax
regulations; (xix) Interim Savings Bank will not recognize any gain or loss on
the transfer of its assets to Bank in exchange for Bank stock and the assumption
by the Bank of the liabilities, if any, of Interim Savings Bank; (xx) the Bank
will not recognize any gain or loss on the receipt of the assets of Interim
Savings Bank in exchange for Bank stock; (xxi) the Bank's basis in the assets
received from Interim Savings Bank in the proposed transaction will, in each
case, be the same as the basis of such assets in the hands of Interim Savings
Bank immediately prior to the transaction; (xxii) the Company will not recognize
any gain or loss upon its receipt of Bank stock solely in exchange for Company
Common Stock; (xxiii) the Bank's holding period for the assets received from
Interim Savings Bank in the proposed transaction will, in each instance, include
the period during which such assets were held by Interim Savings Bank; (xxiv)
Bank shareholders will not recognize any gain or loss upon their exchange of
Bank stock (which they constructively received) solely for shares of Company
Common Stock; (xxv) each Bank shareholder's aggregate basis in his or her
Company Common Stock received in the exchange will be the same as the aggregate
basis of the Bank stock surrendered in exchange therefor; (xxvi) each Bank
shareholder's holding period in his or her Company Common Stock received in the
exchange will include the period during which the Bank stock surrendered was
held, provided that the Bank stock surrendered is a capital asset in the hands
of the Bank shareholder on the date of the exchange; and (xxvii) the Eligible
Account Holders and Supplemental Eligible Account Holders will recognize gain,
if any, upon the issuance to them of withdrawable savings accounts, an interest
in the liquidation account and nontransferable subscription rights to purchase
Company stock, but only to the extent of the value, if any, of the subscription
rights. The form of such opinion has been filed with the SEC as an exhibit to
the Company's registration statement.
In the opinion of FinPro, which opinion is not binding on the IRS, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the Common Stock
at a price equal to its estimated fair market value, which will be the same
price as the Purchase Price for the unsubscribed shares of Common Stock. If the
subscription rights granted to Eligible Account Holders and Supplemental
Eligible Account Holders are deemed to have an ascertainable value, receipt of
such rights could result in taxable gain to those Eligible Account Holders and
Supplemental Eligible Account Holders who exercise the subscription rights in an
amount equal to such value and the Bank could recognize gain on such
distribution. Eligible Account Holders and Supplemental Eligible Account Holders
are encouraged to consult with their own tax advisor as to the tax consequences
in the event that such subscription rights are deemed to have an ascertainable
value.
Unlike private rulings, an opinion of counsel is not binding on the IRS
and the IRS could disagree with the conclusions reached therein. Depending on
the conclusion or conclusions with which the IRS disagrees, the IRS may take the
position that the transaction is taxable to any one or more of the Mutual
Holding Company, the Mid-Tier Holding Company and/or the members of the Mutual
Holding Company, the Bank, the Minority Stockholders of the Bank and/or the
Eligible Account Holders and Supplemental Eligible Account Holders who exercise
their subscription
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rights. In the event of such disagreement, there can be no assurance that the
IRS would not prevail in a judicial or administrative proceeding.
Certain Restrictions on Purchase or Transfer of Shares After Conversion
All Subscription Shares purchased in the Offering by a director or an
executive officer of the Bank will be subject to a restriction (required by the
OTS) that the shares not be sold for a period of one year following the
Conversion, except in the event of the death of such director or executive
officer. Each certificate for restricted shares will bear a legend giving notice
of this restriction on transfer, and instructions will be issued to the effect
that any transfer within such time period of any certificate or record ownership
of such shares other than as provided above is a violation of the restriction.
Any shares of Common Stock issued at a later date as a stock dividend, stock
split, or otherwise, with respect to such restricted stock will be subject to
the same restrictions. The directors and executive officers of the Bank and
certain other persons in receipt of material non-public information will also be
subject to the insider trading rules promulgated pursuant to the Exchange Act.
In certain circumstances officers and directors of the Company could be deemed
to be engaged in the distribution of the Common Stock, and be restricted in
their ability to sell their shares of Common Stock under SEC regulations.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to a stock option plan or any
tax qualified employee stock benefit plan of or non-tax qualified employee stock
benefit plan of the Bank or Company (including any employee plan, recognition
plan or restricted stock plan).
Unless approved by the OTS, the Company will not be permitted to
repurchase shares of its Common Stock for three years, except for: (i) an offer
to all stockholders on a pro rata basis; or (ii) for the repurchase of
qualifying shares of a director. Notwithstanding the foregoing, beginning one
year following completion of the Conversion the Company may repurchase its
Common Stock so long as (i) the repurchases within the following two years are
part of an open-market program not involving greater than 5% of its outstanding
capital stock during a twelve-month period; (ii) the repurchases do not cause
the Bank to become undercapitalized; and (iii) the Company provides to the
Regional Director of the OTS no later than ten days prior to the commencement of
a repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY AND THE BANK
General
The Plan of Conversion provides for the Conversion of the Mutual
Holding Company from the mutual to the stock form of organization and in
connection therewith, the Company, as a new Delaware stock corporation has been
organized which will become the sole stockholder of the Bank following the
Conversion. Provisions in the Company's Certificate of Incorporation and Bylaws
together with provisions of Delaware corporate law, may have anti-takeover
effects. In addition, certain provisions of the Company's and Bank's
compensation plans contain provisions which may discourage or make it more
difficult for persons or companies to acquire control of either the Company or
the Bank. Also, the Bank's Stock Charter and Bylaws and compensation plans
entered into in connection with the Conversion may have anti-takeover effects as
described below. In addition, regulatory restrictions may make it difficult for
persons or companies to acquire control of either the Company or the Bank.
Restrictions in the Company's Certificate of Incorporation and Bylaws
A number of provisions of the Company's Certificate of Incorporation
and Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory
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provisions relating to stock ownership and transfers, and business combinations,
which might be deemed to have a potential "anti-takeover" effect. These
provisions may have the effect of discouraging a future takeover attempt or
change of control which is not approved by the Board of Directors but which a
majority of individual Company stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors or
management of the Company more difficult. The following description of certain
of the provisions of the Certificate of Incorporation and Bylaws of the Company
is necessarily general and reference should be made in each case to such
Certificate of Incorporation and Bylaws, which are incorporated herein by
reference.
Limitation on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Securities Exchange Act of 1934, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire upon the exercise of conversion rights or options and shares as to which
such person and his affiliates have or share investment or voting power, but
shall not include shares beneficially owned by the ESOP or directors, officers
and employees of the Bank or Company or shares that are subject to a revocable
proxy and that are not otherwise beneficially owned, or deemed by the Company to
be beneficially owned, by such person and his affiliates. The Certificate of
Incorporation of the Company further provides that the provision limiting voting
rights may only be amended upon the vote of 80% of the outstanding shares of
voting stock.
Board of Directors. The Board of Directors of the Company is divided
into three classes. Each class shall serve a staggered term. The Company's
Certificate of Incorporation and Bylaws provide that the size of the Board l
shall be determined by a majority of the directors. The Certificate of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a shareholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Company. The Certificate of
Incorporation of the Company provides that a director may be removed from the
Board of Directors prior to the expiration of his term only for cause, upon the
vote of 80% of the outstanding shares of voting stock.
The Company will have a Nominating Committee which will be responsible
for nominations of directors. Stockholders who wish to nominate persons for
election to the Board of Directors may do so if the stockholder makes timely
written notice to the Company's Secretary. Generally, to be timely, such notice,
which must include all information required to be disclosed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, must be received at
the Company's principal executive offices no later than ninety (90) days prior
to the date of the meeting.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of shareholders of the Company may be called
only by the Board of Directors of the Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
shareholders of the Company may be taken only at an annual or special meeting
and prohibits shareholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 70.0 million shares of Common Stock and 1.0 million shares of
Preferred Stock. The shares of Common Stock and Preferred Stock were authorized
in an amount greater than that to be issued in the Conversion to provide the
Company's Board of Directors
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with as much flexibility as possible to effect, among other transactions,
financings, acquisitions, stock dividends, stock splits and employee stock
options. However, these additional authorized shares may also be used by the
Board of Directors consistent with its fiduciary duty to deter future attempts
to gain control of the Company. The Board of Directors also has sole authority
to determine the terms of any one or more series of Preferred Stock, including
voting rights, conversion rating and liquidation preferences. As a result of the
ability to fix voting rights for a series of Preferred Stock, the Board has the
power, to the extent consistent with its fiduciary duty, to issue a series of
Preferred Stock to persons friendly to management in order to attempt to block a
post-tender offer merger or other transaction by which a third party seeks
control, and thereby assist management to retain its position. The Company's
Board currently has no plans for the issuance of additional shares, other than
the issuance of additional shares upon exercise of stock options and to permit
the 1998 Retention Plan to obtain the equivalent of 4% of the shares sold in the
Offering.
Shareholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Company's outstanding shares of voting
stock to approve certain "Business Combinations," as defined therein, and
related transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to exceptions, be
approved by the vote of the holders of only a majority of the outstanding shares
of Common Stock of the Company and any other affected class of stock. Under the
Certificate of Incorporation, at least 80% approval of stockholders is required
in connection with any Business Combination involving an Interested Stockholder
(as defined below) except (i) in cases where the proposed transaction has been
approved in advance by a majority of those members of the Company's Board of
Directors who are unaffiliated with the Interested Stockholder and were
directors prior to the time when the shareholder became an Interested
Stockholder or (ii) if the proposed transaction met certain conditions set forth
therein which are designed to afford the shareholders a fair price in
consideration for their shares, in which cases approval of only a majority of
the outstanding shares of voting stock is required. The term "Interested
Stockholder" is defined to include any individual, corporation, partnership or
other entity (other than the Company or its subsidiary) which owns beneficially
or controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of the Company. This provision of the Certificate of Incorporation
applies to any "Business Combination," which is defined to include (i) any
merger or consolidation of the Company or any of its subsidiaries with or into
any Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, transfer, pledge or other disposition to or with any Interested
Stockholder or Affiliate of an Interested Stockholder of 25% or more of the
assets of the Company or combined assets of the Company and its subsidiary;
(iii) the issuance or transfer to any Interested Stockholder or its Affiliate by
the Company (or any subsidiary) of any securities of the Company in exchange for
any assets, cash or securities the value of which equals or exceeds 25% of the
fair market value of the Common Stock of the Company; (iv) the adoption of any
plan for the liquidation or dissolution of the Company proposed by or on behalf
of any Interested Stockholder or Affiliate thereof; and (v) any reclassification
of securities, recapitalization, merger or consolidation of the Company which
has the effect of increasing the proportionate share of Common Stock or any
class of equity or convertible securities of the Company owned directly or
indirectly, by an Interested shareholder or Affiliate thereof.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein), to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Bank and the stockholders of the Company,
give due consideration to all relevant factors, including, without limitation,
the social and economic effects of acceptance of such offer on the Company's
customers and the Bank's present and future account holders, borrowers and
employees; on the communities in which the Company and the Bank operate or are
located; and on the ability of the Company to fulfill its corporate objectives
as a savings and loan holding company and on the ability of the Bank to fulfill
the objectives of a federally chartered stock savings association under
applicable statutes and regulations. By having these standards in the
Certificate of Incorporation of the Company, the Board of Directors may be in a
stronger position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Company, even if the price
offered is significantly greater than the then market price of any equity
security of the Company.
111
<PAGE>
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Certificate of Incorporation, including the provision limiting voting rights,
the provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Certificate of Incorporation. The Company's Bylaws may be amended by its Board
of Directors, or by a vote of 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
shareholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a shareholder meeting to have at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a shareholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
shareholder and the stockholder's interest in the business matter. Similarly, a
shareholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
Anti-Takeover Effects of the Company's Certificate of Incorporation, Bylaws and
Compensation Plans Adopted in the Conversion
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Bank's current and proposed employment agreements and stock
benefit plans may also discourage takeover attempts by increasing the costs to
be incurred by the Bank and Company in the event of a takeover. See "Management
of the Bank."
The foregoing provisions and limitations may make it more difficult for
companies or persons to acquire control of the Bank. Additionally, the
provisions could deter offers to the shareholders which might be viewed by such
shareholders to be in their best interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and compensation plans are in the best
interests of the Company and its stockholders. An unsolicited non-negotiated
proposal can seriously disrupt the business and management of a corporation and
cause it great expense. Accordingly, the Board of Directors believes it is in
the best interests of the Company and its stockholders to encourage potential
acquirors to negotiate directly with management and that these provisions will
encourage such negotiations and discourage non-negotiated takeover attempts. It
is also the Board of Directors' view that these provisions should not discourage
persons from proposing a merger or other transaction at a price that reflects
the true value of the Company and that otherwise is in the best interest of all
stockholders.
Delaware Corporate Law
In 1988, Delaware enacted a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in transactions with the
target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(an "Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
112
<PAGE>
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the shareholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, calculated without regard to those
shares owned by the corporation's directors who are also officers or certain
employee stock plans; (iii) any business combination with an Interested
Stockholder that is approved by the Board of Directors and by a two-thirds vote
of the outstanding voting stock not owned by the Interested Stockholder; and
(iv) certain business combinations that are proposed after the corporation had
received other acquisition proposals and which are approved or not opposed by a
majority of certain continuing members of the Board of Directors. A corporation
may exempt itself from the requirements of the statute by adopting an amendment
to its Certificate of Incorporation or Bylaws electing not to be governed by
Section 203. At the present time, the Board of Directors of the Company does not
intend to propose any such amendment.
Restrictions in the Bank's Federal Stock Charter and Bylaws
The Bank's Charter contains a provision whereby the acquisition of or
offer to acquire beneficial ownership of more than 10% of the issued and
outstanding shares of any class of equity securities of the Bank by any person
(i.e., any individual, corporation, group acting in concert, trust, partnership,
joint stock company or similar organization), either directly or through an
affiliate thereof, will be prohibited until August 3, 2000 (five years from the
date of consummation of the Reorganization). Any stock beneficially owned in
excess of 10% of the stock outstanding will be deemed to be acquired in
violation of the Charter provision and will not be counted as outstanding for
voting purposes. This limitation shall not apply to any transaction in which the
Bank forms a stock holding company without a change in the respective beneficial
ownership interests of its stockholders, other than pursuant to the exercise of
any dissenter or appraisal rights, the purchase of shares by underwriters in
connection with a public offering, or the purchase of shares by a tax qualified
employee stock benefit plan. In the event that holders of revocable proxies for
more than 10% of the shares of the Common Stock of the Company seek, among other
things, to elect one-third or more of the Company's Board of Directors, to cause
the Company's stockholders to approve the acquisition or corporate
reorganization of the Company, or to exert a continuing influence on a material
aspect of the business operations of the Company, which actions could indirectly
result in a change in control of the Bank, the Board of Directors of the Bank
will be able to assert this provision of the Bank's Charter against such
holders. Although the Board of Directors of the Bank is not currently able to
determine when and if it would assert this provision of the Bank's Charter, the
Board of Directors, in exercising its fiduciary duty, may assert this provision
if it were deemed to be in the best interests of the Bank, the Company and its
stockholders. It is unclear, however whether this provision, if asserted, would
be successful against such persons in a proxy contest which could result in a
change in control of the Bank indirectly through a change in control of the
Company. For a period of five years from the effective date of the
Reorganization, shareholders will not be permitted to call a special meeting of
shareholders relating to a change of control of the Bank or a Charter amendment
or to cumulate their votes in the election of directors. The staggered terms of
the Board of Directors could have an anti-takeover effect by making it more
difficult for a majority of shares to force an immediate change in the Board of
Directors since only one-third of the Board is elected each year. The purpose of
the provisions is to assure stability and continuity of management of the Bank
in the years immediately following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time for the issuance or use of the shares of undesignated preferred
stock proposed to be authorized, the Board of Directors believes that the
availability of such shares will provide the Bank with increased flexibility in
structuring possible future financing and acquisitions and in meeting other
corporate needs which may arise. In the event of a proposed merger, tender offer
or other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of preferred stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such preferred stock, therefore, may be to deter or render
more difficult a future takeover attempt. The Board of Directors of the Bank
does not intend to issue any preferred stock except on terms which the Board
deems to be in the best interests of the Bank and its then existing
stockholders.
113
<PAGE>
Regulatory Restrictions
The Plan of Conversion prohibits any person, prior to the completion of
the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring, either directly or indirectly, or making an offer to
acquire more than 10% of the stock of any converted savings institution, without
the prior written approval of the OTS, except for (i) offers that if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock, (ii) offers in the
aggregate for up to 24.99% by the ESOP or other tax-qualified plans of the
Company or the Bank, and (iii) offers which are not offered by recently
converted savings associations and which receive prior OTS approval. Such
prohibition is also applicable to the acquisition of the Common Stock of the
Company. In the event that any person, directly or indirectly, violates this
regulation, the securities beneficially owned by such person in excess of 10%
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matters submitted to a
vote of shareholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity
security of the Company generally would be subject to approval by the OTS under
the Savings and Loan Holding Company Act (the "SLHCA"). The OTS requires all
persons seeking control of a savings institution, and, therefore, indirectly its
holding company, to obtain regulatory approval prior to offering to obtain
control. Such change in control restrictions on the acquisition of holding
company stock are not limited to three years after conversion but will apply for
as long as the regulations are in effect. Persons holding revocable or
irrevocable proxies may be deemed to be beneficial owners of such securities
under OTS regulations and therefore prohibited from voting all or the portion of
such proxies in excess of the 10% aggregate beneficial ownership limit. Such
regulatory restrictions may prevent or inhibit proxy contests for control of the
Company or the Bank which have not received prior regulatory approval.
Additional Anti-takeover Effects
Assuming executive officers and directors (i) purchase 76,000
Subscription Shares in the Offering, (ii) receive Exchange Shares in the Share
Exchange as described above, (iii) receive a number of shares of Common Stock
equal to 4% and 10% of the number of Subscription Shares sold in the Offering
pursuant to the 1998 Recognition Plan and 1998 Stock Option Plan, respectively
(assuming such plans are approved by stockholders, that all awards are vested
and all options exercised, and the 1998 Recognition Plan shares are purchased in
the open market); and (iv) receive all stock benefits that were not vested as of
December 1, 1997, and exercised all such stock options; then executive officers
and directors will own between _____% and _____% of the Common Stock at the
minimum and adjusted maximum of the Offering Range, respectively. Such amount
does not include the 2.6% of the Company's Common Stock that will be owned by
the ESOP at the conclusion of the Conversion, assuming it purchases 8.0% of the
Subscription Shares sold in the Offering, and assuming that all participants
vote the shares allocated to their ESOP account in accordance with management's
recommendations. Under the terms of the ESOP, the unallocated shares will be
voted by the independent ESOP trustee in the same proportion as the allocated
shares. Accordingly, directors and officers will have effective voting control
over a substantial amount of Common Stock issued and outstanding at the
completion of the Conversion. The potential voting control by directors and
officers could, together with additional stockholder support or upon exercise of
their options, defeat stockholder proposals requiring an 80% supermajority vote.
As a result, these provisions may preclude takeover attempts that certain
stockholders deem to be in their best interest and may tend to perpetuate
existing management.
114
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
At the Effective Date, the Company will be authorized to issue 75.0
million shares of Common Stock having a par value of $.01 per share and 5.0
million shares of preferred stock having a par value of $.01 per share (the
"Preferred Stock"). The Company currently expects to issue up to 20,700,648
(subject to adjustment) shares of Common Stock in the Offering, and up to
10,809,352 shares (subject to adjustment) in exchange for Minority Shares in the
Conversion. The Company does not intend to issue shares of Preferred Stock in
the Conversion. Each share of the Company's Common Stock will have the same
relative rights as, and will be identical in all respects with, each other share
of Common Stock. Upon payment of the Purchase Price for the Common Stock, in
accordance with the Plan of Conversion, all such stock will be duly authorized,
fully paid and nonassessable.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the FDIC
or any other government agency.
Common Stock
Dividends. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy." The holders of Common
Stock of the Company will be entitled to receive and share equally in such
dividends as may be declared by the Board of Directors of the Company out of
funds legally available therefor. If the Company issues Preferred Stock, the
holders thereof may have a priority over the holders of the Common Stock with
respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or as are otherwise presented to them by
the Board of Directors. Except as discussed in "Restrictions on Acquisition of
the Company and the Bank," each holder of Common Stock will be entitled to one
vote per share and will not have any right to cumulate votes in the election of
directors. If the Company issues Preferred Stock, holders of the Preferred Stock
may also possess voting rights. Certain matters require an 80% shareholder vote.
See "Restrictions on Acquisition of the Company and the Bank."
As a federal stock savings association, corporate powers and control of
the Bank are vested in its Board of Directors, who elect the officers of the
Bank and who fill any vacancies on the Board of Directors as it exists upon
Conversion. Voting rights of the Bank are vested exclusively in the owners of
the shares of capital stock of the Bank, which will be the Company, and voted at
the direction of the Company's Board of Directors. Consequently, the holders of
the Common Stock will not have direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as holder of the Bank's capital stock would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion--Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
115
<PAGE>
Preferred Stock
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without shareholder approval, issue Preferred Stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
General. The Charter of the Bank authorizes the issuance of capital
stock consisting of 20,000,000 shares of common stock, par value $10.00 per
share, and 10,000,000 shares of preferred stock, which preferred stock may be
issued in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of common stock
of the Bank has the same relative rights as, and is identical in all respects
with, each other share of common stock. The Board of Directors of the Bank is
authorized to approve the issuance of common stock up to the amount authorized
by the Charter without the approval of the Bank's stockholders. All of the
issued and outstanding Common Stock of the Bank will be held by the Company as
the Bank's sole stockholder.
Dividends. The holders of the Bank's common stock are entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefore. See "Dividend
Policy" for certain restrictions on the payment of dividends.
Voting Rights. The holders of the Bank's common stock possess exclusive
voting rights in the Bank. Each holder of shares of common stock is entitled to
one vote for each share held, subject to any right of shareholders to cumulate
their votes for the election of directors. The holders of the Bank's common
stock are not be permitted to cumulate their votes for the election of
directors. See "Restrictions on Acquisition of the Company and the
Bank--Antitakeover Effects of the Company's Certificate of Incorporation, Bylaws
and Compensation Plans Adopted in the Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of the Bank's common stock will be entitled to
receive, after payment of all debts and liabilities of the Bank (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the special liquidation account to Eligible Account Holders, all assets of
the Bank available for distribution in cash or in kind. If additional preferred
stock is issued subsequent to the Conversion, the holders thereof may also have
priority over the holders of common stock in the event of liquidation or
dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank
will not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price thereon, the common
stock will be fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chase Mellon
Shareholder Services.
EXPERTS
The consolidated financial statements of Peoples Bancorp, Inc. as of
December 31, 1996 and 1995 and for each of the years in the three year period
ended December 31, 1996, have been included herein in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
116
<PAGE>
FinPro has consented to the publication herein of the summary of its
report to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its opinion with
respect to subscription rights.
LEGAL OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Bank and Company by
Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., special counsel to the Bank and Company. Certain legal matters will be
passed upon for FBR by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information, including
the Conversion Valuation Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
The SEC maintains a web site (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants,
including the Company, that file electronically. The statements contained in
this Prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete.
The Bank has filed an application for conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the District Director of the
OTS located at 10 Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan of Conversion, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion.
A copy of the Certificate of Incorporation and the Bylaws of the
Company and the Federal Stock Charter and Bylaws of the Bank are available
without charge from the Bank.
117
<PAGE>
PEOPLES BANCORP, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT................................................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION
(As of September 30, 1997 (unaudited) and December 31, 1996 and 1995) .................... F-3
CONSOLIDATED STATEMENTS OF INCOME
(For the nine months ended September 30, 1997 and 1996
(unaudited) and the years ended December 31, 1996, 1995 and 1994)....................... 37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(For the nine months ended September 30, 1997 (unaudited) and the years
ended December 31, 1996, 1995 and 1994)................................................. F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the nine months ended September 30, 1997 and 1996 (unaudited) and
the years ended December 31, 1996, 1995 and 1994)....................................... F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(For the nine months ended September 30, 1997 and 1996 (unaudited) and
the years ended December 31, 1996, 1995 and 1994)....................................... F-10
</TABLE>
All schedules are omitted as the required information is not applicable or the
information is presented in the consolidated financial statements.
Financial statements of Peoples Bancorp, Inc. (the "Company") are not presented
herein because the Company has not yet issued any stock, has no assets and no
liabilities, and has not conducted any business other than of an organizational
nature.
Financial statements of Peoples Bancorp, M.H.C. (the "Mutual Holding Company")
are not presented herein because the Mutual Holding Company's assets other than
Mid-Tier Common Stock are insignificant and it has no liabilities and does not
conduct any business.
F-1
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Financial Statements
September 30, 1997 and 1996 (Unaudited)
and December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
[GRAPHIC OMITTED]
Independent Auditors' Report
The Board of Directors and Stockholders
Peoples Bancorp, Inc.:
We have audited the accompanying consolidated financial statements of Peoples
Bancorp, Inc. (holding company for Trenton Savings Bank FSB) as listed on the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Bancorp,
Inc. as of December 31, 1996 and 1995, and the results of its operations and
cash flows for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Short Hills, N.J.
January 21, 1997, except as to note 21,
which is as of December 31, 1997
F-2
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Condition
September 30, 1997 (unaudited) and
December 31, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
December 31,
September 30, -----------------
Assets 1997 1996 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Cash and due from banks (note 14) $ 10,909 12,938 6,253
Federal funds sold 2,300 8,000 10,000
--------- --------- -------
Total cash and cash equivalents 13,209 20,938 16,253
Securities available for sale (note 5) 127,651 87,648 83,776
Securities and mortgage-backed securities held to
maturity (market value of $70,922 in 1997, $86,512
in 1996 and $92,158 in 1995) (notes 6 and 7) 70,761 86,553 91,261
Federal Home Loan Bank stock, at cost 3,386 3,089 2,864
Loans, net (note 8) 397,866 380,288 306,093
Bank premises and equipment, net (note 9) 6,800 6,982 5,867
Accrued interest receivable (note 10) 4,823 3,602 3,765
Prepaid expenses 1,822 1,471 767
Intangible assets (note 2) 10,834 9,164 2,325
Other assets 1,790 1,281 1,247
--------- --------- ---------
Total assets $ 638,942 601,016 514,218
========= ========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 11) 493,334 491,246 410,770
Borrowing (note 12) 30,000 - -
Accrued expenses and other liabilities 7,369 6,418 5,906
--------- --------- ---------
Total liabilities 530,703 497,664 416,676
--------- --------- ---------
Stockholders' equity:
Common stock. $.10 par value. Authorized
20,000,000 shares; issued and outstanding
9,045,795 shares at September 30, 1997,
9,037,160 shares at December 31, 1996 and
8,912,500 shares at December 31, 1995 904 904 891
Additional paid-in capital 30,495 30,357 28,687
Retained earnings - substantially restricted 77,592 72,545 65,267
Unearned Management Recognition Plan shares (954) (1,543) -
Net unrealized gain on securities available for sale,
net of taxes 202 1,089 2,697
---------- --------- ---------
Total stockholders' equity (notes 13 and 14) 108,239 103,352 97,542
---------- --------- ---------
Commitments and contingencies (notes 9 and 16)
Total liabilities and stockholders' equity $ 638,942 601,016 514,218
========== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the nine months ended September 30, 1997 (unaudited)
and the years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
Net
unrealized
gain on
Retained Unearned securities
Additional earnings Management available Total
Number Common paid-in (substantially Recognition for sale, stockholders'
of shares stock capital restricted) Plan shares net of taxes equity
--------- ------ --------- ------------ ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 --$ -- -- 49,123 -- -- 49,123
Net income for the year -- -- -- 7,675 -- -- 7,675
Cumulative effect of accounting change - net
unrealized gain in securities designated as
available for sale, net of income tax
expense of $3,019 -- -- -- -- -- 5,371 5,371
Net change in net unrealized gain on securities
available for sale, net of income tax
benefit of $1,861 -- -- -- -- -- (3,401) (3,401)
--------- ----- --------- ---------- -------- ----- ---------
Balance at December 31, 1994 -- -- -- 56,798 -- 1,970 58,768
Proceeds of the stock offering, net of issuance
expenses of $1,387, and mutual holding
company capitalization, $200 8,912,500 891 28,687 -- -- -- 29,578
Net income for the year -- -- -- 8,648 -- -- 8,648
Dividends declared -- -- -- (179) -- -- (179)
Net change in net unrealized gain on securities
available for sale, net of tax expense of $360 -- -- -- -- -- 727 727
--------- ----- --------- ---------- -------- ------ ----------
Balance at December 31, 1995 8,912,500 891 28,687 65,267 -- 2,697 97,542
Net income for the year -- -- -- 8,391 -- -- 8,391
Dividends declared -- -- -- (1,113) -- -- (1,113)
Establishment of Management Recognition Plan 124,660 13 1,670 -- (1,683) -- --
Amortization on unearned Management Recognition
Plan shares -- -- -- -- 140 -- 140
Net change in net unrealized gain on securities
available for sale, net of tax expense of $905 -- -- -- -- -- (1,608) (1,608)
--------- ----- --------- ---------- -------- ----- ---------
Balance at December 31, 1996 9,037,160 904 30,357 72,545 (1,543) 1,089 103,352
Net income for the nine month period (unaudited) -- -- -- 5,898 -- -- 5,898
Dividends declared -- -- -- (851) -- -- (851)
Proceeds from exercise of stock options 8,635 -- 13 -- -- -- 13
Amortization on unearned Management Recognition
Plan shares -- -- 125 -- 589 -- 714
Net change in net unrealized gain on securities
available for sale, net of tax expense of $499 -- -- -- -- -- (887) (887)
--------- ----- --------- ---------- -------- ------ ----------
Balance at September 30, 1997 (unaudited) 9,045,795 $ 904 30,495 77,592 (954) 202 108,239
========= ===== ========= ========== ======== ====== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 (unaudited)
and the years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
----------------- -------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,898 6,448 8,391 8,648 7,675
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,488 - - 150 181
Depreciation and amortization expense 579 147 507 433 389
Amortization of Management Recognition Plan shares 714 56 140 - -
Amortization of intangible assets 577 204 389 226 21
Net accretion of premiums and discounts on securities (64) (126) (586) (204) (81)
(Increase) decrease in accrued interest receivable
and other assets (4,340) 361 602 (4,997) 124
Increase (decrease) in accrued interest payable and
other liabilities 826 (565) 863 855 750
Net gain on sale of securities (2,923) (2,189) (2,839) (4,193) (2,408)
Net gain on sale of other real estate -- (23) (23) (2) (3)
------- ------- ------- ------- -------
Net cash provided by operating activities 2,755 4,313 7,444 916 6,648
------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale
and held to maturity 39,940 44,055 51,756 44,850 56,960
Purchase of securities held to maturity -- (11,522) (11,759) (34,016) (6,491)
Purchase of securities available for sale (73,046) (16,997) (40,281) (44,949) (29,127)
Proceeds from sales of securities available for sale 3,816 3,583 9,368 10,054 12,661
Purchase of Federal Home Loan Bank Stock (297) (225) - - -
Maturities and repayments of mortgage-backed securities 9,337 11,042 12,176 6,699 6,576
Purchase of mortgage-backed securities held to maturity -- - (6,065) (25,495) (9,540)
Net increase in loans (17,578) (29,715) (26,266) (16,773) (34,106)
Net additions to bank premises, furniture and equipment (398) (478) (742) (387) (402)
Proceeds from sale of bank premises, furniture and equipment 312 - - - -
Proceeds from sales of other real estate owned - 105 105 79 3
Payment for purchase of Burlington County Bank, net
of cash acquired - - 3,363 - -
Payment for purchase of Manchester Trust Bank, net
of cash acquired (3,807) - - - -
------- ------- ------- ------- -------
Net cash used in investing activities (41,721) (152) (8,345) (59,938) (3,466)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net proceeds received from stock offering - - - 29,778 -
Dividends paid (851) (828) (1,113) (179) -
Capitalization of mutual holding company - - - (200) -
Net cash received from assumption of deposit liabilities - - - 31,468 -
Net increase in demand deposits 16,475 3,688 4,856 1,405 929
Net (decrease) increase in savings and time deposits (14,387) 2,671 2,443 338 (7,209)
Repayment of subordinated note - - (600) - -
Net increase in borrowings 30,000 - - - -
------- ------- ------- ------- -------
Net cash provided by (used in) financing activities 31,237 5,531 5,586 62,610 (6,280)
------- ------- ------- ------- -------
Net (decrease) increase in cash and cash equivalents (7,729) 9,692 4,685 3,588 (3,098)
Cash and cash equivalents as of beginning of period 20,938 16,253 16,253 12,665 15,763
------- ------- ------- ------- -------
Cash and cash equivalents as of end of period $ 13,209 25,945 20,938 16,253 12,665
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid:
Interest $ 16,112 10,829 15,577 16,394 12,673
======= ======= ======= ======= =======
Income taxes $ 3,351 3,975 4,875 5,805 4,320
======= ======= ======= ======= =======
Noncash investing activities:
Transfer of securities to securities available for sale $ - - - - 93,872
======= ======= ======= ======= =======
Transfer of securities available for sale to securities
held to maturity $ - - - - 37,112
======= ======= ======= ======= =======
Assets acquired in settlement of loans $ 374 110 723 34 77
======= ======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996 (unaudited) and
December 31, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Peoples Bancorp, Inc. (the Bancorp) is the holding company for its
wholly-owned subsidiary , Trenton Savings Bank FSB (the Bank). The Bank
provides banking services to individual and corporate customers primarily
in Mercer and Burlington counties in New Jersey and Bucks county in
Pennsylvania. The Bank is subject to competition from other financial
institutions and the regulations of certain Federal and state agencies
and undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts
of the Bancorp, the Bank, Manchester Trust Bank, and TSBusiness Finance
Corporation. Significant intercompany accounts and transactions have been
eliminated in consolidation.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the
financial statements and the reported amounts of revenues and expenses
during the periods presented. Actual results could differ significantly
from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for
loan losses. In connection with the determination of the allowance for
loan losses, management obtains independent appraisals for significant
properties.
The unaudited consolidated financial statements as of September 30, 1997
and the nine month periods ended September 30, 1997 and 1996 have been
prepared in accordance with generally accepted accounting principles. In
the opinion of management, all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of such interim
periods have been made. The results of operations for the nine months
ended September 30, 1997 are not necessarily indicative of results that
may be expected for the year ending December 31, 1997.
Loans
Loans are stated at the principal amount outstanding, net of deferred
loan origination fees, costs and unearned discounts, and the allowance
for loan losses.
Interest income on commercial, real estate mortgage and installment loans
is credited to operations based upon the principal amount outstanding.
Loans are placed on a nonaccrual status when a default of principal or
interest has existed for a period of 90 days, except when, in the opinion
of management, the collection of the principal and interest is reasonably
anticipated or adequate collateral exists. Previously accrued and
uncollected interest is reversed when a loan is placed on nonaccrual
status. Interest income is recognized subsequently only in the period
collected. Loans are returned to an accrual status when factors
indicating doubtful collectibility on a timely basis no longer exist.
F-6
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
Management, considering current information and events regarding the
borrowers ability to repay their obligations, considers a loan to be
impaired when it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
When a loan is considered to be impaired, the amount of impairment is
measured based on the fair value of the collateral. Impairment losses are
included in the allowance for loan losses through provisions charged to
operations.
The Bank has defined the population of impaired loans to be all
nonaccrual commercial loans. Impaired loans are individually assessed to
determine that the loan's carrying value is not in excess of the fair
value of the collateral or the present value of the loan's expected cash
flows. Smaller balance homogeneous loans that are collectively evaluated
for impairment, including mortgage and consumer loans, are specifically
excluded from the impaired loan portfolio.
Loan origination and commitment fees less certain costs have been
deferred, and the net amount amortized as an adjustment to the related
loan's yield over the contractual life of the related loan.
Allowance for Loan Losses
An allowance for loan losses is charged to operations based on
management's evaluation of the credit risk in its portfolio. Such
evaluation includes a review of all loans for which full collectibility
may not be reasonably assured and considers, among other matters, the
estimated net realizable value of the underlying collateral, economic
conditions and other matters which warrant consideration. All losses are
charged to the allowance when the loss actually occurs or when a
determination is made that a loss is probable. Subsequent recoveries, if
any, are added back to the allowance.
A substantial portion of the Bank's loans are secured by real estate in
the New Jersey market. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio is susceptible to
changes in market conditions in New Jersey and the Bank's market area.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions, particularly in New Jersey. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on
their judgments about information available to them at the time of their
examination.
Debt, Equity and Mortgage-Backed Securities
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS 115, the Bank is
required to report debt, readily-marketable equity and
F-7
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
mortgage-backed securities in one of the following categories (i)
"held-to-maturity" (management has a positive intent and ability to hold
to maturity) which are to be reported at amortized cost; (ii) "trading"
(held for current resale) which are to be reported at fair value, with
unrealized gains and losses included in earnings and (iii)
"available-for-sale" (all other debt, readily marketable equity and
mortgage-backed securities) which are to be reported at fair value, with
unrealized gains and losses excluded from earnings and reported, net of
tax, as a separate component of stockholders' equity. Accordingly, in
adopting SFAS 115, the Bank classified all of its holdings of debt,
readily-marketable equity and mortgage-backed securities at January 1,
1994 as either "held-to-maturity" or "available-for-sale." The adoption
of SFAS 115 had no impact on 1994 net income but resulted in a net credit
of $5,371,298 in stockholders' equity due to unrealized gains at January
1, 1994, on securities classified as "available-for-sale."
Premiums and discounts on debt and mortgage-backed securities are
amortized to expense and accreted to income over the estimated life
of the respective security using the level-yield method.
Gains and losses on the sale of securities are based upon the amortized
cost of the security using the specific identification method.
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is provided for on a
straight-line basis over the estimated useful lives of the respective
assets. Amortization of leasehold improvements is provided for on a
straight-line basis over the shorter of the useful life or the lease term
plus one renewal period.
Intangible Assets
Intangible assets consist primarily of premiums paid upon the 1995
assumption of deposits and goodwill arising from the 1996 acquisition of
the net assets of Burlington County Bank and the 1997 acquisition of the
net assets of Manchester Trust Bank. Premiums on deposits are amortized
on a straight-line basis over a period of ten years. Goodwill is being
amortized on a straight-line basis over 15 years which represents the
estimated periods to be benefited from the net assets acquired. On a
periodic basis, the Bank reviews its intangible assets for the events or
changes in circumstances that may indicate that the carrying amount of
the assets may not be recoverable.
Income Taxes
The Bank records income taxes utilizing the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
F-8
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
Pension Plan
The Bank has a pension plan covering employees and officers meeting
service and age requirements. The Bank's policy is to fund pension
costs accrued.
Other Postretirement Benefit Plans
In addition to the Bank's defined benefit plan, the Bank provides a
postretirement medical and life insurance plan to its retirees. The
benefits available under the plan depend on the years of service to the
Bank and the age of the retiree. The Bank's policy is to accrue for such
cost in the period which the benefit is earned.
Stock Option Plan
The Bank applies the "intrinsic value based method" as described in APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation.
Accordingly, no compensation cost has been recognized for the stock
option plan.
Management Recognition Plan
Compensation cost is incurred by the Bank over the vesting period based
upon the fair value of the shares at the date of allocation.
Statements of Cash Flows
The Bank considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Earnings Per Share (See Note 21)
Basic earnings per common share is calculated by dividing net income, by
the average number of common shares outstanding during the period. Common
stock equivalents are not included in the calculation.
Diluted EPS is computed similar to that of basic EPS except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if all potential dilutive common
shares were issued.
Earnings per share data for 1995 and 1994 are not presented as the Bank
completed its initial public offering on August 3, 1995 and such data
is not deemed meaningful by management.
Reclassifications
Certain reclassifications have been made to prior years amounts to
conform to the September 1997 presentation.
F-9
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(2) Acquisitions
Intangible assets consist primarily of premium paid upon the assumption
of deposits and goodwill arising from the acquisitions of Burlington
County Bank and Manchester Trust Bank.
On September 8, 1997, the Bancorp completed the acquisition of Manchester
Trust Bank, a trust services company with $140.1 million of assets under
management. Under terms of the agreement, Manchester will be operated as
a wholly-owned subsidiary of the Bank.
The following summarizes completed acquisitions of Peoples Bancorp, Inc.
as of September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
Total as of the date acquired
------------------------------------------- Method
Year Net Cash of
acquired Assets Loans Deposits assets paid accounting
-------- ------ ----- -------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assumption of deposits
from the RTC 1995 $ - - 33,974 - 2,506 Purchase
Burlington County Bank 1996 80,249 48,200 73,200 5,245 12,473 Purchase
Manchester Trust Bank 1997 2,013 - - 1,894 4,134 Purchase
</TABLE>
The above transactions resulted in the following goodwill (in thousands):
Goodwill balance as of:
----------------------------
December 31,
Sept. 30, ---------------- Original Amortization
1997 1996 1995 amount period
-------- ------ ------ -------- ------------
Assumption of deposits
from the RTC $ 1,850 2,054 2,325 2,506 10 years
Burlington County Bank 6,750 7,110 - 7,228 15 years
Manchester Trust Bank 2,234 - - 2,240 15 years
------- ------ ------ -------
$ 10,834 9,164 2,325 11,974
======= ====== ====== =======
The following supplemental schedule presents the pro forma results of
operations for the periods ended September 30, 1997 and 1996 and for the
years ended December 31, 1996 and 1995 as though the companies had
combined on January 1, 1995. The pro forma results of operations do not
necessarily reflect the results of operations that would have occurred
had the Bank, Manchester and Burlington been combined during such
periods.
September 30, December 31,
----------------- ----------------
1997 1996 1996 1995
---- ---- ---- ----
(in thousands)
Net interest income $ 16,458 16,410 21,599 20,126
Net income 5,991 6,665 8,633 9,219
Basic earnings per common share .67 .74 .96 -
Diluted earnings per common share .67 .74 .96 -
Pro forma earnings per common share as of December 31, 1995 is not
presented as its presentation would not be meaningful due to the Bank's
initial stock offering as of August 3, 1995.
F-10
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(3) Charter Conversion, Reorganization to a Mutual Holding Company and
Conversion to Stock Form of Ownership
On January 1, 1995 the Bank converted from a state chartered mutual
savings bank to a federally chartered mutual savings bank called Trenton
Savings Bank FSB.
On February 8, 1995, the Board of Directors of the Bank unanimously
adopted the Plan of Reorganization from a Federal Mutual Savings Bank to
a Federal Mutual Holding Company and Stock Issuance Plan, which plan was
subsequently amended (as amended, the Plan). Pursuant to the Plan, the
Bank reorganized from a Federally-chartered mutual savings bank into a
Federal mutual holding company, Peoples Bancorp, MHC and concurrently
formed a Federally-chartered capital stock savings subsidiary, which took
the name Trenton Savings Bank FSB. Each deposit account of the Bank at
the time of the reorganization became a deposit account in the
newly-formed bank in the same amount and upon the same terms and
conditions, except that the holder of each such deposit account has
voting and liquidation rights with respect to the holding company rather
than the Bank.
As part of the reorganization, the Bank was authorized to offer stock in
one or more offerings, up to a maximum of 49.9% of the issued and
outstanding shares of its common stock. On May 15, 1995, the Bank
received initial approval from the Office of Thrift Supervision (OTS) to
solicit subscribers for stock.
On August 3, 1995, the Bank completed its minority stock offering whereby
the Bank issued 3,116,500 shares at $10 per share for a total of
$31,165,000, which represents a minority ownership of 35.0% of the Bank
based upon its valuation by an independent appraiser. The net proceeds of
the stock offering, after reflecting offering expenses of $1.387 million
and costs to capitalize the mutual holding of $200,000, were $29.578
million. The net proceeds were added to the Bank's general funds to be
used for general corporate purposes.
Following the completion of the reorganization, all depositors who had
membership or liquidation rights with respect to the Bank as of the
effective date of the reorganization will continue to have such rights
solely with respect to the holding company so long as they continue to
hold deposit accounts with the Bank. In addition, all persons who become
depositors of the Bank subsequent to the reorganization will have such
membership and liquidation rights with respect to the holding company.
Borrower members of the Bank at the time of the reorganization will have
the same membership rights in the holding company that they had in the
Bank immediately prior to the reorganization so long as their existing
borrowings remain outstanding. Borrowers will not receive membership
rights in connection with any new borrowings made after the
reorganization.
In 1996 and 1995, the Bank declared cash dividends of $0.35 and $0.0575,
respectively, per common share to holders of common stock of the Bank.
The Bank's Federal mutual holding company, Peoples Bancorp, MHC, waived
the receipt of the cash dividends paid by the Bank, and it currently
intends to continue this policy. There can be no assurance that the
Bank's regulators will permit future dividend waivers, or the terms of
such waivers.
(4) Reorganization to a Two-Tiered Mutual Holding Company and Subsequent Plan
of Conversion to Full Stock Ownership Structure
On November 26, 1996 the Bank and Peoples Bancorp, Mutual Holding Company
(MHC) filed an application with the Office of Thrift Supervision (OTS),
their primary regulator, to reorganize into a two-tiered holding company.
Pursuant to the reorganization, which was approved by the OTS and
stockholders, and became effective in July 1997, the Bancorp was formed
and became the majority-owned subsidiary of Peoples Bancorp, MHC, and the
Bank became the wholly-owned subsidiary of the Bancorp. The relative
ownership interests of all stockholders of the Bank remained unchanged as
a result of the reorganization. After the reorganization, the Bank
continued its current business and operations as a Federally-chartered
savings bank under its existing name.
F-11
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(4) Reorganization to a Two-Tiered Mutual Holding Company and Subsequent Plan
of Conversion to Full Stock Ownership Structure, cont.
On September 24, 1997, the Board of Directors of the MHC unanimously
adopted the Plan of Conversion and Reorganization, pursuant to which the
MHC is converting from a federally charted mutual holding company to a
Delaware chartered stock corporation. As part of the Conversion each of
the issued and outstanding Minority Shares shall automatically, without
further action by the holder thereof, be converted into and become a
right to receive a number of shares of Common Stock of Peoples Bancorp,
Inc. (the new holding company) determined pursuant to the Exchange Ratio
based upon an independent appraisal.
Pursuant to the Plan, the MHC's majority interests in the Mid-Tier
Holding Company will be converted into shares at the Exchange Ratio, and
sold in a subscription offering.
The affirmative vote of a majority of the total eligible votes of the
members of the MHC at the Special Meeting of Members is required to
approve the Plan of Conversion and the transactions incident to the
Conversion. The affirmative vote of the holders of at least (i)
two-thirds of the outstanding common stock of the Mid-Tier Holding
Company, and (ii) a majority of the Minority Shares at a special meeting
of stockholders of the Mid-Tier Holding Company is required to approve
the Plan of Conversion. Consummation of the Conversion is also subject to
the approval of the OTS.
At the time of the conversion, the Bank will establish a liquidation
account in an amount equal to its equity as reflected in the
statement of financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible account holders and supplemental eligible account holders who
continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually, to the extent that eligible
account holders and supplemental eligible account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's or supplemental
eligible account holder's interest in the liquidation account. In the
event of a complete liquidation of the Bank, each eligible account holder
and supplemental eligible 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.
Subsequent to the conversion, the Bank may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the
effect thereof would cause equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration and
payment would otherwise violate regulatory requirement.
Conversion costs will be deferred and reduce the proceeds from the shares
sold in the conversion. If the conversion is not completed, all costs
will be charged as an expense. There were approximately $300,000 of
capitalized conversion costs as of September 30, 1997.
As of September 30, 1997, the MHC had waived $3.9 million of dividends.
Upon completion of the conversion, restrictions on waived dividends will
no longer exist. Additionally, the restrictions and availability of
waived dividends will cease as the Bank's commom stock will be 100%
publicly owned.
(5) Securities Available for Sale
As discussed in note 1, the Bank adopted SFAS 115 as of January 1, 1994.
The cumulative effect of this change in accounting for the net unrealized
appreciation in securities designated as available for sale was an
increase to securities of $8,390,032 and to stockholders' equity of
$5,371,298, net of income tax expense of $3,018,734.
The amortized cost and estimated market value of securities available for
sale as of September 30, 1997 and December 31, 1996 and 1995 are as
follows:
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Debt securities:
United States Treasury securities $ 51,320 124 - 51,444
United States Agencies securities 46,067 322 3 46,386
Corporate bonds 14,547 43 - 14,590
Government National Mortgage
Association - mortgage-backed
securities 15,072 149 - 15,221
-------- ---- ---- --------
127,006 638 3 127,641
Equity securities 10 - - 10
-------- ---- ---- --------
$ 127,016 638 3 127,651
======== ==== ==== --------
</TABLE>
F-12
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(5) Securities Available for Sale, cont.
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Debt securities:
United States
Treasury securities $ 65,336 204 33 65,507
United States Agencies
securities 9,924 10 167 9,767
Corporate bonds 9,151 21 - 9,172
------- ------ ---- -------
84,411 235 200 84,446
Equity securities 894 2,308 - 3,202
------- ------ ---- -------
$ 85,305 2,543 200 87,648
======= ====== ==== =======
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Debt securities:
United States
Treasury securities $ 70,944 728 30 71,642
United States Agencies
securities 5,011 - - 5,011
------- ------ ---- -------
75,955 728 30 76,653
Equity securities 2,536 4,587 - 7,123
------- ------ ---- -------
$ 78,491 5,315 30 83,776
======= ====== ==== =======
</TABLE>
On October 1, 1994, the Bank transferred $29,704,943 and $5,799,679 of
mortgage-backed securities and United States Agencies securities from
available for sale to held to maturity at fair value. The unrealized loss
at the date of the transfer was $1,607,055 ($641,346 and $1,070,550 at
December 31, 1996 and 1995, respectively) and is being amortized over the
estimated remaining life of the related securities.
The amortized cost and estimated market value of securities available for
sale at September 30, 1997 and December 31, 1996 by contractual maturity
are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
F-13
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(5) Securities Available for Sale, cont.
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
-------------------- --------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
(in thousands)
<S> <C> <C> <C> <C>
Due within one year $ 32,497 32,538 39,530 39,649
Due after one year through five years 33,093 33,218 34,633 34,706
Due after five years through ten years 46,344 46,664 10,248 10,091
Due after ten years 15,072 15,221 - -
-------- -------- ------- -------
127,006 127,641 84,411 84,446
Equity securities 10 10 894 3,202
-------- -------- ------- -------
$127,016 127,651 85,305 87,648
======== ======== ======= =======
</TABLE>
During the nine month period ended September 30, 1997, and years ended
December 31, 1996, 1995 and 1994, proceeds from sales of securities
available for sale resulted in gross gains and gross losses as follows:
December 31, 1997
Sept 30, -------------------------
1997 1996 1995 1994
---- ---- ---- ----
(in thousands)
Proceeds from sales of
securities available for sale $ 3,816 9,368 10,054 12,661
Gross realized gains 2,923 2,839 4,264 2,559
Gross realized losses - - 71 151
====== ====== ======= =======
As of September 30, 1997 United States Agency and Treasury securities
with a fair value of $32,270,000 were pledged to secure a borrowing
agreement entered into during 1997.
F-14
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(6) Securities Held to Maturity
The amortized cost and estimated market value of securities held to
maturity as of September 30, 1997 and December 31, 1996 and 1995 are as follows:
September 30, 1997
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Debt securities:
United States Agencies $ 14,350 - 29 14,321
Obligations of state and
political subdivisions 2,293 119 - 2,412
Corporate bonds 14,515 36 12 14,539
------- ---- ---- -------
$ 31,158 155 41 31,272
======= ==== ==== =======
1996
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Debt securities:
United States Agencies $ 17,042 - 135 16,907
Obligations of state and
political subdivisions 3,400 98 - 3,498
Corporate bonds 17,493 55 28 17,520
------- ---- ---- -------
$ 37,935 153 163 37,925
======= ==== ==== =======
1995
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Debt securities:
United States Agencies $ 24,934 71 77 24,928
Obligations of state and
political subdivisions 1,056 100 - 1,156
Corporate bonds 10,955 100 13 11,042
------- ---- ---- -------
$ 36,945 271 90 37,126
======= ==== ==== =======
F-15
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(6) Securities Held to Maturity, cont.
The amortized cost and estimated market value of securities held to
maturity as of September 30, 1997 and December 31, 1996 by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
September 30, 1997 December 31, 1996
------------------- ------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
(in thousands)
Due in one year or less $ 11,268 11,261 6,202 6,229
Due after one year through five years 17,576 17,558 29,354 29,196
Due five years through ten years 1,548 1,578 1,578 1,604
Due after ten years 766 875 801 896
------- ------- ------- -------
$ 31,158 31,272 37,935 37,925
======= ======= ======= =======
As of September 30, 1997 and December 31, 1996 and 1995, United States
Treasury securities with a face value of $900,000, $3,900,000 and
$100,000, respectively were held in trust to secure deposits of public
funds.
(7) Mortgage-Backed Securities Held to Maturity
The amortized cost and estimated market value of mortgage-backed
securities held to maturity as of September 30, 1997, December 31, 1996
and 1995 are as follows:
September 30, 1997
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Government National
Mortgage Association $ 1,459 - - 1,459
Federal Home Loan
Mortgage Corporation 38,144 208 161 38,191
------- ---- ---- -------
$ 39,603 208 161 39,650
======= ==== ==== =======
F-16
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(7) Mortgage-Backed Securities Held to Maturity, cont.
1996
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Government National
Mortgage Association $ 1,614 38 8 1,644
Federal Home Loan
Mortgage Corporation 47,004 431 492 46,943
------- ---- ---- -------
$ 48,618 469 500 48,587
======= ==== ==== =======
1995
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Government National
Mortgage Association $ 2,056 112 5 2,163
Federal Home Loan
Mortgage Corporation 52,260 748 139 52,869
------- ---- ---- -------
$ 54,316 860 144 55,032
======= ==== ==== =======
The amortized cost and market value of mortgage-backed securities held to
maturity as of September 30, 1997 and December 31, 1996, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
September 30, 1997 December 31, 1996
-------------------- ------------------
Estimated Estimated
Amortized market Aortized market
cost value cost value
---- ----- ---- -----
(in thousands)
Due in one year or less $ 5,540 5,521 3,014 2,990
Due after one year through five years 21,885 22,304 28,776 28,401
Due five years through ten years - - 1,405 1,434
Due after ten years 12,178 11,825 15,423 15,762
------- ------- ------- -------
$ 39,603 39,650 48,618 48,587
======= ======= ======= =======
F-17
<PAGE>
PEOPLES BANCORP, INC.
Notes to Statements of Condition, Continued
(8) Loans
A summary of loans as of September 30, 1997, December 31, 1996 and 1995
follows:
Sept. 30,
1997 1996 1995
---- ---- ----
(in thousands)
Mortgage loans:
One to four family $ 242,374 239,470 227,717
Commercial real estate and
multi-family 40,305 53,415 27,827
-------- -------- --------
Total mortgage loans 282,679 292,885 255,544
Commercial 62,245 34,486 11,573
Home equity 33,914 28,138 21,833
Other consumer loans 22,195 27,478 18,783
-------- -------- --------
Total other loans 118,354 90,102 52,189
-------- -------- --------
Total loans 401,033 382,987 307,733
Allowance for loan loss (3,202) (2,901) (1,767)
Premiums (discounts) 17 (24) 23
Net deferred costs 18 226 104
-------- -------- --------
Total loans, net $ 397,866 380,288 306,093
======== ======== ========
A summary of the activity in the allowance for loan losses for the nine
month periods ended September 30, 1997 and 1996 and the years ended
December 31, 1996, 1995 and 1994 is as follows:
September 30, December 31,
------------- -------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
Allowance for loan losses
at beginning of period $ 2,901 1,767 1,767 1,642 1,471
Acquired allowance - - 1,186 - -
Provision for loan losses 1,488 - - 150 180
Chargeoffs (1,313) (26) (110) (32) (23)
Recoveries 126 - 58 7 14
------ ------- ------ ------ ------
Allowance for loan losses
at end of period $ 3,202 1,741 2,901 1,767 1,642
====== ======= ====== ====== ======
F-18
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(8) Loans, cont.
Loans contractually in arrears by three months or more at September 30,
1997, December 31, 1996 and 1995 were as follows:
1997
-------------------------------------
Carrying Number % of
value of loans category
----- -------- --------
(in thousands)
Mortgage $ 2,788 48 0.99%
Commercial 1,166 38 1.87
Consumer 109 7 0.19
------ ---
$ 4,063 93 1.01%
====== === =====
1996
------------------------------------
Carrying Number % of
value of loans category
----- -------- --------
(in thousands)
Mortgage $ 2,277 37 0.78%
Commercial 1,183 19 2.01
Consumer 244 20 0.44
------ ---
$ 3,704 76 0.97%
====== === =====
1995
-----------------------------------
Carrying Number % of
value of loans category
----- -------- --------
(in thousands)
Mortgage $ 1,017 18 0.40%
Commercial 75 1 0.65
Consumer 40 3 0.10
------ ---
$ 1,132 22 0.37%
====== === ====
Nonaccrual loans totalled $4,477,000, $1,109,000, $2,951,000, $1,122,000
and $1,025,000 at September 30, 1997 and 1996, and December 31, 1996,
1995 and 1994, respectively. Nonaccrual loans as of September 30, 1997
include $1,437,000 of loans that are current but are classified as
doubtful as management believes the ultimate collection of principal and
interest is uncertain. Nonaccrual loans do not include certain loans
contractually in arrears by three months or more for which adequate
collateral exists or the collection of principal and interest is
reasonably anticipated. These loans totalled $1,023,000, $753,000,
$10,000 and $448,000 as of September 30, 1997, December 31, 1996, 1995
and 1994, respectively. The amount of interest income on nonaccrual
loans, which would have been recorded had these loans continued to pay
interest at the original contract rate, was approximately $381,000,
$95,000, $249,000, $87,000 and $98,000 for the nine months ended
September 30, 1997 and 1996 and the years ended December 31, 1996, 1995
and
F-19
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(8) Loans, cont.
1994, respectively. Interest income on nonaccrual loans included in net
income amounted to $116,000, $30,000, $76,000, $14,000 and $55,000 for
the nine months ended September 30, 1997 and 1996 and the years ended
December 31, 1996, 1995 and 1994, respectively. There is no commitment to
lend additional funds to borrowers whose loans have been placed on
nonaccrual.
Restructured loans totalled $192,000, $206,000, $206,000, $1,052,000 and
$1,044,000 at September 30, 1997 and 1996, December 31, 1996, 1995 and
1994. The amount of interest income on restructured loans, which would
have been recorded had these loans continued to pay interest at the
original contract rate, was approximately $16,000, $16,000, $21,000,
$87,000 and $90,000 for the nine months ended September 30, 1997 and 1996
and the years ended December 31, 1996, 1995 and 1994, respectively.
Interest income on restructured loans included in net income was
approximately $15,000, $15,000, $20,000, $80,000 and $80,000 for the nine
months ended September 30, 1997 and 1996 and the years ended December 31,
1996, 1995 and 1994, respectively. There is no commitment to lend
additional funds to borrowers whose loans have been restructured.
The recorded investment in loans receivable considered impaired and the
related allowance for loan losses at September 30, 1997 was $1,166,000
and $292,000, respectively. The balances at December 31, 1996 were
$1,183,000 and $448,000, respectively and $75,000 and $4,000,
respectively, at December 31, 1995.
At September 30, 1997 and December 31, 1996 and 1995, loans to officers
and directors amounted to $772,000, $784,000 and $515,000, respectively.
All such loans were performing according to their original terms.
(9) Bank Premises and Equipment
Bank premises and equipment consists of the following as of September 30,
1997, December 31, 1996 and 1995:
Sept. 30,
1997 1996 1995
---- ---- ----
(in thousands)
Land $ 1,008 867 667
Buildings and improvements 4,848 5,166 4,661
Furniture and equipment 2,441 2,521 1,917
Leasehold improvements 1,318 1,214 901
----- ----- ------
9,615 9,768 8,146
Less accumulated depreciation
and amortization 2,815 2,786 2,279
----- ----- -----
$ 6,800 6,982 5,867
======== ===== =====
F-20
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(9) Bank Premises and Equipment, cont.
In the normal course of business, the Bank has entered into leases for
its branch locations. The lease terms range from five to twenty years and
expire at various times through the year 2007. The agreements provide for
renewal options and all but one require the Bank to pay common area
costs.
The following is a schedule of future minimum lease payments for
operating leases (with initial or remaining terms in excess of one year)
as of September 30, 1997 and December 31, 1996:
September 30, December 31,
- ------------- ------------
1998 $ 396 1997 $ 404
1999 359 1998 424
2000 261 1999 395
2001 229 2000 281
2002 196 2001 252
2003 181 2002 250
Thereafter 436 Thereafter 1,038
------- ------
Total minimum Total minimum
lease payments $ 2,058 lease payments $ 3,044
====== ======
The annual rental expense amounted to $303,000 and $183,000 for the nine
month periods ended September 30, 1997 and 1996, respectively, and
$304,000, $226,000 and $164,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
(10) Accrued Interest Receivable
A summary of accrued interest receivable at September 30, 1997, December
31, 1996 and 1995 is as follows:
Sept. 30,
1997 1996 1995
---- ---- ----
(in thousands)
Loans $ 2,091 1,654 1,427
Securities available for sale 1,916 1,114 1,334
Mortgage-backed securities held
to maturity 274 350 387
Securities held to maturity 542 484 538
Federal funds sold - - 79
-------- ------ ------
$ 4,823 3,602 3,765
======== ====== ======
F-21
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(11) Deposits
Deposit balances as of September 30, 1997, December 31, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
Weighted
average
rate at 1997 1996 1995
Sept.30, ----------------- ---------------- -----------------
1997 Amount % Amount % Amount %
---- ------ - ------ - ------ -
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Types of deposit:
Noninterest
bearing demand
deposit accounts - $ 27,982 5.7 $ 25,366 5.2 $ 10,800 2.6
N.O.W. 1.24 14,955 3.1 16,431 3.3 9,555 2.3
Money market
demand accounts 3.39 58,394 11.8 44,794 9.1 32,894 8.0
Passbook 2.26 95,132 19.3 104,210 21.2 92,747 22.6
Club accounts - 1,069 0.2 269 .1 219 0.1
Other - 5,573 1.1 3,630 .7 2,758 0.7
------- ------ ------- ----- ------- -----
203,105 41.2 194,700 39.6 148,973 36.3
------- ------ ------- ----- ------- -----
Certificates of
deposit 5.25 247,158 50.1 248,396 50.6 209,488 51.0
Retirement
accounts 5.50 43,071 8.7 48,150 9.8 52,309 12.7
------- ------ ------- ------ ------- ------
290,229 58.8 296,546 60.4 261,797 63.7
------- ------ ------- ------ ------- ------
$493,334 100.0 $491,246 100.0 $410,770 100.0
======= ====== ======= ====== ======= ======
</TABLE>
As of September 30, 1997, December 31, 1996 and 1995, certificates of
deposit, regular and retirement accounts have scheduled maturities as
follows:
1997 1996 1995
---- ---- ----
(in thousands)
Within one year $ 218,046 188,744 183,658
One to two years 47,621 39,803 27,920
Two to three years 20,474 20,298 27,753
Thereafter 4,088 47,701 22,466
-------- -------- --------
$ 290,229 296,546 261,797
======== ======== ========
F-22
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(11) Deposits, cont.
An analysis of the interest expense for the nine month periods ended
September 30, 1997 and 1996 and for the years ended December 31, 1996,
1995 and 1994 by deposit category is as follows:
September 30, December 31,
------------- ----------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
NOW, passbook and other
accounts $ 1,756 1,722 2,402 2,671 2,821
Money market demand accounts 1,366 837 1,233 1,066 1,099
Club accounts 1 - 15 13 13
Regular certificates of deposit 9,626 8,532 11,836 11,125 7,490
Retirement accounts 1,985 1,774 2,456 2,134 1,428
------- ------ ------ ------- ------
Total interest $ 14,734 12,865 17,942 17,009 12,851
Certificates of deposit greater than $100,000 amounted to $26,698,000,
$26,093,000 and $14,837,000 at September 30, 1997, December 31, 1996 and
1995, respectively. The deposits of the Bank are insured up to $100,000
by the BIF and SAIF, which is administered by the FDIC and is backed by
the full faith and credit of the U.S. Government.
(12) Borrowed Funds
On January 3, 1997, the Bank entered into an agreement to borrow $30
million at a fixed interest rate of 6.02%. The debt matures on January 3,
2000. The funds provided were used to fund a leveraging program whereby
proceeds from the borrowing were used to fund the purchase of Federal
agency securities designated as available for sale. The note is secured
by United States Agency and Treasury securities designated as available
for sale and having a fair value of $32,270,000 as of September 30, 1997.
The collateral fulfills the security agreement requirement that
collateral with a market value of 107% secure the note.
(13) Income Taxes
The Federal tax bad debt reserve method available to thrift institutions
was repealed in 1996 for tax years beginning after 1995. As a result, the
Bank must change from the reserve method to the specific charge-off
method to compute its bad debt deduction. In addition, the Bank is
required generally to recapture into income the portion of its bad debt
reserves (other than the supplemental reserve) that exceeds its base year
reserves, approximately $2,500,000.
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable
income ratably (on a straight-line basis) over a six-year period. If the
Bank meets a "residential loan requirement" for a tax year beginning in
1996 or 1997, the recapture of the reserves will be suspended for such
tax year. Thus, recapture can potentially be deferred for up to two
years. The residential loan requirement is met if the principal amount of
housing loans made by the Bank during the year at issue (1996 and 1997)
is at least as much as the average of the principal amount of loans made
during the six most recent tax years prior to 1996. Refinancings and home
equity loans are excluded.
For 1996 the Bank has met the residential loan requirement and expects to
meet it for 1997.
F-23
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
Retained earnings as of December 31, 1996 includes approximately
$3,500,000 for which no provision for Federal income tax has been made.
This reserve (base year and supplemental) is frozen not forgiven as
certain events could trigger a recapture.
Income tax expense for the nine month periods ended September 30,
1997 and 1996 and for the years ended December 31, 1996, 1995 and 1994
is comprised of the following components:
September 30, December 31,
------------- ----------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
Current income tax expense:
Federal $ 3,624 3,590 4,728 4,796 3,929
State 311 317 415 382 338
------ ------ ------ ------ ------
3,935 3,907 5,143 5,178 4,267
------ ------ ------ ------ ------
Deferred income tax (benefit)
expense:
Federal (571) (266) (401) (297) 161
State (32) (15) (22) (17) 9
------ ------ ------ ------ ------
(603) (281) (423) (314) 170
------ ------ ------ ------ ------
Total income tax expense $ 3,332 3,626 4,720 4,864 4,437
====== ====== ====== ====== ======
A reconciliation between the effective income tax expense and the
expected amount computed using the applicable statutory Federal income
tax rate for the nine month periods ended September 30, 1997 and 1996 and
for the years ended December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ---------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Income before income taxes $ 9,230 10,074 13,111 13,512 12,112
Applicable statutory Federal tax rate 35% 35% 35% 35% 35%
Expected Federal income tax expense 3,230 3,526 4,589 4,729 4,239
State tax net of Federal benefit 181 196 256 249 226
Increase (Decrease) in Federal income
tax resulting from:
Tax-exempt income (32) (18) (24) (25) (25)
Other (178) (78) (101) (89) (3)
Goodwill 131 - - - -
------ ------ ------ ------ ------
$ 3,332 3,626 4,720 4,864 4,437
====== ====== ====== ====== ======
Effective tax rate 36.1% 36.0% 36.0% 36.0% 36.6%
</TABLE>
F-24
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset (liability) at September 30, 1997,
December 31, 1996 and 1995 are as follows:
Sept. 30,
1997 1996 1995
---- ---- ----
(in thousands)
Deferred tax assets:
Loan fees $ 26 49 48
Other 352 256 91
Postretirement benefits 507 506 411
Pension 191 117 67
Supplemental Employee Retire ment Plan 305 211 -
Allowance for loan loss - book 1,405 980 653
------ ------ ------
2,786 2,119 1,270
------ ------ ------
Deferred tax liabilities:
Shareholders' equity - unrealized gain
on securities available for sale 114 613 1,517
Allowance for loan losses - tax 1,031 930 928
Other 28 65 33
------ ------ ------
1,173 1,608 2,478
------ ------ -----
Net deferred tax asset (liability) $ 1,613 511 (1,208)
====== ====== =====
Management believes that it is more likely than not that the deferred tax
asset will be realized based upon taxable income in the carryback period
and the probability of future operations to generate sufficient taxable
income.
Total deferred tax benefits for the nine month periods ended September 30,
1997 and 1996 and the years ended December 31, 1996, 1995 and 1994 were
allocated as follows:
September 30, December 31,
------------- --------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
Income from operations $ (603) (281) (423) (314) 170
Shareholders' equity - unrealized
gains on securities available
for sale (499) - (905) 360 1,861
Business combination - - (391) - -
------ ----- ----- ---- -----
$(1,102) (281) (1,719) 46 2,031
====== ===== ===== ==== =====
F-25
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(14) Regulatory Matters
Office of Thrift Supervision (OTS) regulations require banks to maintain
minimum levels of regulatory capital. Under the regulations in effect at
December 31, 1996, the Bank was required to maintain (i) a minimum
tangible capital ratio of 1.50%, (ii) a minimum leverage ratio of Tier I
capital to total adjusted assets of 3.0%, and (iii) a minimum ratio of
total capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized. Generally, an institution is considered
well capitalized if it has a leverage (Tier I) capital ratio of at least
5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total
risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors.
Management believes that, as of September 30, 1997 and December 31, 1996
and 1995, the Bank meets all capital adequacy requirements to which it is
subject. Further, the most recent OTS notification categorized the Bank
as a well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's capital
classification.
The following is a reconciliation of the Bank stockholders' equity to
regulatory capital at September 30, 1997 (in thousands):
Tier 1 Total
Tangible Core risk-based risk-based
capital capital capital capital
------- ------- ------- -------
Stockholders' equity per the
consolidated financial
statements $ 108,239 108,239 108,239 108,239
Intangible assets (10,834) (10,834) (10,834) (10,834)
Net unrealized gain on
securities (202) (202) (202) (202)
General valuation allowance - - - 3,202
-------- ------- ------- --------
Total regulatory capital $ 97,203 97,203 97,203 100,405
======== ======= ======= ========
F-26
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(14) Regulatory Matters, cont.
The following is a summary of the Bank's actual capital amounts and
ratios as of September 30, 1997 and December 31, 1996 and 1995, compared
to the OTS minimum capital adequacy requirements and classification as a
well-capitalized institution:
<TABLE>
<CAPTION>
OTS Requirements
------------------------------------------
For Classification
Minimum as Well
Actual Capital Adequacy Capitalized
------------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997
Tangible capital $ 97,203 15.48% $ 9,418 1.50% $ - -%
Tier I (core) capital 97,203 15.48 18,835 3.00 31,392 5.00
Risk-based capital:
Tier I 97,203 25.64 - - 22,743 6.00
Total 100,405 26.48 30,324 8.00 37,906 10.00
December 31, 1996:
Tangible capital 92,302 15.6 8,860 1.50 - -
Tier I (core) capital 92,302 15.6 17,721 3.00 29,534 5.00
Risk-based capital:
Tier I 92,302 27.5 - - 20,119 6.00
Total 95,200 28.4 26,825 8.00 33,531 10.00
December 31, 1995:
Tangible capital 91,838 18.1 7,627 1.50 - -
Tier I (core) capital 91,838 18.1 15,253 3.00 25,422 5.00
Risk-based capital:
Tier I 91,838 35.5 - - 15,528 6.00
Total 93,605 36.2 20,704 8.00 25,880 10.00
</TABLE>
As of September 30, 1997, December 31, 1996 and 1995, the Federal Reserve
Bank required the Bank to maintain an average reserve balance of $0, $0
and approximately $564,000, respectively, to meet regulatory
requirements.
F-27
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans
Pension Plan
The Bank has a pension plan covering officers and employees meeting
certain eligibility requirements including the attainment of age 21 and
completion of one thousand hours of service during the twelve consecutive
months commencing on the Employee Commencement Date. Prior service costs
are amortized over a forty-year period, changes in the unfunded liability
due to a prior year change in actuarial assumptions are amortized over
thirty years and pension costs are funded as accrued.
A comparison of the most recent available accumulated plan benefits and
plan net assets for the pension plan, as determined by the plan actuaries
as of January 1, 1997, 1996 (as amended October 1, 1996 for the
acquisition of Burlington County Bank) and 1995, follows:
1997 1996 1995
---- ---- ----
(in thousands)
Actuarial present value of accumulated
plan benefits:
Vested participants $ 2,584 2,082 2,030
Non-vested participants 123 87 82
------ ------ ------
$ 2,707 2,169 2,112
Projected benefit obligation for
services rendered 3,306 3,081 2,653
Plan assets at fair value 2,987 2,807 2,387
------ ------ ------
Projected benefit obligation
in excess of plan assets 319 274 266
Unrecognized gain 225 322 149
Unrecognized prior service cost (178) (182) (215)
------ ------ ------
Accrued pension expense $ 366 414 200
====== ====== ======
The components of net pension expense for the periods ended September 30,
1997 and 1996 and the years ended December 31, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
Sept. 30, December 31,
------------ --------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Service cost-benefits earned during the year $ 174 116 155 117 130
Interest cost on projected benefit obligation 194 149 199 214 188
Actual return on plan assets (175) (137) (183) (182) (189)
Net amortization and deferral 14 13 17 19 (14)
---- ---- ---- ---- ----
Net pension expense $ 207 141 188 168 115
===== === === === ===
</TABLE>
F-28
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
Assumptions used to develop the net periodic pension cost for the periods
ended September 30, 1997 and 1996 and for the years ended December 31,
1996, 1995 and 1994 are as follows:
September 30, December 31,
------------- -----------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
Discount rate 7.5% 7.75% 7.75% 8.25% 7.0%
Expected long-term rate of return 7.5 7.5 7.5 7.5 7.5
Rate of increase in compensation
levels 5.5 5.5 5.5 6.0 5.5
=== === === === ===
Postretirement Benefits
The Bank has established a postretirement medical and life insurance plan
for the benefit of substantially all employees. The Bank utilizes the
accrual method of accounting for postretirement benefits.
The following table sets forth the net periodic postretirement benefit
cost and accumulated postretirement benefit obligation (APBO) as
determined by the plan actuaries as of January 1, 1997, 1996 (as amended
October 1, 1996 for the acquisition of Burlington County Bank) and 1995,
follows:
1997 1996 1995
---- ---- ----
(in thousands)
Accumulated postretirement benefit
obligation (APBO) $ (1,195) (1,177) (980)
Fair value of assets - - -
-------- ------- ------
Projected benefit obligation funded status (1,195) (1,177) (980)
Accumulated net unrecognized gain (107) (109) (98)
-------- ------- ------
Net postretirement accrued benefit cost $ (1,302) (1,286) (1,078)
======== ======= ======
Net postretirement benefit costs for the periods ended September 30,
1997 and 1996 and the years ended December 31, 1996, 1995 and 1994 are
as follows:
Sept. 30, December 31,
------------- ---------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
Service cost $ 35 23 30 26 23
Interest cost on accumulated post-
retirement benefit obligation 65 59 79 80 64
-- -- ---- ---- --
$ 100 82 109 106 87
==== === ==== ==== ===
F-29
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
For measurement purposes, the cost of medical benefits was projected to
increase at a rate of 9.50% and 10.00% in 1997 and 1996, respectively,
thereafter grading to a stable 5.5% medical inflation rate in 2005. The
present value of the accumulated benefit obligation assumed a 7.50% and
7.75% discount rate compounded annually for 1997 and 1996, respectively.
The plan is unfunded as of September 30, 1997, as the Bank funds the plan
on a cash basis.
Stock Option Plan
During 1996, the Bank's stockholders approved a stock option plan
authorizing 311,650 shares available to be granted to certain directors,
officers and employees of the Bank. Options granted under the plan
amounted to 77,500 during 1997 and 234,000 at during 1996 and are
exercisable at the fair value of the stock as of the grant date. The
options vest over a five-year term, and expire after 10 years from the
date of the grant. For the nine month period ended September 30, 1997,
8,635 options were exercised and no options were forfeited or had
expired. No options were exercised, forfeited or had expired during 1996.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). This Statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS 123 encourages all entities to adopt the "fair
value based method" of accounting for employee stock compensation plans.
However, SFAS 123 also allows an entity to continue to measure
compensation cost under such plans using the "intrinsic value based
method" as described in APB No. 25. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, usually the vesting
period. Fair value is determined using an option pricing model that takes
into account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock and
the expected dividends on it, and the risk-free interest rate over the
expected life of the option.
The Bank continues to recognize compensation expense using the method
prescribed in APB No. 25. Had compensation cost been determined
consistent with SFAS 123 for options granted during 1997 and 1996,
additional compensation cost for the nine month periods ended September
30, 1997 and 1996 and the year ended December 31, 1996 would have been
$134,000, $20,000 and $61,000, respectively. As a result, net income and
diluted earnings per share for the nine month periods ended September 30,
1997 and 1996 and for the year ended December 31, 1996 would have been
reduced to $5,812,000 and $0.65, $6,435,000 and $0.72, and $8,352,000 and
$0.94, respectively. The stock option plan's fair value of options
granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for the grants
issued during 1997 and 1996: dividend yield of 1.67% and 2.59%,
respectively, expected volatility of 23.79%; risk-free interest rate of
6.1% and 6.7%, respectively, and expected lives of 5 years.
The weighted average exercise price of options granted in 1997 was
$21.00. The weighted average grant date fair value for the stock option
plan's options granted during 1997 was $5.84.
F-30
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
The weighted average exercise price of options granted in 1996 and
outstanding as of December 31, 1996 was $13.50. The weighted average
grant date fair value for the stock option plan's options granted during
1996 was $3.49.
Management Recognition Plan
During 1996, the Bank's stockholders approved the Trenton Savings Bank
Management Recognition Plan and authorized the issuance of 124,660 shares
from unissued common stock to the Management Recognition Plan. As of
September 30, 1997 and December 31, 1996, 124,660 shares have been
allocated to employees and directors of the Bank with a weighted average
grant date fair value of $13.50 per share.
The shares vest over a five-year period.
(16) Commitments and Contingencies
The Bank is party to commitments to extend credit in the normal course of
business to meet the financial needs of its customers. Commitments to
extend credit are agreements to lend money to a customer as long as there
is no violation of any condition established in the contract. Commitments
to fund mortgage loans generally have fixed expiration dates or other
termination clauses, whereas home equity lines of credit have no
expiration date. Since some commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. Collateral is not required by
the Bank for loan commitments. The Bank's loans are located primarily in
the State of New Jersey and Bucks county in Pennsylvania.
At September 30, 1997 and December 31, 1996 and 1995, the Bank had loan
commitments (including unused lines of credit) of $47,712,000,
$27,697,000 and $18,843,000, respectively, consisting primarily of fixed
rate loans which are not included in the accompanying financial
statements. The commitments at December 31, 1996 have commitment periods
that range from 30 to 90 days and interest rates ranging from 5.5% to
12.0%. There is no exposure to credit loss in the event the other party
to commitments to extend credit does not exercise its right to borrow
under the commitment.
In the normal course of business, the Bank may be a party to various
outstanding legal proceedings and claims. In the opinion of management,
the financial position of the Bank will not be materially affected by the
outcome of such legal proceedings and claims.
(17) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value.
Cash and Cash Equivalents
The carrying amount is a reasonable estimate of the fair value of these
instruments.
F-31
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(17) Disclosures about Fair Value of Financial Instruments, cont.
Debt, Equity and Mortgage-Backed Securities
Fair values are based on quoted market prices or dealer quotes.
Loan Receivables
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial,
residential mortgage and other consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms.
The fair value is estimated using an estimate of current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand as of September 30, 1997
and December 31, 1996 and 1995. The fair value of certificates of deposit
was estimated using the rates currently offered for deposits of similar
remaining maturities.
Commitments to Extend Credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The outstanding commitment balance is a reasonable
estimate of fair value.
Limitations: The following fair value estimates were made as of September
30, 1997 and December 31, 1996 and 1995, based on pertinent market data
and relevant information on the financial instrument. These estimates do
not include any premium or discount that could result from an offer to
sell at one time the Bank's entire holdings of a particular financial
instrument or category thereof. Since no market exists for a substantial
portion of the Bank's financial instruments, fair value estimates were
necessarily based on judgments with respect to future expected loss
experience, current economic conditions, risk assessments of various
financial instruments involving a myriad of individual borrowers, and
other factors. Given the inherently subjective nature of these estimates,
the uncertainties surrounding them and the matters of significant
judgement that must be applied, these fair value estimations cannot be
calculated with precision. Modifications in such assumptions could
meaningfully alter these estimates.
Since these fair value approximations were made solely for on and off
balance sheet financial instruments as of September 30, 1997 and December
31, 1996 and 1995, no attempt was made to estimate the value of
anticipated future business or the value of
F-32
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(17) Disclosures about Fair Value of Financial Instruments, cont.
nonfinancial statement assets and liabilities. Furthermore, certain tax
implications related to the realization of the unrealized gains and
losses could have a substantial impact on these fair value estimates and
have not been incorporated into many of the estimates.
The estimated fair values of the Bank's financial instruments as of
September 30, 1997, December 31, 1996 and 1995 are as follows:
September 30, 1997
------------------------
Carrying Fair
amount value
------ -----
(in thousands)
Financial assets:
Cash and cash equivalents $ 13,209 13,209
Securities available for sale 127,651 127,651
Securities and mortgage-backed securities
held to maturity 70,761 70,922
Loans, net 397,866 395,786
======= =======
Financial liabilities:
Deposits $ 493,334 493,327
Borrowed funds 30,000 30,096
====== ======
Off balance sheet financial instruments:
Commitments to extend credit $ 47,712 47,712
========= ======
1996
------------------------
Carrying Fair
amount value
------ -----
(in thousands)
Financial assets:
Cash and cash equivalents $ 20,938 20,938
Securities and mortgage-backed securities
held to maturity 87,648 87,648
Securities held to maturity 86,553 86,512
Loans, net 380,288 377,976
======= =======
Financial liabilities:
Deposits $ 491,246 493,654
========= =======
Off balance sheet financial instruments:
Commitments to extend credit $ 27,697 27,697
========= ======
F-33
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(17) Disclosures about Fair Value of Financial Instruments, cont.
1995
-----------------------
Carrying Fair
amount value
------ -----
(in thousands)
Financial assets:
Cash and cash equivalents $ 16,253 16,253
Securities available for sale 83,776 83,776
Securities and mortgage-backed securities
held to maturity 91,261 92,158
Loans, net 306,093 307,927
======= =======
Financial liabilities:
Deposits $ 410,770 416,705
========= =======
Off balance sheet financial instruments:
Commitments to extend credit $ 18,843 18,843
========= ======
(18) Insurance Funds Legislation
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF-insured deposits to
recapitalize Savings Associations Insurance Fund (SAIF) and spread the
obligations for payment of Financing Corporation (FICO) bonds across all
SAIF and Bank Insurance Fund (BIF) members. The Federal Deposit Insurance
Corporation (FDIC) special assessment being levied amounts to 65.7 basis
points on SAIF assessable deposits held as of March 31, 1995. The Bank
recorded a $177,000 charge (before tax-effect) as a result of the FDIC
special assessment. This legislation will eliminate the substantial
disparity between the amount that BIF and SAIF member institutions had
been paying for deposit insurance premiums. As of December 31, 1996, the
Bank's deposits are primarily BIF-insured except for $34 million of
deposits which were acquired from a SAIF-insured institution.
Beginning on January 1, 1997, BIF members will pay a portion of the FICO
payment equal to 1.29 basis points per $100 in BIF-insured deposits
compared to 6.44 basis points per $100 in SAIF-insured deposits, and will
pay a pro rata share (approximately 2.4 basis points per $100 in
deposits) of the FICO payment on the earlier of January 1, 2000, or the
date upon which the last savings association ceases to exist. The
legislation also requires BIF and SAIF to be merged by January 1, 1999,
provided that subsequent legislation is adopted to eliminate the savings
association charter and no savings associations remain as of that time.
The FDIC has recently lowered SAIF assessments to a range comparable to
that of BIF members, although SAIF members must also make the FICO
payments described above. Management cannot predict the level of FDIC
insurance assessments on an on-going basis or whether the BIF and SAIF
will eventually be merged.
F-34
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(19) Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 (SFAS No. 125),
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities". SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. These standards are based on consistent
application of a financial-component approach and focuses on control.
Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
SFAS No. 125 provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for transfers occurring after
December 31, 1996 and has been applied prospectively.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127 (SFAS No. 127), "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125", an amendment of SFAS No.
125. SFAS No. 127 defers for one year the effective date of portions of
SFAS No. 125 that address secured borrowings and collateral for all
transactions. Additionally, SFAS No. 127 defers for one year the
effective date of transfers of financial assets that are part of
repurchase agreements, securities lending and similar transactions. The
adoption of SFAS No. 125 and SFAS No. 127 is not expected to have a
material effect on the Bank's consolidated financial statements
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), "Earnings per share" establishes
standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common
stock. SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures. SFAS No. 128 requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15,
1997, including interim periods, earlier application is not permitted.
SFAS No. 128 also requires restatement of all prior period EPS data
presented. The Bank adopted SFAS No. 128 in 1997. Per share amounts for
prior periods have been restated. The adoption of SFAS 128 did not have a
material effect on the Bank's reported earnings per share.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 (SFAS No. 130), "Reporting Comprehensive Income". This Statement
establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement is effective for
fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. The Bank has not determined the impact that this
Statement will have on its reporting of operations.
F-35
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(19) Recent Accounting Pronouncements, cont.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and
Related Information". This Statement establishes standards for the way
that public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. This Statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated. This Statement need not be applied to interim financial
statements in the initial year of its application, but comparative
information for interim periods in the initial year of application is to
be reported in financial statements for interim periods in the second
year of application. The adoption of this Statement is not expected to
change the Bank's reporting requirements.
(20) Quarterly Financial Data (unaudited)
The following tables summarizes certain 1997, 1996 and 1995 quarterly
financial data.
Quarter Ended
-----------------------------------------
Sept. 30 June 30, Mar. 31
1997 1997 1997
---- ---- ----
(in thousands)
Interest income $ 11,009 10,827 10,646
Interest expense 5,571 5,324 5,328
Net interest income 5,438 5,503 5,318
Provision for loan losses 1,274 204 10
Gain (loss) on security transaction 1,676 913 334
Operating expenses 3,751 3,073 3,019
Income before tax expense 2,619 3,558 3,052
Net income for the quarter 1,668 2,276 1,953
Earnings per share - Basic 0.19 0.25 0.22
Earnings per share -Diluted 0.19 0.25 0.22
Quarter Ended
--------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
1996 1996 1996 1996
---- ---- ---- ----
(in thousands)
Interest income $ 10,241 8,970 8,850 8,842
Interest expense 5,076 4,356 4,217 4,292
Net interest income 5,165 4,614 4,633 4,550
Provision for loan losses - - - -
Gain (loss) on security transaction 650 - 617 1,572
Operating expenses 3,235 2,369 2,002 2,063
Income before tax expense 3,037 2,430 3,410 4,234
Net income for the quarter 1,943 1,556 2,183 2,709
Earnings per share - Basic 0.22 0.17 0.25 0.30
Earnings per share - Diluted 0.22 0.17 0.25 0.30
F-36
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(20) Quarterly Financial Data, cont.
Quarter Ended
-------------------------------------------
Dec. 31 Sept. 30 June 30, Mar. 31
1995 1995 1995 1995
---- ---- ---- ----
(in thousands)
Interest income $ 8,852 8,898 8,185 7,583
Interest expense 4,420 4,593 4,301 3,696
Net interest income 4,432 4,305 3,884 3,887
Provision for loan losses 15 45 45 45
Gain (loss) on security transaction 884 937 1,525 847
Operating expenses 2,085 1,843 2,017 1,847
Income before tax expense 3,402 3,546 3,505 3,059
Net income for the quarter 2,178 2,269 2,244 1,957
(21) Earnings per Common Share
The Bank adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share" on December 31, 1997. All earnings per
share data for previous periods have been restated to conform with the
provisions of SFAS 128.
The following table summarizes the computation of basic earnings and
diluted earnings per common share for the nine months ended September 30,
1997 and 1996 and for the year ended December 31, 1996:
September 30,
--------------------- Dec. 31,
1997 1996 1996
---- ---- ----
(in thousands, except per share data)
Earnings available to common
shareholders $ 5,898 6,448 8,391
Weighted-average common
shares outstanding 8,923 8,913 8,913
Plus common stock equivalent 80 3 10
------- -------- -------
Diluted weighted-average
shares outstanding $ 9,003 8,916 8,923
======= ===== =====
Earnings per common share:
Basic $ 0.66 0.72 0.94
Diluted 0.66 0.72 0.94
==== ==== ====
F-37
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(21) Earnings per Common Share, cont.
Earnings per common share for 1995 and 1994 are not presented as the Bank
completed its initial public offering on August 3, 1995 and such data is
net deemed meaningful by management.
F-38
<PAGE>
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by the Company, the Bank or the Agent. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus nor any sale hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company or the
Bank since any of the dates as of which information is furnished herein or since
the date hereof.
SUMMARY......................................................................4
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF THE BANK AND SUBSIDIARIES.................................12
RISK FACTORS................................................................14
THE COMPANY.................................................................18
THE BANK....................................................................18
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE.................................20
USE OF PROCEEDS.............................................................20
DIVIDEND POLICY.............................................................21
MARKET FOR THE COMMON STOCK.................................................22
CAPITALIZATION..............................................................24
PRO FORMA DATA..............................................................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................30
BUSINESS OF THE BANK........................................................44
REGULATION..................................................................62
TAXATION....................................................................68
MANAGEMENT OF THE COMPANY...................................................70
MANAGEMENT OF THE BANK......................................................70
THE CONVERSION..............................................................80
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY
AND THE BANK..............................................................99
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY................................104
DESCRIPTION OF CAPITAL STOCK OF THE BANK...................................106
TRANSFER AGENT AND REGISTRAR...............................................106
EXPERTS....................................................................106
LEGAL OPINIONS.............................................................107
ADDITIONAL INFORMATION.....................................................107
Until March __, 1998 or 25 days after commencement of the Syndicated
Community Offering, if any, whichever is later, all dealers effecting
transactions inthe registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments of subscriptions.
36,236,500 Shares
Peoples
Bancorp, Inc.
(Proposed Holding Company for
Trenton Savings Bank FSB)
COMMON STOCK
Par Value $.01 per share
PROSPECTUS
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
February __, 1998
- --------------------------------------------------------------------------------
