PROSPECTUS [LOGO]
Up to 1,157,000 Shares of Common Stock
DELAWARE FIRST FINANCIAL CORPORATION
400 Delaware Avenue
Wilmington, Delaware 19801
(302) 421-9090
================================================================================
Ninth Ward Savings Bank, FSB is converting from the mutual form to the
stock form of organization. As part of the Conversion, Ninth Ward Savings Bank,
FSB will become a wholly owned subsidiary of Delaware First Financial
Corporation, which was formed in September 1997 to acquire all of the shares of
Ninth Ward Savings Bank, FSB. The common stock of Delaware First Financial
Corporation is being offered to the public in accordance with a Plan of
Conversion. The Plan of Conversion must be approved by a majority of the votes
eligible to be cast by members of Ninth Ward Savings Bank, FSB and by the Office
of Thrift Supervision. The offering will not go forward if Ninth Ward Savings
Bank, FSB does not receive these approvals or Delaware First Financial
Corporation does not receive orders for the number of shares at the minimum of
the EVR.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the common stock
being offered to be between $7,440,000 to $10,060,000, which establishes the
range of the number of shares to be offered. Subject to Office of Thrift
Supervision approval, up to 1,157,000 shares, an additional 15% above the
maximum number of shares, may be offered. Based on these estimates, we are
making the following offering of shares of common stock:
o Price Per Share: $10
o Number of Shares
Minimum/Maximum/Maximum as adjusted: 744,000 to 1,006,000 to 1,157,000
o Underwriting Commissions and Expenses
Minimum/Maximum/Maximum as adjusted: $502,000 to $539,000 to $559,000
o Net Proceeds to Delaware First
Financial Corporation
Minimum/Maximum/Maximum as adjusted: $6,938,000 to $9,521,000 to $11,011,000
o Net Proceeds Per Share
Minimum/Maximum/Maximum as Adjusted: $9.33 to $9.46 to $9.52
Please refer to Risk Factors beginning on page 8 of this Prospectus.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Neither the Securities and Exchange Commission, Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For information on how to subscribe, please call the
Stock Information Center at (302) 421-9674.
TRIDENT SECURITIES, INC.
November 12, 1997
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TABLE OF CONTENTS
Page
----
TERMS OF OFFERING.......................................................... i
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING............................. v
SUMMARY.................................................................... 1
SELECTED FINANCIAL DATA.................................................... 4
RECENT DEVELOPMENTS........................................................ 7
RISK FACTORS............................................................... 8
PROPOSED MANAGEMENT PURCHASES.............................................. 13
USE OF PROCEEDS............................................................ 14
DIVIDEND POLICY............................................................ 16
MARKET FOR THE COMMON STOCK................................................ 16
CAPITALIZATION............................................................. 17
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE................................ 19
PRO FORMA DATA............................................................. 21
CONSOLIDATED STATEMENT OF EARNINGS AND INCOME
OF NINTH WARD SAVINGS BANK, FSB.......................................... 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ 28
BUSINESS OF DELAWARE FIRST FINANCIAL CORPORATION........................... 45
BUSINESS OF NINTH WARD SAVINGS BANK, FSB................................... 46
REGULATION................................................................. 69
TAXATION................................................................... 76
MANAGEMENT OF THE COMPANY.................................................. 78
MANAGEMENT OF NINTH WARD SAVINGS BANK, FSB................................. 79
THE CONVERSION............................................................. 89
RESTRICTIONS ON ACQUISITION OF THE COMPANY................................. 106
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY................................ 111
LEGAL AND TAX MATTERS...................................................... 113
EXPERTS.................................................................... 114
REGISTRATION REQUIREMENTS.................................................. 114
ADDITIONAL INFORMATION..................................................... 114
GLOSSARY................................................................... G-1
This Prospectus contains forward-looking statements which reflect
Delaware First Financial Corporation's views regarding future events and
financial performance. Actual results could differ materially from those
projected in the forward-looking statements as a result of risks and
uncertainties, including, but not limited to, those found in the "Risk Factors"
section. The words "believe," "expect," and "anticipate" and similar expressions
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identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of their dates.
Delaware First Financial Corporation undertakes no obligation to publicly update
or revise any forward-looking statements whether as a result of new information,
future events, or otherwise. The "Risk Factors" discussion begins on page 8
of this Prospectus.
Please see the Glossary beginning on page G-1 for the meaning of
capitalized terms that are not defined in this Prospectus.
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What is the purpose of the Offering?
A: The offering means that you will have the chance to become a stockholder of
our newly formed holding company, Delaware First Financial Corporation,
which will allow you to share in our future as a federal stock savings
bank. The stock offering will increase our capital and funds for lending
and investment activities, which will give us greater flexibility to
diversify operations and expand into other geographic markets. This, in
turn, should allow us added flexibility to attempt to address our interest
rate risk level. Our current vulnerability to changes in interest rates is
the primary reason we were required to enter into a supervisory agreement
with the OTS. Additionally, as a stock savings institution operating
through a holding company structure, we will have the ability to plan and
develop long-term growth and improve our future access to the capital
markets.
Q: How do I subscribe for the stock during the offering?
A: You must complete and return the stock order form to us together with your
payment, on or before December 18, 1997.
Q: For how much stock may I subscribe?
A: The minimum purchase is 25 shares (or $250). The maximum purchase is 10,000
shares (or $100,000), for any individual person or persons ordering. No
person, related person or persons acting together, may purchase more than
20,000 shares (or $200,000). We may decrease or increase the maximum
purchase limitation without notifying you. In the event that the offering
is oversubscribed, shares will be allocated based upon a formula.
Q: What happens if there are not enough shares to fill all orders?
A: You might not receive any or all of the shares for which you subscribe. If
there is an oversubscription, the stock will be offered on a priority basis
to the following persons:
o Persons who had a deposit account of $50 or more with us on December
31, 1995. Any remaining shares will be offered to:
o Tax Qualified Employee Plans, including the Employee Stock Ownership
Plan of Ninth Ward Savings Bank, FSB. Any remaining shares will be
offered to:
o Persons who had a deposit account of $50 or more with us on September
30, 1997. Any remaining shares will be offered to:
o Other depositors and certain borrowers of ours, as of October 31,
1997.
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Q: What happens if there are shares unsubscribed for by depositors and
borrowers?
A: If depositors and borrowers do not subscribe for all of the shares, the
remaining shares will be offered to certain members of the general public
with preference given to people who live in the state of Delaware or in
Cecil County, Maryland, Salem County, New Jersey or Delaware or Chester
Counties, Pennsylvania; counties that are contiguous to New Castle County,
Delaware.
Q: What particular factors should I consider when deciding whether or not to
subscribe for the stock?
A: Because of the small size of the offering, there may not be an active
market for the shares, which may make it difficult to resell any shares you
may own. Also, before you decide to subscribe for stock, you should
carefully read the Risk Factors section in this prospectus.
Q: As a depositor or borrower member of Ninth Ward Savings Bank, FSB, what
will happen if I do not subscribe for any stock?
A: You presently have voting rights while we are in the mutual form; however,
once we convert to the stock form you will lose your voting rights unless
you purchase stock. You are not required to purchase stock. Your deposit
account, certificate accounts and any loans you may have with us will be
not be affected.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire Prospectus. This section highlights selected information and may not
contain all of the information that is important to you. In addition, you
should contact:
Stock Information Center
Delaware First Financial Corp.
400 Delaware Avenue
Wilmington, Delaware 19801
(302) 421-9674
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SUMMARY
This summary highlights selected information from this Prospectus and may
not contain all the information that is important to you. To understand our
Conversion and the stock offering fully, you should carefully read this entire
Prospectus, including the consolidated financial statements and the notes to the
financial statements of Ninth Ward Savings Bank, FSB. References in this
Prospectus to "Ninth Ward," the "Bank," "we," "us," and "our" refer to Ninth
Ward Savings Bank, FSB. In certain instances where appropriate, "us" or "our"
refers collectively to Delaware First Financial Corporation and Ninth Ward
Savings Bank, FSB. References in this Prospectus to "the Company" refer to
Delaware First Financial Corporation, only.
The Companies
Delaware First Financial Corporation
400 Delaware Avenue
Wilmington, Delaware 19801
(302) 421-9090
Delaware First Financial Corporation is not an operating company and has
not engaged in any significant business to date. It was formed in September
1997, as a Delaware corporation to be the holding company for Ninth Ward Savings
Bank, FSB. The holding company structure will provide greater flexibility in
terms of operations, expansion and diversification. See "BUSINESS OF THE
COMPANY."
Ninth Ward Savings Bank, FSB
400 Delaware Avenue
Wilmington, Delaware 19801
(302) 421-9090
We are a community and customer oriented federal mutual savings bank
operating from a single office in Wilmington since 1922. Historically, we have
emphasized residential mortgage lending, primarily originating one-to-four
family mortgage loans. At June 30, 1997, we had total assets of $112.5 million,
total liabilities of $106.5 million, and retained earnings of $6.1 million. See
"BUSINESS OF NINTH WARD."
The Stock Offering
Between 744,000 and 1,006,000 shares of common stock par value $0.01 per
share of the Company are being offered at $10 per share. As a result of changes
in market and financial conditions prior to completion of the conversion or to
fill the
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order of our ESOP and subject to the Office of Thrift Supervision approval, the
offering may be increased to 1,157,000 shares without further notice to you.
Stock Purchases
The shares of common stock will be offered on the basis of priorities.
If you are a depositor or borrower member, you will receive subscription rights
to purchase the shares. The shares will be offered first to eligible depositor
and borrower members in a Subscription Offering and any remaining shares will be
offered in a community offering to members of the general public with first
preference being given to natural persons residing in Delaware, in Cecil County,
Maryland, Chester County and Delaware County, Pennsylvania, and in Salem County,
New Jersey . We reserve the right in our absolute discretion to reject in whole
or in part orders in the community offering and syndicated community offering.
See "THE CONVERSION."
Subscription Rights
You may not sell or assign the subscription rights you may have because of
your status as a depositor or borrower of Ninth Ward Savings Bank, FSB. Any
transfer of subscription rights is prohibited by law.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the pro forma
market value of the Common Stock by FinPro, an appraisal firm experienced in
appraisals of savings institutions. FinPro has estimated that, in its opinion,
as of September 18, 1997, the aggregate pro forma market value of the Common
Stock ranged between $7.4 million and $10.1 million (with a mid-point of $8.8
million). We are offering up to 1,006,000 shares for sale. The pro forma market
value of the shares is our market value after giving effect to the sale of
shares in this offering. The appraisal was based in part upon our financial
condition and operations and the effect of the additional capital raised by the
sale of common stock in this offering. The $10 price per share was determined by
our Board of Directors and is the per share price most commonly used in stock
offerings involving conversions of mutual savings institutions. The independent
appraisal will be updated prior to the consummation of the conversion. If the
pro forma market value of the common stock is either below $7.4 million or above
$11.6 million, or if the offering is extended beyond February 2, 1998, you will
be notified by us and you will have the opportunity to modify or cancel your
order. See "THE CONVERSION."
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Termination of the Offering
The subscription offering will terminate at 12:00 p.m., Wilmington Time, on
December 18, 1997. The community offering, if any, may terminate at any time on
or after the subscription offering expiration date without notice but no later
than February 2, 1998, without approval by the OTS.
Benefits to Management from the Offering
Our full-time employees will participate in the offering through purchases
of stock by our Employee Stock Ownership Plan (the "ESOP"), which is a form of
employee ownership and retirement plan. We also intend to implement a Restricted
Stock Plan (the "RSP") and an Option Plan following completion of the
Conversion, which will benefit our executive and other officers and directors.
If the RSP is adopted our directors and officers will receive shares of common
stock at no cost to them. However, the RSP and Option Plan cannot be adopted
until after the Conversion and are subject to both stockholder approval and
compliance with OTS regulations. See "MANAGEMENT OF NINTH WARD SAVINGS BANK,
FSB."
Use of the Proceeds Raised from the Sale of Common Stock
The primary purpose of the conversion is to increase the capital of the
Bank. The majority of the funds raised in the conversion will be used by the
Company to purchase all of the outstanding shares of the Bank. The Bank intends
to use these funds to accomplish the goals set out in its business plan.
Delaware First Financial Corporation will retain up to 25% of the net proceeds
from the stock offering. The Company will use some or all of its funds to make a
loan to our ESOP to fund its purchase of stock in the conversion. The loan to
the ESOP must be approved by the OTS. See "US OF PROCEEDS."
Dividends
Initially, we do not intend to pay any cash dividends on the Common Stock.
See "DIVIDEND POLICY."
Market for the Common Stock
Since the size of the offering is relatively small, no assurance can be
given or that an active and liquid trading market for the common stock will
develop and be maintained after the conversion. Therefore, investors should have
a long-term investment intent. Persons purchasing shares may not be able to sell
their shares when they desire or to sell them at a price equal to or above $10.
See "MARKET FOR COMMON STOCK."
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Important Risks in Owning Delaware First Financial Corporation's Common Stock
Before you decide to purchase stock in the offering, you should read the
Risk Factors section on pages 8 to 13 of this Prospectus.
SELECTED FINANCIAL DATA
We are providing the following summary of selected financial information
and other data for your benefit. This information is only a summary and does not
purport to be complete, and is qualified in its entirety by reference to the
detailed information and financial statements and accompanying notes beginning
on page F-1. Selected financial information at June 30, 1997 and for the six
months ended June 30, 1997 and 1996 have been derived from unaudited financial
statements. In our opinion, such information reflects all adjustments (which
consist only of normal recurring adjustments) necessary for a fair presentation
of the selected financial information and other data. The results of operations
for the six months ended June 30, 1997 are not necessarily indicative of the
results which may be expected for any other period.
The following tables reflect that all of our investment securities and
mortgage-backed securities were classified as "Held to Maturity" at December 31,
1995 and "Available for Sale" at December 31, 1996 and June 30, 1997. Further,
our quality ratios under our key operating ratio data are end of period ratios.
With the exception of end of period ratios, all ratios are based on the average
of period ending balances during the indicated periods and are annualized when
appropriate. The noninterest expense in our key operating ratios is assumed to
be other expenses.
Selected Financial Data
-----------------------
December 31,
------------
June 30, 1997 1996 1995
------------- ---- ----
Total Assets $112,544,699 $112,683,218 $97,377,204
Investment securities, net $5,992,005 $6,475,800 $11,488,192
Mortgage-backed securities 190,414 203,147 698,669
Interest-bearing deposits 2,668,566 2,456,294 783,808
Noninterest-bearing deposits 169,649 187,158 277,048
Loans receivable, net 92,919,385 98,042,118 78,835,306
Loans held for sale 5,547,674 0 1,020,000
Savings deposits 78,351,363 78,408,793 81,522,249
FHLB advances 25,200,000 25,900,000 7,950,000
Net worth or retained earnings $6,086,942 $5,957,589 $6,062,906
-- substantially restricted
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Summary of Operations
---------------------
<TABLE>
<CAPTION>
For the Six Months For the Year
Ended June 30, Ended December 31,
------------------------ ------------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
Operating Data:
<S> <C> <C> <C> <C>
Total interest income $4,072,358 $3,762,647 $7,922,109 $7,292,747
Total interest expense 2,976,891 2,641,110 5,750,139 5,055,141
---------- ---------- ---------- ----------
Net interest income: 1,095,467 1,121,537 2,171,970 2,237,606
Provision for loan losses 10,000 26,000 47,000 5,000
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 1,085,467 1,095,537 2,124,970 2,232,606
Gain on sales of loans 16,632 48,766 68,629 438,970
Other income 68,281 108,504 236,147 81,229
Other expenses 960,575 1,181,961 2,593,287 2,068,211
---------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary item 209,805 70,846 163,541) 684,594
Income taxes (benefit) 88,000 30,000 (69,000) 264,670
---------- ---------- ---------- ----------
Net income (loss) $ 121,805 $ 40,846 $ (94,541) $ 419,924
========== ========== ========== ==========
Key Operating Ratios
--------------------
For the Six Months For the Year
Ended June 30, Ended December 31,
------------------------ ------------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
Key Performance Ratios:
Return on average assets 0.22% 0.08% (0.09%) 0.45%
Return on average retained earnings 4.05 1.34 (1.57) 7.17
Average retained earnings to
average assets 5.35 5.83 5.72 6.23
Average interest rate spread during
the period 1.75 1.99 1.78 2.13
Quality Ratios:
Nonperforming assets to total assets 0.29 0.22 0.33 0.25
Allowance for loan losses to total loans 0.27 0.24 0.25 0.25
Allowance for loan losses to
nonperforming loans 78.59 93.78 65.69 81.97
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Noninterest expense to average assets 0.85 1.13 2.47 2.20
Net interest income to noninterest
expense (x times) 1.14 0.95 0.84 1.08
Average interest-earning assets to
average interest-bearing liabilities
(x times) 1.05 1.06 1.05 1.05
</TABLE>
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RECENT DEVELOPMENTS
In July of 1997, we undertook several actions designed to reduce our
interest rate risk. Specifically, we sold approximately $5.5 million in home
mortgage loans to the FHLMC. The loans sold were fixed rate loans for which we
retained servicing. The proceeds were invested in loans and investments with
shorter maturities but were primarily used to reduce borrowings from the FHLB of
Pittsburgh. Borrowings were reduced by approximately $4 million. Both actions
were designed to respond to those provisions of the OTS Supervisory Agreement
which required us to begin to reduce our exposure to interest rate risk. We are
required under the Supervisory Agreement to report quarterly to the OTS on our
progress in reducing interest rate risk.
We are considering changing the name of Ninth Ward Savings Bank in the
future to a name that is more descriptive of the organization, its mission and
goals. Management believes that a name change will help ease the consumer
confusion caused by the fact that the Bank, while called "Ninth Ward," is not
geographically located in the Ninth Ward section of the city of Wilmington. A
new name could also give the Bank greater visibility and recognition as it looks
to expand into other Delaware markets.
The Bank's Business Plan was adopted in the third quarter of 1997. It calls
for an emphasis on commercial lending and the opening of one or two branches
within the next two years. Commercial lending is generally viewed as a higher
risk form of lending. Also the Bank experienced a significant increase in
nonperforming assets as a percentage of total assets from .19% for the nine
month period ending September 30, 1996 to .70% for the nine month period ending
September 30, 1997. This was attributable to an increase in past due status of
certain residential and home equity loans. Management determined, therefore,
that it would be prudent to increase the allowance for loan losses in the third
quarter by $200,000.
The following tables set forth certain information concerning the financial
position and results of operations of Ninth Ward at the dates and for the
periods indicated. Information at September 30, 1997 and June 30, 1997 are
unaudited but in the opinion of management contain all adjustments (non of which
were other than normal recurring entries) necessary for a fair presentation of
the results of such periods. The summary of operations and key operating data
for the nine months ended September 30, 1997 are not necessarily indicative of
the results of operations for the entire fiscal year. Further, our quality
ratios under our key operating data are end of period ratios. With the exception
of end of period ratios, all ratios are based on the average period ending
balances during the indicated periods and are annualized when appropriate. The
noninterest expense in our key operating ratios is assumed to be other expenses.
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Selected Financial Data
September 30, 1997 June 30, 1997
------------------ -------------
Loans receivable, net $ 91,348,017 $ 92,919,385
Loans held for sale 0 5,547,674
Total interest earning assets 102,864,749 110,143,017
Savings deposits 77,697,794 78,351,363
FHLB advances 21,200,000 25,200,000
Total interest bearing liabilities 98,897,794 103,551,363
Summary of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total interest income $ 1,983,574 $ 2,053,122 $ 6,055,931 $ 5,815,769
Total interest expense 1,466,068 1,519,594 4,442,959 4,160,704
Net interest income 517,506 533,528 1,612,973 1,655,065
Provision for loan losses 200,815 0 210,815 26,000
Noninterest income 183,123 257,298 268,036 414,568
SAIF assessment 0 492,000 0 492,000
Other noninterest expenses 607,136 684,698 1,567,711 1,866,659
Income taxes (benefit) (45,000) (232,700) 43,000 (202,700)
Net income (loss) (62,322) (153,172) 59,483 (112,326)
</TABLE>
Key Operating Data
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
Key Performance Ratios:
Return on average assets 0.07% (0.14)%
Return on average retained earnings 1.32 (2.49)
Average retained earnings to average assets 5.46 5.51
Quality Ratios:
Nonperforming assets to total assets 0.72 0.19
Allowance for loan loss to total loans 0.49 0.22
Allowance for loan loss to nonperforming loans 59.23 96.58
Noninterest expense to average assets 1.43 2.17
Net interest income to noninterest expense
(x times) 1.03 0.70
Average interest-earning assets to average
interest-bearing liabilities (x times) 1.05 1.05
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RISK FACTORS
In addition to the other information in this Prospectus, you should
consider carefully the following risk factors in evaluating an investment in our
Common Stock.
Supervisory Agreement
On May 21, 1997, we entered into a Supervisory Agreement with the OTS.
Pursuant to the Supervisory Agreement, we are required to take certain actions
in the areas of interest rate risk, increases in capital, and the development
and adoption of a business plan. The primary thrust of the actions required by
the OTS is to improve operations and performance through reductions in our
interest rate risk and to provide OTS with a three year business plan. The goal
of this business plan, which has been provided to the OTS, is, among other
things, to improve performance and achieve and maintain adequate levels of
capital. Our business plan is also required to address our long-term goals with
respect to cost of funds, asset growth and non-interest expense. See "BUSINESS
OF NINTH WARD SAVINGS BANK, FSB--Supervisory Agreement."
We are also required to adopt an interest rate risk policy which expressly
sets forth our policies and procedures for maintaining an acceptable level of
interest rate risk. Under regulations of the FDIC relating to the premiums paid
for deposit insurance, institutions operating under supervisory agreements, as
we are, will be required to pay more for federal deposit insurance. That
additional cost will continue as long as the Supervisory Agreement remains in
effect and will prevent us from achieving the full benefit of the rate reduction
for deposit insurance. Although we are deemed "well-capitalized," the existence
of the Supervisory Agreement prevents us from qualifying for the lowest
assessment on deposit insurance. Further, the existence of the Supervisory
Agreement would permit the OTS to lower our capital category. See
"REGULATION--Insurance of Deposit Accounts."
Potential Vulnerability to Changes in Interest Rates and Interest Rate Risk
Profile
Historically, we have primarily originated fixed rate mortgage loans.
Typically, we have sold a portion of these loans in the secondary market.
However, in 1996 we held many of these loans in our portfolio. At June 30, 1997,
over 87% of our first mortgage loans were fixed rate. This concentration of
fixed rate loans, and our inability to attract adjustable rate loans has exposed
us to greater interest rate risk which the OTS has advised us is unacceptably
high. In July we undertook certain actions to lower interest rate risk, but
these actions have not completely eliminated our exposure to interest rate risk.
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Our operating results are also dependent to a significant degree on our net
interest income which is the difference between interest income from our loans
and investments and the interest we pay on deposits and the money we borrow. Our
interest income and expense change as interest rates increase or decrease and
the amount we earn on our assets and pay on our liabilities. Currently, the
difference, or spread, between the amount paid by us on deposits and the amount
received by us from loans and investments is very narrow. While interest rates
fluctuate and assets and liabilities reprice because of a variety of factors
including general economic conditions, the policies of various regulatory
authorities, and other factors which are beyond our control, the fact that our
spread is narrower than many comparable institutions makes our net interest
income particularly vulnerable to such fluctuations. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Asset and Liability Management" and "BUSINESS OF NINTH WARD SAVINGS BANK --
Current Operations," "-- Lending Activities" and "-- Deposits and Borrowings."
Because of our single office location, the competition in our market area
and a deposit base which we believe is interest rate sensitive, our cost of
funds is high. This high cost of funds in combination with our asset and
liability structure as it is presently constituted exposes us to substantial
interest rate risk. When interest rates are rising the interest income earned on
our predominantly fixed rate mortgage loan assets will not increase as rapidly
as the interest expense we pay on our deposit and borrowing liabilities, which
are predominately certificates of deposit with maturities of up to three years.
As a result, our earnings will be adversely affected when the cost of our
certificates of deposit and other savings accounts and borrowings increases more
rapidly than the income we earn on our loans and investments. The degree to
which such earnings will be adversely affected depends upon how quickly interest
rates rise and the degree to which we are affected by a rise in interest rates.
Our earnings were also adversely affected in 1996 and the first half of 1997 by
the narrow difference between the interest paid by us on our deposits and the
income we received from our loans and assets. If interest rates rise, that
spread may become smaller, since $72.1 million, or 77.5% of our loan portfolio
at June 30, 1997 consisted of longer term fixed rate loans, while $44.2 million,
or 56.4% of our deposits mature within one year of June 30, 1997. The interest
earned on our loan portfolio will increase slowly to the extent that existing
fixed rate loans at lower rates are paid off and new loans at higher rates are
originated, while the rates paid on deposits would increase more quickly. Rising
interest rates also affect our earnings if loan demand is diminished. Our total
interest-bearing liabilities repricing within one year exceeded our total
interest-earning assets repricing in the same period by $29.2 million, creating
a one-year interest sensitivity gap of negative 25.9%. This negative gap will
cause the Bank's net interest income to be adversely affected in a rising rate
environment. Both our business plan and our Supervisory Agreement emphasize a
reduction of this interest rate risk. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management"
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Expansion into Small Business/Commercial Lending
To date, we have operated as a traditional savings and loan association
emphasizing the origination of loans secured by one-to-four family residences.
At June 30, 1997, $82.6 million, or 88.9%, of our loan portfolio consisted of
single family residential mortgage loans in our market area. However, the Board
of Directors believes that as a result of market trends, including the recent
consolidation of financial institutions and the economics of our market area,
there will be increasing demand in our market area for commercial loans and home
equity loans. After the Conversion, we anticipate expanding our product line to
offer small business/commercial loans secured by real estate and unsecured small
business/commercial loans, as well as expanding our existing home equity loan
program. At the present time there is no one in our management with significant
experience in the small business/commercial lending area. In order to expand
into this area we anticipate hiring a Senior Officer to supervise and develop
this business. This person's ability and skills will be essential in order to
enable us to execute our strategy. If we are unable to locate and hire a
suitable individual we may be unable to implement our strategy concerning small
business/commercial lending.
While small business/commercial loans are more interest rate sensitive and
carry higher yields than do residential mortgage loans, they generally carry a
higher degree of credit risk than residential mortgage loans. Consequently,
diversification of our loan portfolio may alter and increase our risk profile..
Additionally, small business/commercial loans are often larger and may involve
greater risks than other types of lending. Because payments on such loans are
often dependent on successful operations of the underlying business or project,
repayment of such loans may be subject to a greater extent to adverse conditions
in the economy. We will seek to minimize these risks through underwriting
guidelines which may contain certain safeguards. However, our business plan
calls for us to make small business/commercial loans secured by real estate as
well as unsecured business loans.
We also plan to increase our home equity lending program. At June 30, 1997,
these loans amount to $10.9 million, or 11.7%, of our loan portfolio. These
loans may carry greater risks than our traditional mortgage loans because we are
often a second lien holder on such loans. Additionally, our provision for loan
losses may increase in the future as we implement the Board of Directors'
strategy of emphasizing home equity loans and expanding into small
business/commercial lending
Creation of Branches
Historically, we have operated from a single location located in
Wilmington, Delaware. Our business plan calls for us to open additional branches
in the next two years. These branches are intended to allow us to compete more
effectively by offering more
11
<PAGE>
convenience to depositors and other customers and attract additional lower cost,
core deposits. The opening of an additional branch or branches is dependent on
finding suitable locations for such branches as well as general economic
conditions.
If we are unable to find suitable locations for additional branches, our
ability to attract lower cost funds will continue to be impaired. This inability
to attract low cost funds is one of the causes of our low earnings. Expansion is
intended to provide us with better access to lower cost funds; however it will
also, increase our operating expenses and related costs, and initially will have
an adverse impact on earnings.
Geographic Concentration of Loans
Substantially all of our real estate mortgage loans are secured by
properties located in New Castle County, Delaware. We currently believe our
loans are adequately secured or reserved for in the event that real estate
prices in our market area substantially weaken or economic conditions in our
market area deteriorate, thereby reducing the value of property securing our
loans, causing some borrowers to default and the value of the real estate
collateral to be insufficent to fully secure their loans. In either event we may
experience increased levels of delinquencies and related losses having an
adverse impact on net income.
Reliance on Certificate of Deposits as Primary Source of Funds
At June 30, 1997, $65.8 million, or 84.0% of our deposits were in the form
of certificates of deposit. Of this amount, $14.3 million, or 18.3%, were
certificates of deposit of $100,000 or more ("Jumbo Deposits"). This unusally
high percentage of Jumbo Deposits is an indirect result of our inability to
attract core deposits, as discusses below. These Jumbo Deposits are not brokered
deposits.
In order to attract sufficient deposits, we are required to offer rates on
deposits that are competitive with other financial institutions since we do not
have a branch location other than our downtown Wilmington office. We cannot
compete for funds based solely on location or convenience. Instead, we compete
for deposits based primarily on price and personal service. Because we offer
competitive deposit rates, some depositors chose to deposit in excess of
$100,000 with us.
While many of our certificates of deposit are accounts of long-standing
customers, they are significantly influenced by prevailing interest rate levels
and market conditions. Our single office location, the need to offer interest
rates competitive with other financial institutions, and the abundance of other
alternative investment products have caused us to be more reliant on
certificates of deposit, particularly Jumbo Deposits, which are generally
considered more sensitive to changes in interest rates. Therefore, we believe
our cost of funds is higher than many financial institutions operating in our
market area.
12
<PAGE>
Only $12.6 million, or 16.0% of our deposits are in the form of passbooks,
money market and transaction accounts. We believe that these are core deposits,
which are traditionally defined as lower-cost funds not held in certificate of
deposit form. Core deposits, as opposed to those in certificate form, are
typically not as susceptible to withdrawal in times of rapidly increasing
interest rates. However, because the majority of our funding sources are in
certificate form, we are susceptible to the risk of withdrawal or changes in
interest income in the event of rapid increases in rates. The substantial amount
of Jumbo Deposits could enable a relatively small number of depositors to move
their deposits to higher yielding investments and cause a large deposit outflow.
Such an outflow could force us to place additional reliance on Federal Home Loan
Bank ("FHLB") advances as a source of funds. At June 30, 1997, we had $25.2
million of outstanding advances from the FHLB and an unused line of credit of
$8.6 million.
Lack of Active Market for Common Stock
Due to the small size of the offering, it is highly unlikely that an active
trading market in our common stock will develop and be maintained. If an active
market does not develop, you may not be able to sell your shares promptly or
perhaps at all, or sell your shares at a price equal to or above the price which
you paid for the shares. The common stock may not be appropriate as a short-term
investment. See "MARKET FOR THE COMMON STOCK."
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<PAGE>
Intent to Remain Independent; Unsuitability as a Short-Term Investment
We have operated as an independent, community oriented savings association
since 1922. It is our intention to continue to operate as an independent
community oriented financial institution following the Conversion. Accordingly,
you are urged not to subscribe for shares of our Common Stock if you are
anticipating a rapid sale by us to a third party. See "BUSINESS OF THE COMPANY."
Also due to our intention to remain independent, we have included certain
provisions in our certificate of incorporation and bylaws which will assist us
in maintaining our status as an independent, publicly owned corporation. These
provisions as well as the Delaware general corporation law and certain federal
regulations may have certain anti-takeover effects which include: restrictions
on the acquisition of the Company's equity securities and limitations on voting
rights; the classification of the terms of the members of the Board of
Directors; certain provisions relating to the meeting of stockholders; denial of
cumulative voting by stockholders in the election of directors; the issuance of
preferred stock and additional shares of Common Stock without shareholder
approval; and super majority provisions for the approval of certain business
combinations. See "RESTRICTIONS ON ACQUISITIONS OF THE COMPANY." As a result,
stockholders who might wish to participate in a change of control transaction
may not have an opportunity to do so.
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion
Return on average equity (net income divided by average equity) is a ratio
used by many investors to compare the performance of a savings institution to
its peers. As a result of the Conversion we expect that our equity will increase
substantially. Our expenses also will increase because of the increased
compensation expense resulting from our ESOP, RSP, and the costs of being a
public company. Because of the increases in our equity and expenses, our return
on equity may decrease as compared to our performance in previous years.
Initially, we intend to invest the net proceeds in short term investments which
generally have lower yields than residential mortgage loans. At December 31,
1995 and 1996 and June 30, 1997, our return on average equity was 7.17%,
(1.57%), and 4.05% respectively. See "USE OF PROCEEDS."
14
<PAGE>
Possible Voting Control by Directors and Officers
The proposed purchases of the common stock by our directors, officers and
ESOP, as well as the potential acquisition of the common stock through the
Option Plan and RSP, could make it difficult to obtain majority support for
stockholder proposals which are opposed by us. Our directors and executive
officers expect to own 21,900, or 2.5%, of the shares of common stock
outstanding upon consummation of the conversion, based upon the midpoint of the
EVR. See "PROPOSED MANAGEMENT PURCHASES." The RSP, if adopted, may purchase up
to 4% of the amount of common stock sold in the conversion. In addition, the
voting of those shares could enable us to block the approval of transactions
(i.e., business combinations and amendment to our certificate and bylaws)
requiring the approval of 80% of the stockholders under the Company's
certificate. See "MANAGEMENT OF NINTH WARD SAVINGS BANK -- Executive
Compensation," "DESCRIPTION OF CAPITAL STOCK," and "RESTRICTIONS ON ACQUISITIONS
OF THE COMPANY."
Possible Dilutive Effect of RSP and Stock Options
If the Conversion is completed and shareholders approve the RSP and Option
Plan, we will issue stock to our officers and directors through these plans. If
the shares for the RSP and Option Plan are issued from our authorized but
unissued stock, your ownership percentage could be diluted by up to
approximately 15.2% and the trading price of our stock may be reduced. See "PRO
FORMA DATA," "MANAGEMENT OF NINTH WARD SAVINGS BANK -- Proposed Future Stock
Benefit Plans."
Financial Institution Regulation and Future of the Thrift Industry
We are subject to extensive regulation, supervision, and examination by the
OTS and FDIC. A bill, H.R. 10, has been reported by the U.S. House of
Representatives, Committee on Banking and Financial Services, that would
consolidate the OTS with the Office of the Comptroller of the Currency ("OCC")
and eliminate the federal thrift charter under which we currently operate. If
this legislation becomes law, we could be forced to become a state chartered
bank or a national commercial bank. If we become a commercial bank, our
investment authority and the ability of the Company to engage in diversified
activities would be more limited, which could affect our profitability. See
"REGULATION."
Competition
The city of Wilmington, Delaware, the market area in which we conduct our
business, is a highly competitive market for loans and deposits. Thirty-two
financial institutions operate 50 active branch offices and compete for $18.9
billion in total deposits in this market. Many of these financial institutions
are large national and regional entities with greater resources than ours.
Additionally, we operate from only one office and, as a result, have a
relatively high cost of funds as well as a limited product line. As such, we can
provide no assurance concerning our ability to achieve profitability in future
periods.
15
<PAGE>
Impact of Data Processing Costs Related to Year 2000 Conversion
We currently use a third party data processing provider. We plan to do so
for the foreseeable future. This provider, like others in the data processing,
and many other industries, must address the issues raised by the Year 2000.
Specifically, many computer systems only read the last two digits of the year in
a specific date and read "00" as "1900" as opposed to "2000." There may be
significant cost associated with the upgrade of the data processor's systems in
order to correct this problem. If these costs are passed to customers, our
expenses for data processing services could increase.
16
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the Offering cannot be determined
until the offering is complete, we presently anticipate that the net proceeds
from the sale of Common Stock will be between $6,938,000 and $9,521,000
($11,011,000 million assuming an increase in EVR by 15%). See "PRO FORMA DATA."
The Company will use the majority of the net proceeds from the offering to
purchase all of the capital stock we will issue in connection with the
Conversion. Subject to regulatory approval, the Company will retain up to 25% of
the net proceeds. A portion of the net proceeds to be retained by the Company
will be loaned to our ESOP to fund its purchase of up to 8% of the shares sold
in the Conversion. Based on the issuance of 744,000 shares, or 1,006,000 shares
at the minimum and maximum of the EVR, the loan to the ESOP would be $595,200
and $804,800, respectively. If these shares are not available in the Conversion,
they will be purchased in the open market following completion of the
Conversion. On a short-term basis, the balance of the net proceeds retained by
the Company initially will be invested in short-term investments. A portion of
the net proceeds may also be used to fund the purchase of up to 4% of the shares
for a RSP which is anticipated to be adopted following the Conversion. Some of
the proceeds may be used to expand facilities, in particular the establishment
of branch offices. See "PRO FORMA DATA."
Although we exceed all regulatory requirements, the funds we receive from
the sale of our capital stock will further strengthen our capital position.
These funds may be used for general corporate purposes including, but not
limited to: (i) repaying FHLB advances, (ii) funding loan commitments; (iii)
investment in mortgage-backed securities; (iv) investment in mortgages and other
loans; and (v) possible expansion of our banking facilities. However, initially
we intend to invest the net proceeds in short-term investments until we can
deploy the proceeds pursuant to our business plan. Our plan calls for
diversification of our lending products into commercial/small business lending.
It also anticipates our opening a branch or branches in the next two years.
Branch expansion, however, is dependent upon finding a suitable location for the
facilities, the cost of constructing, purchasing or leasing such a facility and
general economic conditions, including the level of interest rates. Accordingly,
there is no assurance that expansion will be achieved in the near future, if at
all. We also plan to increase our home equity lending program and enter new
lines of lending.
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<PAGE>
After the first year following the Conversion (or sooner if authorized by
the OTS), the Company may repurchase shares of our Common Stock subject to
applicable regulations of the OTS governing such repurchases. The decision to
repurchase our Common Stock will be made by our Board of Directors and will be
based on our board's view of the price of the Common Stock, general economic
conditions, the attractiveness of other investments and our capital needs. Any
decision to repurchase stock will be subject to the determination of the
Company's Board of Directors that both the Company and Ninth Ward Savings Bank,
FSB will be capitalized in excess of all applicable regulatory requirements
after such repurchases and the receipt of necessary approvals or non-objections
from the OTS. The repurchase of stock would also be prohibited if equity would
be reduced below the amount required for the liquidation account. There can be
no assurance that the Company will repurchase any shares.
The net proceeds may vary because the total expenses of the Conversion may
be more or less than those estimated. We expect our estimated expenses to be
between $502,000 and $539,000. Our estimated net proceeds will range from $6.9
million to $9.5 million (or up to $11.0 million in the event the maximum of the
estimated valuation range is increased to $11.6 million). See "PRO FORMA DATA."
The net proceeds will also vary if the number of shares to be issued in the
Conversion is adjusted to reflect a change in our estimated pro forma market
value. Payments for shares made through withdrawals from existing deposit
accounts with us will not result in the receipt of new funds for investment by
us but will result in a reduction of our liabilities and interest expense as
funds are transferred from interest-bearing certificates or accounts.
DIVIDEND POLICY
Upon Conversion, our Board of Directors will have the authority to declare
dividends on the shares, subject to statutory and regulatory requirements.
Initially, we do not expect to pay cash dividends on the shares. Generally,
declarations of dividends by the Board of Directors depends upon a number of
factors, including, but not limited to: (i) the amount of the net proceeds
retained by the Company in the Conversion, (ii) investment opportunities
available, (iii) capital requirements, (iv) regulatory limitations, (v) results
of operations and financial condition, (vi) tax considerations, and (vii)
general economic conditions. Upon review of such considerations, the board may
authorize dividends in the future if it deems such payment appropriate and in
compliance with applicable law and regulation. For a period of one year
following the completion of the Conversion, we will not pay any dividends that
would be treated for tax purposes as a return of capital, nor take any actions
to pursue or propose such dividends.
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 in part upon the receipt of dividends from Ninth Ward Savings Bank,
18
<PAGE>
FSB. Ninth Ward, like all financial institutions regulated by the OTS, is
subject to certain restrictions on the payment of dividends based on its net
income, its capital in excess of regulatory capital requirements and the amount
of capital required for the liquidation account required to be established in
connection with the Conversion. The Company is subject, however, to the
requirements of Delaware law, which generally limit the payment of dividends to
amounts that will not affect the ability of the Company, after the dividend has
been distributed, to pay its debts in the ordinary course of business.
MARKET FOR THE COMMON STOCK
Ninth Ward, as a mutual thrift institution, and the Company, as a newly
organized company, have never issued capital stock, and consequently there is no
established market for the Company's common stock, par value $.01 per share (the
"Common Stock"). Following the completion of the offering, it is anticipated
that the Common Stock will be traded on the over-the-counter market with
quotations available through the OTC Bulletin Board operated by the NASDAQ.
Trident has agreed to make a market for the Company's Common Stock following
consummation of the Conversion. 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 and other
regulatory requirements. Prior to the Conversion the Company will attempt to
obtain the commitment from at least one additional broker-dealer to act as
market maker for the Common Stock. There is no assurance that there will be two
market makers which are necessary for listing on the OTC Bulletin Board. If the
Common Stock cannot be listed on the OTC Bulletin Board or the transactions in
the Common Stock will be reported in the "Pink Sheets" of the National Quotation
Bureau, Inc.
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 Company's control or that of
any market broker. Due to the small size of the offering, it is highly unlikely
that an active trading market will develop and be maintained. You could have
difficulty disposing of your shares and you should not view the shares as a
short-term investment. The absence of an active and liquid trading market may
prevent you from selling your shares at a price equal to or above the price you
paid for the shares.
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<PAGE>
CAPITALIZATION
The following table presents Ninth Ward's historical capitalization
including deposits at June 30, 1997 and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion based upon
the sale of the indicated number of shares at $10 per share and upon the other
assumptions set forth under "PRO FORMA DATA." A CHANGE IN THE NUMBER OF SHARES
TO BE ISSUED IN THE OFFERING MAY MATERIALLY AFFECT SUCH PRO FORMA
CAPITALIZATION.
20
<PAGE>
<TABLE>
<CAPTION>
The Company Pro Forma Consolidated Capitalization at June 30, 1997 On The Sale Of:
----------------------------------------------------------------------------------
875,000 Shares at 1,006,000 Shares at 1,157,000 Shares at
Historical 744,000 Shares at $10 per Share $10 per Share $10 per Share
Capitalization $10 per Share (Midpoint (Maximum (Maximum, as
June 30, 1997 (Minimum Range) of Range) of Range) adjusted)(1)
-------------- ----------------- ----------------- ------------------- -------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2) $ 78,351 $ 78,351 $ 78,351 $ 78,351 $ 78,351
FHLB advances 25,200 25,200 25,200 25,200 25,200
-------- -------- -------- -------- --------
Total deposits and borrowings $103,551 $103,551 $103,551 $103,551 $103,551
======== ======== ======== ======== ========
Shareholders' equity:
Preferred stock, par
value $.01, 500,000 shares
authorized; none issued $ 0 $ 0 $ 0 $ 0 $ 0
Common Stock, par value
$0.1 per share, 3,000,000
shares authorized; shares to
be issued as reflected(3)(4) 0 7 9 10 12
Additional paid-in capital(3)(5) 0 6,931 8,221 9,511 10,999
Retained earnings
(substantially restricted) 6,087 6,087 6,087 6,087 6,087
Less:
Common Stock acquired
by ESOP(3) 0 (595) (700) (805) (926)
Common Stock acquired
by the RSP(3) 0 (298) (350) (402) (463)
-------- -------- -------- -------- --------
Total shareholders' equity $ 6,087 $ 12,132 $ 13,267 $ 14,401 $ 15,709
======== ======== ======== ======== ========
</TABLE>
21
<PAGE>
- ----------
(1) As adjusted to give effect to an increase in the number of shares that
could occur to an increase in the EVR of up to 15% to reflect changes in
market and financial conditions prior to the completion of the Conversion
or to fill the order of the ESOP.
(2) No effect is given to possible withdrawals from deposit accounts to
purchase the Common Stock. Any such withdrawals will reduce pro forma
deposits by the amounts thereof.
(3) Assumes that 8% and 4% of the shares sold in the Conversion will be
purchased by the ESOP and the RSP, respectively. No shares will be
purchased by the RSP in the Conversion. It is assumed on a pro forma basis
that our RSP will be adopted by the Board of Directors, approved by the
stockholders at a special or annual meeting no earlier than six months
after completion of our Conversion of the Company and reviewed by the OTS.
It is assumed that the RSP will purchase Common Stock in the open market in
order to give an indication of its effects on capitalization. The pro forma
presentation does not show the impact of: (i) results of operations after
the Conversion; (ii) changes in market prices of shares of the Common Stock
after the Conversion; or (iii) a smaller than 4% purchase by the RSP.
Assumes that the funds used to acquire the ESOP shares will be borrowed
from the Company for a ten year term at prime rate as published in The Wall
Street Journal. For an estimate of impact of the ESOP on earnings, see "Pro
Forma Data." We intend to make contributions to the ESOP sufficient to
service and ultimately retire its debt. The amount to be acquired by the
ESOP and the RSP is reflected as a reduction in stockholder equity. The
issuance of authorized by unissued shares for the RSP in an amount equal to
4% of the outstanding shares of Common Stock will have the effect of
diluting existing stockholders' interests by 3.9%. There can be no
assurance that approval of the RSP will be obtained. See "Management Of
Ninth Ward Savings Bank -- Proposed Future Stock Benefit Plans."
(4) Does not reflect additional shares of Common Stock that possibly could be
purchased by participants in the Option Plan if implemented under which the
directors, executive officers and other employees could be granted options
to purchase an aggregate amount of Common Stock equal to 10% of the shares
issued in the Conversion (87,500 shares at the midpoint of the estimated
value range) at exercise prices equal to the market price of the Common
Stock on the date of grant. Implementation of the option plan will require
regulatory and stockholder approval. See "Management Of Ninth Ward Savings
Bank -- Proposed Future Stock Benefit Plans."
(5) Based upon estimated net proceeds of $6.9 million, $8.2 million, and $9.5
million, less the par value of the shares sold. See "Pro Forma Data" for
assumptions used in calculating the net proceeds. Pro forma information
gives effect to the Company's retention of 25% of net proceeds.
-------------
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At June 30, 1997 we exceeded each of the three OTS capital requirements.
Set forth below is a summary of our compliance with the OTS capital standards as
of June 30, 1997, on a historical and pro forma basis assuming that the
indicated number of shares of Common Stock were sold at $10 per share as of such
date. See "PRO FORMA DATA" for the assumptions used to determine the net
proceeds of the Conversion.
22
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at June 30, 1997
--------------------------------------------------------------------------------------------
1,157,000 Shares
Historical (15% above
at June 30, 1997 744,000 Shares 875,000 Shares 1,006,000 Shares Maximum)
----------------- --------------------- --------------------- -------------------- ---------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(1) Amount(2) Assets(1) Amount(2) Assets(1) Amount(2) Assets(1) Amount(2) Assets(1)
------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital(3) $6,087 5.39% $12,132 10.74% $13,267 11.74% $14,401 12.74% $15,709 13.90%
===== ===== ======= ===== ======= ===== ======= ===== ====== =====
Tangible capital:
Capital level $6,058 5.38% $12,103 10.11% $13,238 11.06% $14,372 11.89% $15,680 12.83%
Requirement 1,688 1.50% 1,779 1.50% 1,791 1.50% 1,813 1.50% 1,833 1.50%
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess $4,370 3.88% $10,324 8.61% $11,447 9.56% $12,559 10.39% $13,847 11.33%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital:
Capital level $6,058 5.38% $12,103 10.11% $13,238 11.06% $14,372 11.89% $15,680 12.83%
Requirement 3,375 3.00% 3,558 3.00% 3,581 3.00% 3,626 3.00% 3,666 3.00%
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess $2,683 2.38% $ 8,545 7.11% $ 9,657 8.06% $10,746 8.89% $12,014 9.83%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk capital:
Capital level $6,315 10.10% $13,755 22.00% 15,065 24.09% $16,375 26.19% $17,885 28.60%
Requirement(4) 5,002 8.00% 5,099 8.00% 5,117 8.00% 5,135 8.00% 5,156 8.00%
----- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess $1,313 2.10% $8,656 14.00% $9,948 16.09% $11,240 18.19% $12,729 20.60%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ----------
(1) GAAP, adjusted or risk weighted assets as appropriate.
(2) Pro forma capital levels include the impact of the ESOP, RSP and assume
receipt by us of the net proceeds of the Conversion and the retention of
25% of the proceeds by the Company.
(3) Subject to certain restrictions.
(4) Assumes reinvestment of proceeds with 20% risk weighted assets as if such
proceeds had been received and applied on June 30, 1997.
23
<PAGE>
--------------------
PRO FORMA DATA
The following table sets forth the historical and, after giving effect to
the Conversion, the Bank's pro forma net income and shareholders' equity for the
year ended December 31, 1996 and the six months ended June 30, 1997. The pro
forma amounts have been calculated at the minimum, midpoint and anticipated
maximum of the Estimated Valuation Range ("EVR"), assuming the sale of the
Common Stock at $10 per share. The estimated net proceeds have been calculated
based upon the following assumptions: (1) the shares of Common Stock are
purchased by the following persons in the following amounts: (a) the ESOP and
the RSP will purchase up to 8% and 4% of the shares sold, respectively; (b) our
executive officers and directors will purchase 21,900 shares; and (c)
depositors, borrowers and members of the general public will purchase all
remaining shares; (2) based on negotiations between us and Trident, Trident will
receive a marketing fee of one and one half percent (1.5%) of the aggregate
dollar amount of Common Stock sold excluding any shares of Common Stock sold to
our directors, executive officers and their associates and the ESOP; and (3)
fixed expenses incurred in connection with the Conversion are expected to be
$403,000 excluding Trident's marketing fee. As a part of the Conversion, the
Company will retain 25% of the Conversion proceeds. We have also assumed that no
shares will be sold in a syndicated community offering by selected dealers. This
pro forma presentation also does not show the effect of: (i) results of
operations after the Conversion; (ii) changing market prices of the shares after
the Conversion; or (iii) less than 4% purchase by the RSP.
Fixed expenses are estimated to be $403,000. Actual offering expenses may
vary from those estimated, because the fees paid will depend upon the
percentages and total number of shares sold in the Conversion, the aggregate
Purchase Price and other factors. Based on the Independent Appraisal, the EVR is
between $7.4 million and $10.1 million (subject to adjustment up to $11.6
million to reflect an increase in the Independent Valuation). Based upon the $10
per share Purchase Price, this represents a range between a minimum of 744,000
shares and a maximum of 1,006,000 shares (subject to adjustment up to 1,157,000
shares).
Our pro forma net earnings for the year ended December 31, 1996, and the
six months ended June 30, 1997, have been calculated based on historical
earnings for those periods, the estimated net proceeds received by us being
invested at 5.67% and 5.67%, respectively. Our yield represents the actual yield
that we anticipated for reinvestment of the net proceeds at December 31, 1996
and June 30, 1997, respectively, which was calculated at the one year Treasury
Bill yield at the respective dates. The actual yield was used on the
reinvestment of the net proceeds because it reflects a more realistic rate of
return than the arithmetic average of the average yield of our interest-earning
assets and cost of deposits. The effect of withdrawals from deposit accounts for
the purchase of Common Stock has not been reflected. Our pro forma after-tax
yield is assumed to be 3.29% and 3.29%, respectively, based on an effective tax
rate of 42%. Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by 1,006,000 shares of Common Stock,
the total number of shares expected to be issued in the Conversion. No effect
24
<PAGE>
has been given in the pro forma shareholders' equity calculations for the
assumed earnings on the net proceeds. The tables below give the effect to the
RSP which is expected to be adopted by the Company following the Conversion and
presented (together with the Option Plan) to stockholders for approval at our
annual or special meeting of stockholders to be held at least six months after
consummation of the Conversion. If approved by shareholders, the Company intends
to acquire an amount of stock equal up to 4% of the shares of conversion stock
in the offering through open market purchases or issued but unauthorized shares.
The stockholders' equity information is not intended to represent the fair
market value of the shares or the current value of our assets or liabilities or
the amounts, if any, that would be available for distribution to stockholders in
the event of a liquidation. For additional information regarding the liquidation
account see Note 16 to the consolidated financial statements. The pro forma
income derived from the assumptions set forth above should not be considered
indicative of actual results of our operations for any period. Such pro forma
data may be materially affected by a change in the price per share or number of
shares to be issued in the Conversion or other factors. For information
regarding investment of use of proceeds, see "USE OF PROCEEDS" and the
conversion stock pricing and number of shares to be issued in the Conversion.
25
<PAGE>
<TABLE>
<CAPTION>
At or For Six Months Ended June 30, 1997
-------------------------------------------------------------------
1,157,000
744,000 875,000 1,006,000 Shares at $10
Shares at $10 Shares at $10 Shares at $10 Per Share
Per Share Per Share Per Share (Super
(Minimum of (Midpoint of (Maximum of (Maximum of
Estimated Estimated Estimated Estimated
Valuation Valuation Valuation Valuation
Range) Range) Range) Range)
------------- ------------- ------------- -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $7,440 $8,750 $10,060 $11,570
Less: Estimated expenses (502) (520) (539) (559)
------- ------- ------- -------
Estimated net proceeds $6,938 $8,230 $9,521 $11,011
Less: Common stock acquired by ESOP (595) (700) (805) (926)
Common stock acquired by RSP (298) (350) (402) (463)
------- ------- ------- -------
Net investable net proceeds $6,045 $7,180 $8,314 $9,622
======= ======= ======= =======
Consolidated net income (loss):
Historical $(95) $(95) $(95) $(95)
Pro forma income on net proceeds 199 236 273 316
Pro forma ESOP adjustments(1) (35) (41) (47) (54)
Pro forma RSP adjustments(2) (35) (41) (47) (54)
------- ------- ------- -------
Pro forma net income $34 $59 $ 84 $113
======= ======= ======= =======
Consolidated net income per share:
Historical $(0.14) $(0.12) $(0.10) $(0.09)
Pro forma income on net proceeds 0.29 0.29 0.29 0.29
Pro forma ESOP adjustments(1) (0.05) (0.05) (0.05) (0.05)
Pro forma RSP adjustment(2) (0.05) (0.05) (0.05) (0.05)
------- ------- ------- -------
Pro forma net income per share $0.05 $0.07 $0.09 $0.10
======= ======= ======= =======
Consolidated stockholders' equity (book value):(3)
Historical $5,958 $5,958 $5,958 $5,958
Estimated net proceeds(2) 6,938 8,230 9,521 11,011
Less: Common stock acquired by ESOP(1) (595) (700) (805) (926)
Common Stock acquired by RSP(2) (298) (350) (402) (463)
------- ------- ------- -------
Pro forma stockholders' equity $12,003 $13,138 $14,272 $15,580
======= ======= ======= =======
Consolidated stockholders' equity per share:(3)
Historical $8.01 $6.81 $5.92 $5.15
Estimated net proceeds(2) 9.32 9.41 9.46 9.52
Less: Common Stock acquired by ESOP(1) (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by RSP(2) (0.40) (0.40) (0.40) (0.40)
------ ------- ------- -------
Pro forma stockholders' equity per share $16.13 $15.02 $14.18 $13.47
===== ======= ======= =======
Purchase price as a percentage of pro forma
stockholders' equity per share(4) 62.00% 66.58% 70.52% 74.24%
Purchase price as a multiple of pro forma
net income per share(5) 200.00 x 142.86 x 111.11 x 100.00 x
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
-------------------------------------------------------------------
1,157,000
744,000 875,000 1,006,000 Shares at $10
Shares at $10 Shares at $10 Shares at $10 Per Share
Per Share Per Share Per Share (Super
(Minimum of (Midpoint of (Maximum of (Maximum of
Estimated Estimated Estimated Estimated
Valuation Valuation Valuation Valuation
Range) Range) Range) Range)
------------- ------------- ------------- -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $7,440 $8,750 $10,060 $11,570
Less: Estimated expenses (502) (520) (539) (559)
------- ------- ------ -------
Estimated net proceeds $6,938 $8,230 $9,521 $11,011
Less: Common Stock acquired by ESOP (595) (700) (805) (926)
Common Stock acquired by RSP (298) (350) (402) (463)
------- --- --- ---
Net investable proceeds $6,045 $7,180 $8,314 $9,622
======= ======= ====== =======
Consolidated net income (loss):
Historical $122 $122 $122 $122
Pro forma income on net proceeds 99 118 137 158
Pro forma ESOP adjustments(1) (17) (20) (23) (27)
Pro forma RSP adjustments(2) (17) (20) (23) (27)
------- ------- ---- -------
Pro forma net income $187 $200 $213 $226
======= ======= === =======
Consolidated net income (loss) per share:
Historical $0.18 $ 0.15 $ 0.13 $ 0.11
Pro forma income on net proceeds 0.14 0.15 0.15 0.15
Pro forma ESOP adjustments(1) (0.02) (0.02) (0.02) (0.03)
Pro forma RSP adjustment(2) (0.02) (0.02) (0.02) (0.03)
------- ------- ------- -------
Pro forma net income per share $0.28 $0.26 $0.24 $0.20
======= ======= ======= =======
Consolidated stockholders' equity (book value)(3):
Historical $6,087 $6,087 $6,087 $6,087
Estimated net proceeds(2) 6,938 8,230 9,521 11,011
Less: Common stock acquired by ESOP(1) (595) (700) (805) (926)
Common stock acquired by RSP(2) (298) (350) (402) (463)
------- ------- ------- -------
Pro forma stockholders' equity $12,132 $13,267 $14,401 $15,709
======= ======= ======= =======
Consolidated stockholders' equity per share:(3)
Historical $8.18 $6.96 $6.05 $5.26
Estimated net proceeds(2) 9.33 9.41 9.46 9.52
Less: Common Stock acquired by ESOP(1) (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by RSP(2) (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma stockholders' equity per share $16.31 $15.17 $14.31 $13.58
======= ======= ======= =======
Purchase price as a percentage of pro forma
stockholders' equity per share(4) 61.31% 65.92% 69.88% 73.64%
Purchase price as a multiple of pro forma net
income per share(5) 17.86 x 19.23 x 20.83 x 25.00 x
</TABLE>
27
<PAGE>
- ----------
(1) Assumes 8% of the shares sold in the Conversion are purchased by the ESOP,
and that the funds used to purchase such shares are borrowed from the
Company. The approximate amount expected to be borrowed by the ESOP is not
reflected as a liability but is reflected as a reduction of capital. We
intend to make annual contributions to the ESOP over a ten year period in
an amount at least equal to the principal and interest requirement of the
debt. The pro forma net income assumes: (i) that 744,000, 875,000,
1,006,000, and 1,157,000 shares at the minimum, mid-point, maximum and
maximum, as adjusted of the EVR, were committed to be released during the
year ended December 31, 1996 and the six months ended June 30, 1997 at an
average fair value of $10 per share in accordance with Statement of
Position ("SOP") 93-6 of the American Institute of Certified Public
Accountants ("AICPA"); (ii) the effective tax rate was 42% for such
periods; and (iii) only the ESOP shares committed to be released were
considered outstanding for purposes of the per share net earnings. The pro
forma stockholders' equity per share calculation assumes all ESOP shares
were outstanding, regardless of whether such shares would have been
released. Because the Company will be providing the ESOP loan, only
principal payments on the ESOP loan are reflected as employee compensation
and benefits expense. As a result, to the extent the value of the shares
appreciates over time, compensation expense related to the ESOP will
increase. For purposes of the preceding tables, it was assumed that a
ratable portion of the ESOP shares purchased in the Conversion were
committed to be released during the periods ended June 30, 1997. If it is
assumed that all of the ESOP shares were included in the calculation of
earnings per share for the period ended and June 30, 1997, earnings per
share would have been $0.25, $0.23, $0.21, and $0.20, at June 30, 1997,
based on the sale of shares at the minimum, midpoint, maximum and the
maximum, as adjusted, of the EVR. See "Management Of Ninth Ward Savings
Bank -- Other Benefits - Employee Stock Ownership Plan."
(2) Assumes issuance to the RSP of 29,760, 35,000, 40,240 and 46,280 at the
minimum, mid-point, maximum, and maximum, as adjusted of the EVR. The
assumption in the pro forma calculation is that (i) shares were purchased
by the Company following the Conversion, (ii) the purchase price for the
shares purchased by the RSP was equal to the purchase price of $10 per
share and (iii) 20% of the amount contributed was an amortized expense
during such period. Such amount does not reflect possible increases or
decreases in the value of such stock relative to the Purchase Price. As we
accrue compensation expense to reflect the five year vesting period of such
shares pursuant to the RSP, the charge against capital will be reduced
accordingly. Implementation of the RSP within one year of Conversion would
require regulatory and stockholder approval at a meeting of our
stockholders to be held no earlier than six months after the Conversion.
For purposes of this table, it is assumed that the RSP will be adopted by
the Board of Directors, reviewed by the OTS, and approved by the
stockholders, and that the RSP will purchase the shares in the open market
within the year following the Conversion. If the shares to be purchased by
the RSP are assumed at July 1, 1997, to be newly issued shares purchased
from the Company by the RSP at the Purchase Price, at the minimum,
midpoint, maximum and maximum, as adjusted, of the EVR, pro forma
stockholders' equity per share would have been $15.68, $14.58, $13.77 and
$13.06 at June 30, 1997, and pro forma earnings per share would have been
$0.26, $0.24, $0.22, and $0.20, for the six months ended June 30, 1997,
respectively. As a result of the RSP, stockholders' interests will be
diluted by approximately 3.9%. See "Management Of Ninth Ward Savings Bank
-- Proposed Future Stock Benefit Plans - Restricted Stock Plan."
(3) Assumes that following the consummation of the Conversion, the Company will
adopt the Option Plan, which if implemented within one year of Conversion
would be subject to regulatory review and Board of Director and stockholder
approval, and that such plan would be considered and voted upon at a
meeting of the Company stockholders to be held no earlier than six months
after the Conversion. Under the Option Plan, employees and directors could
be granted options to purchase an aggregate amount of shares equal to 10%
of the shares issued in the Conversion at an exercise price equal to the
market price of the shares on the date of grant. In the event the shares
issued under the Option Plan were awarded, the interests of existing
stockholders would be diluted. At the minimum, midpoint, maximum and the
maximum, as adjusted, of the EVR, if all shares under the Option Plan were
newly issued at the
28
<PAGE>
beginning of the respective periods and the exercise price for the option
shares were equal to the Purchase Price, the number of outstanding shares
would increase to by 10%.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the over its liabilities. The calculations are based
upon the number of shares issued in the Conversion, without giving effect
to SOP 93-6. The amounts shown do not reflect the federal income tax
consequences of the potential restoration to income of the tax bad debt
reserves for income tax purposes, which would be required in the event of
liquidation. The amounts shown also do not reflect the amounts required to
be distributed in the event of liquidation to eligible depositors from the
liquidation account which will be established upon the consummation of the
Conversion. Pro forma stockholders' equity information is not intended to
represent the fair market value of the shares, the current value of our
assets or liabilities or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the Conversion and by other factors.
(5) Pro forma net income per share calculations include the number of shares
assumed to be sold in the Conversion and, in accordance with SOP 93-6,
exclude ESOP shares which would net have been released during the period.
Accordingly, 57,000, 66,000, 77,000 and 88,000 shares have been subtracted
from the shares assumed to be sold at the minimum, mid-point, maximum, and
maximum, as adjusted, of the EVR, respectively, and 687,000, 809,000,
929,000, and 1,069,000 shares are assumed to be outstanding at the minimum,
mid-point, maximum, and maximum, as adjusted of the EVR.
29
<PAGE>
THE CONVERSION
Our Board of Directors and the OTS have approved the Plan subject to the
Plan's approval by a majority of votes cast by our members at a special meeting
of members to be held on December 19, 1997 and subject to the satisfaction of
certain other conditions imposed by the OTS in its approval. OTS approval,
however, does not constitute a recommendation or endorsement of the Plan by the
OTS.
General
On June 30, 1997, our Board of Directors adopted a Plan of Conversion,
pursuant to which we will convert from a federally chartered mutual savings bank
to a federally chartered stock savings bank and become a wholly owned subsidiary
of the Company. The Conversion will include adoption of the proposed Federal
Stock Charter and Bylaws which will authorize the issuance of capital stock by
us. Under the Plan, our capital stock is being sold to the Company and the
Common Stock of the Company is being offered to our customers and then to the
public. The Conversion will be accounted for at historical cost in a manner
similar to a pooling of interests.
The OTS has approved the Company's application to become a savings and loan
holding company and to acquire all of our Common Stock to be issued in the
Conversion. Pursuant to such OTS approval, the Company plans to retain up to 25%
of the net proceeds from the sale of shares of its Common Stock and to use the
remaining proceeds to purchase all of the Common Stock we will issue in the
Conversion in an amount which will cause our tangible capital to reach
approximately 10% of adjusted total assets
The shares are first being offered in a Subscription Offering to holders of
subscription rights. To the extent shares of Common Stock remain available after
the Subscription Offering, shares of Common Stock may be offered in a Community
Offering. The Community Offering, if any, may commence anytime subsequent to the
commencement of the Subscription Offering. Shares not subscribed for in the
Subscription and Community Offerings may be offered for sale by the Company in a
Syndicated Community Offering. We have the right, in our sole discretion, to
accept or reject, in whole or in part, any orders to purchase shares of the
Common Stock received in the Community and Syndicated Community Offering. See
"-- Community Offering" and "-- Syndicated Community Offering."
Shares of Common Stock in an amount equal to our pro forma market value as
a stock savings institution must be sold in order for the Conversion to become
effective. The Community Offering must be completed within 45 days after the
last day of the Subscription Offering period unless such period is extended by
us with the approval of the OTS. The Plan provides that the Conversion must be
completed within 24 months after the date of the approval of the Plan by our
members.
30
<PAGE>
In the event that we are unable to complete the sale of Common Stock and
effect the Conversion within 45 days after the end of the Subscription Offering,
we may request an extension of the period by the OTS. No assurance can be given
that the extension would be granted if requested. Due to the volatile nature of
market conditions, no assurances can be given that our valuation would not
substantially change during any such extension. If the EVR of the shares must be
amended, no assurance can be given that such amended EVR would be approved by
the OTS. Therefore, it is possible that if the Conversion cannot be completed
within the requisite period, we may not be permitted to complete the Conversion.
A substantial delay caused by an extension of the period may also significantly
increase the expense of the Conversion. No sales of the shares may be completed
in the offering unless the Plan is approved by our members.
The completion of the offering is subject to market conditions and other
factors beyond our control. No assurance can be given as to the length of time
following approval of the Plan at the meeting of our members that will be
required to complete the Community Offering or other sale of the shares being
offered in the Conversion. If delays are experienced, significant changes may
occur in our estimated pro forma market value upon Conversion together with
corresponding changes in the offering price and the net proceeds to be realized
by us from the sale of the shares. In the event the Conversion is terminated, we
would be required to charge all Conversion expenses against current income and
any funds collected by us in the offering would be promptly returned to each
potential investor, plus interest at the prescribed rate.
Effects of Conversion to Stock Form on Depositors and Borrowers of Ninth
Ward Savings Bank, FSB
Voting Rights. Currently in our mutual form, our depositor and borrower
members have voting rights and may vote for the election of directors. Following
the Conversion, depositors and borrower members will cease to have voting rights
and all voting rights will be vested in the holders of the Company Common Stock.
Savings Accounts and Loans. Pursuant to our Plan the balances, terms and
FDIC insurance coverage of savings accounts will not be affected by the
Conversion and our depositors will automatically become our depositors after the
Conversion. Furthermore, the amounts and terms of loans and obligations of the
borrowers under their individual contractual arrangements with us will not be
affected by the Conversion.
Tax Effects. Our conversion is conditioned on receiving certain rulings or
opinions on the tax aspects of the Conversion. We have received an opinion from
our counsel, Peabody & Brown, which addresses the federal tax consequences of
the Conversion. The opinion has been filed as an exhibit to the registration
statement of which this prospectus is a part and covers those federal tax
matters that are material to the transaction. The opinion provides, in part,
that: (i) the Conversion will qualify as a Conversion under Section 368(a)(1)(F)
of the Code, and no gain or loss will be recognized by us in either our mutual
form or our stock
31
<PAGE>
form, or by the Company, by reason of the proposed Conversion; (ii) no gain or
loss will be recognized by us upon the receipt of money from the Company for our
stock, and no gain or loss will be recognized by the Company upon the receipt of
money for the shares; (iii) our assets in either our mutual or our stock form
will have the same basis before and after the Conversion; (iv) the holding
period of our assets will include the period during which the assets were held
by us in our mutual form prior to conversion; (v) no gain or loss will be
recognized by the Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members upon the issuance to them of withdrawable savings
accounts in us in the stock form in the same dollar amount as their savings
accounts in us in the mutual form plus an interest in the liquidation account of
us in the stock form in exchange for their savings accounts in us in the mutual
form; (vi) provided that the amount to be paid for the shares pursuant to the
subscription rights is equal to the fair market value of such shares, no gain or
loss will be recognized by Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members under the Plan upon the distribution to them
of nontransferable subscription rights to purchase shares; (vii) the basis of
each account holder's savings accounts in us after the Conversion will be the
same as the basis of his savings accounts in us prior to the Conversion,
decreased by the fair market value of the nontransferable subscription rights
received and increased by the amount, if any, of gain recognized on the
exchange; (viii) the basis of each account holder's interest in the liquidation
account will be zero; (ix) the holding period of the Common Stock acquired
through the exercise of subscription rights shall begin on the date on which the
subscription rights are exercised; (x) we will succeed to and take into account
the earnings and profits or deficit in earnings and profits of us, in our mutual
form, as of the date of Conversion; (xi) immediately after Conversion, we will
succeed to the bad debt reserve accounts of Ninth Ward Savings Bank, FSB in its
mutual form, and the bad debt reserves will have the same character in our hands
after Conversion as if no distribution or transfer had occurred; and (xii) the
creation of the liquidation account will have no effect on our taxable income,
deductions or addition to reserve for bad debts either in our mutual or stock
form.
The opinion from Peabody & Brown is based in part on the assumption that
the exercise price of the subscription rights to purchase shares will be
approximately equal to the fair market value of those shares at the time of the
completion of the proposed Conversion. With respect to the subscription rights,
we have received an opinion of FinPro which, based on certain assumptions,
concludes that the subscription rights to be received by Eligible Account
Holders and other eligible subscribers do not have any economic value at the
time of distribution or at the time the subscription rights are exercised,
whether or not a public offering takes place. Such opinion is based on the fact
that such rights are: (i) acquired by the recipients without payment therefor,
(ii) non-transferable, (iii) of short duration, and (iv) afford the recipients
the right only to purchase shares at a price equal to their estimated fair
market value, which will be the same price at which shares for which no
subscription right is received in the Subscription Offering will be offered in
the Community Offering. If the subscription rights granted to Eligible Account
Holders or other eligible subscribers are deemed to have an ascertainable value,
receipt of such rights would be taxable only to those Eligible Account Holders
or other eligible subscribers who exercise the subscription rights
32
<PAGE>
in an amount equal to such value (either as a capital gain or ordinary income),
and we could recognize gain on such distribution.
We are also subject to Delaware income taxes and have received an opinion
from Young, Conaway, Stargatt & Taylor that the Conversion will be treated for
Delaware state tax purposes similar to the Conversion's treatment for federal
tax purposes.
Unlike a private letter ruling from the IRS, the opinions of Peabody &
Brown, FinPro and Young, Conaway, Stargatt & Taylor have no binding effect or
official status, and no assurance can be given that the conclusions reached in
any of those opinions would be sustained by a court if contested by the IRS or
the Delaware tax authorities. Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members are encouraged to consult with their own tax
advisers as to the tax consequences in the event the subscription rights are
deemed to have an ascertainable value.
Liquidation Account. In the unlikely event of our complete liquidation in
our present mutual form, each depositor is entitled to equal distribution of any
of our assets, pro rata to the value of his accounts, remaining after payment of
claims of all creditors (including the claims of all depositors to the
withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
accounts was to the total value of all deposit accounts in us at the time of
liquidation.
Upon a complete liquidation after the Conversion, each depositor would have
a claim, as a creditor, of the same general priority as the claims of all other
general creditors of ours. Therefore, except as described below, a depositor's
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. A depositor would not have an interest in the residual value
of our assets above that amount, if any.
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
$6,086,942, our retained earnings at the date of the latest statement of
financial condition contained in this Prospectus. Each Eligible Account Holder
and Supplemental Eligible Account Holder, if he continues to maintain his
deposit account with us, would be entitled on a complete liquidation of us after
Conversion, to an interest in the liquidation account prior to any payment to
stockholders. Each Eligible Account Holder would have an initial interest in
such liquidation account for each deposit account held in us on the qualifying
date, December 31, 1995. Each Supplemental Eligible Account Holder would have a
similar interest as of the qualifying date, September 30, 1997. The interest as
to each deposit account would be in the same proportion of the total liquidation
account as the balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such qualifying dates. However, if the
amount in the deposit account on any December 31 annual closing date commencing
on December 31, 1997 is less than the
33
<PAGE>
amount in such account on the respective qualifying dates, then the interest in
this special liquidation account would be reduced from time to time by an amount
proportionate to any such reduction, and the interest in the liquidation account
would cease to exist if the deposit account were closed or reaches zero. The
interest in the special liquidation account will never be increased despite any
increase in the related deposit account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction we in our converted form are not the
surviving institution shall be considered a complete liquidation. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
Subscription Rights and the Subscription Offering
In accordance with OTS regulations and the Plan, non-transferable
subscription rights to purchase shares of the Common Stock have been granted to
all persons and entities entitled to purchase shares in the Subscription
Offering under the Plan. The number of shares which these parties may purchase
will be determined, in part, by the total number of shares to be issued and by
the availability of the shares for purchase under the categories set forth in
the Plan. If the Community Offering, as described below, extends beyond 45 days
following the completion of the Subscription Offering, subscribers will be
resolicited. All subscriptions will be subject to the availability of stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan and as described below under "-- Limitations on Purchases
of Shares."
The following priorities have been established:
Category 1: Eligible Account Holders. Each depositor of Ninth Ward with
$50.00 or more on deposit as of December 31, 1995 will receive non-transferable
subscription rights on a priority basis to purchase that number of shares of
Common Stock which is equal to the greater of 10,000 shares ($100,000)
(including joint accounts) or 20,000 shares ($200,000) in the case of a purchase
with Associates, or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares to be issued by a fraction of
which the numerator is the amount of the qualifying deposit of the Eligible
Account Holder and the denominator is the total amount of qualifying deposits of
all Eligible Account Holders. If such allocation results in an oversubscription,
shares shall be allocated among subscribing Eligible Account Holders so as to
permit each such account holder, to the extent possible, to purchase the lesser
of 100 shares or the total amount of his subscription. Any shares not so
allocated shall be allocated among the subscribing Eligible Account Holders on
an equitable basis, related to the amounts of their respective qualifying
deposits as compared to the total qualifying deposits of all subscribing
Eligible Account Holders. Subscription rights received
34
<PAGE>
by officers and directors in this category based on their increased deposits in
us in the one-year period preceding December 31, 1995, are subordinated to the
subscription rights of other Eligible Account Holders. See " Limitations on
Purchases and Transfer of Shares."
Category 2: Tax-Qualified Employee Benefit Plans. Our tax-qualified
employee benefit plans ("Employee Plans") have been granted non-transferable
subscription rights to purchase up to 8% of the total shares issued in the
Conversion. The ESOP is an Employee Plan.
The right of Employee Plans to subscribe for shares is subordinate to the
right of the Eligible Account Holders to subscribe for shares. However, in the
event the offering results in the issuance of shares above the maximum of the
EVR (i.e., more than 1,006,000 shares), the Employee Plans have a priority right
to fill their subscription. The ESOP is the only Employee Plan and currently
intends to purchase up to 8% of the Common Stock issued in the Conversion. The
Employee Plans may, however, determine to purchase some or all of the shares
covered by their subscriptions after the Conversion in the open market or, if
approved by the OTS, out of authorized but unissued shares in the event of an
oversubscription.
Category 3: Supplemental Eligible Account Holders. Each depositor of Ninth
Ward with $50.00 or more on deposit as of September 30, 1997 who is not an
Eligible Account Holder will receive non-transferable subscription rights to
purchase that number of shares which is equal to the greater of 10,000 shares
($100,000), or 20,000 shares ($200,000) in the case of a purchase with
Associates, or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares to be issued by a fraction of
which the numerator is the amount of the qualifying deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Supplemental Eligible Account Holders. If the allocation made in
this paragraph results in an oversubscription, shares shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each such
account holder, to the extent possible, to purchase the lesser of 100 shares or
the total amount of his subscription. Any shares not so allocated shall be
allocated among the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective qualifying deposits
as compared to the total qualifying deposits of all subscribing Supplemental
Eligible Account Holders. See "-- Limitations on Purchases and Transfer of
Shares."
The right of Supplemental Eligible Account Holders to subscribe for shares
is subordinate to the rights of the Eligible Account Holders and Employee Plans
to subscribe for shares.
Category 4: Other Members. Each depositor of Ninth Ward as of the Voting
Record Date (November __, 1997) who is not an Eligible Account Holder or
Supplemental Eligible Account Holder, and each borrower with a loan outstanding
on January 1, 1993, which continues to be outstanding on the Voting Record Date
will receive non-transferable
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subscription rights to purchase up to 10,000 shares ($100,000) or 20,000 shares
($200,000) in the case of a purchase with Associates to the extent such shares
are available following subscriptions by Eligible Account Holders, Employee
Plans, and Supplemental Eligible Account Holders. In the event there are not
enough shares to fill the orders of the Other Members, the subscriptions of the
Other Members will be allocated so that each subscribing Other Member will be
entitled to purchase the lesser of 100 shares or the number of shares ordered.
Any remaining shares will be allocated among Other Members whose subscriptions
remain unsatisfied on a 100 share (or whatever lesser amount is available) per
order basis. See "-- Limitations on Purchases and Transfer of Shares."
Expiration Date. The Subscription Offering will expire at Noon, Wilmington
Delaware Time, on December 18, 1997 unless extended for up to 45 additional days
with the approval of the OTS. Subscription rights not used by the time the
offering expires are void.
Members in Non-Qualified States. We will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for the shares pursuant to the Plan reside. However, no
person will be offered or allowed to purchase any shares under the Plan if he
resides in a foreign country or in a state with respect to which any of the
following apply: (i) a small number of persons otherwise eligible to subscribe
for shares under the Plan reside in that state or foreign country; (ii) the
granting of subscription rights or offer or sale of shares of Common Stock to
those persons would require either us, or our employees to register, under the
securities laws of that state or foreign country, as a broker or dealer or to
register or otherwise qualify our securities for sale in that state or foreign
country; or (iii) such registration or qualification would be impracticable for
reasons of cost or otherwise. Where the number of persons eligible to subscribe
for shares is small, we will decide whether to offer shares based on a number of
factors. Some of these factors include the size of the accounts held by account
holders in the State, the costs required to be paid to sell shares in that
particular State and the need to register the Company or its employees or
directors under that particular State securities laws. No payments will be made
in lieu of the granting of subscription rights to any person.
Restrictions on Transfer of Subscription Rights and Shares. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights.
Subscription rights may be exercised only by the person to whom they are granted
and only for his account. Each person subscribing for shares will be required to
certify that he is purchasing shares solely for his own account and has not
entered into an agreement or understanding regarding the sale or transfer of
those shares. Federal Regulations also prohibit any person from offering or
making an announcement of an offer or intent to make an offer to purchase
subscription rights or shares of Common Stock prior to the completion of the
Conversion.
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We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
believed by us to involve the transfer of subscription rights.
Community Offering
To the extent that shares remain available for purchase after filling all
orders received in the Subscription Offering, we may offer shares of Common
Stock to certain members of the general public giving preference to natural
persons who are permanent residents of the Local Community -- the State of
Delaware, Chester County and Delaware County, Pennsylvania, Cecil County,
Maryland and Salem County, New Jersey -- under such terms and conditions as may
be established by the Board of Directors. In the Community Offering, the minimum
purchase is 25 shares and no person may purchase more than 10,000 shares
($100,000) for a single purchaser or 20,000 shares ($200,000) when aggregated
with the purchases by an Associate of such person and persons acting in concert
with such persons. In the event there are not sufficient shares to fill all
orders, the remaining shares would be allocated in the same manner as shares
would be allocated in the "Other Members" category. See "-- Subscription Rights
and the Subscription Offering -- Category 4: Other Members."
The Community Offering may commence at any time after the commencement of
the Subscription Offering. The Community Offering once commenced, may expire at
any time without notice but no later than 12:00 p.m., Wilmington, Delaware Time,
on February 2, 1998 unless extended with the permission of the OTS. Purchases of
shares in the Community Offering are subject to our right in our sole
discretion, to accept or reject such purchases in whole or in part either at the
time and receipt of an order, or as soon as practicable following the completion
of the Community Offering.
In the event Community Offering orders are not filled, funds received by us
will be promptly refunded with interest at our passbook rate. In the event an
insufficient number of shares are available to fill all orders in the Community
Offering, the available shares will be allocated on an equitable basis
determined by the Board of Directors, provided however that a preference will be
given to natural persons residing in Local Community. If regulatory approval is
received to extend the Community Offering beyond 45 days following the
completion of the Subscription Offering, subscribers will be resolicited. Shares
sold in the Community Offering will be sold at the Purchase Price. The offering
extensions cannot be provided beyond December 19, 1999.
Syndicated Community Offering
The Plan provides that, if necessary, all shares of Common Stock not
purchased in the Subscription Offering and Community Offering, if any, may be
offered for sale to certain members of the general public in a Syndicated
Community Offering through a syndicate of
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register broker-dealers to be managed by Trident acting as agent for the
Company. The Company has the right to reject orders in whole or part in their
sole discretion in the Syndicated Community Offering. Neither Trident nor any
registered broker-dealer shall have any obligation to take or purchase any of
the Common Stock in the Syndicated Community Offering. However, Trident has
agreed to use its best efforts in the sale of shares in the Syndicated Community
Offering.
Stock sold in the Syndicated Community Offering also will be sold at the
$10.00 Purchase Price. See, "-- Stock Pricing." No person shall be permitted to
subscribe in the Syndicated Community Offering for shares of Common Stock with
an aggregate purchase price of more than $100,000. See, " -- Payment for Shares
and -- Marketing Arrangements" for a description of the commission to be paid to
selected dealers and to Trident.
Ordering and Receiving Shares
Use of Order Forms. Rights to subscribe may only be exercised by completion
of an original order form. Persons ordering shares in the Subscription Offering
must deliver by mail or in person a properly completed and executed original
order form to us prior to the Expiration Date. Order forms must be accompanied
by full payment for all shares ordered. See "-- Payment for Shares. "
Subscription rights under the Plan will expire on the Expiration Date, whether
or not we have been able to locate each person entitled to subscription rights.
Once submitted, subscription orders cannot be revoked without our consent unless
the Conversion is not completed within 45 days of the Expiration Date.
Persons and entities not purchasing shares in the Subscription Offering
may, subject to availability, purchase shares in the Community Offering by
returning to us a completed and properly executed order form along with full
payment for the shares ordered.
In the event an order form (i) is not delivered and is returned to us by
the United States Postal Service or we are unable to locate the addressee, (ii)
is not received or is received after the Expiration Date, (iii) is defectively
completed or executed, or (iv) is not accompanied by full payment for the shares
subscribed for (including instances where a savings account or certificate
balance from which withdrawal is authorized is insufficient to fund the amount
of such required payment), the subscription rights for the person to whom such
rights have been granted will lapse as though that person failed to return the
completed order form within the time period specified. We may, but will not be
required to, waive any irregularity on any order form or require the submission
of corrected order forms or the remittance of full payment for subscribed shares
by such date as we specify. The waiver of an irregularity on an order form in no
way obligates us to waive any other irregularity on that, or any irregularity on
any other, order form. Waivers will be considered on a case by case basis.
Photocopies of order forms, facsimiled order forms, payments from private third
parties or payments through electronic transfers of funds will not be accepted.
Our interpretation of the terms and conditions
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of the Plan and of the acceptability of the order forms will be final. We have
the right to investigate any irregularity on any order form.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus.
Payment for Shares. Payment for shares of Common Stock may be made (i) in
cash, if delivered in person, (ii) by check or money order, or (iii) by
authorization of withdrawal from savings accounts (including certificates of
deposit) maintained with us. Appropriate means by which such withdrawals may be
authorized are provided in the order form. Once such a withdrawal has been
authorized, none of the designated withdrawal amount may be used by the
subscriber for any purpose other than to purchase the shares. Where payment has
been authorized to be made through withdrawal from a savings account, the sum
authorized for withdrawal will continue to earn interest at the passbook rate
until the Conversion has been completed or terminated. Interest penalties for
early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares; however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the passbook savings account rate subsequent to
the withdrawal. Payments made in cash or by check or money order, will be placed
in a segregated savings account and interest will be paid by us at our passbook
savings account rate from the date payment is received until the Conversion is
completed or terminated. Payments from private third parties or payments through
electronic transfer of funds will not be accepted. An executed order form, once
received by us, may not be modified, amended, or rescinded without our consent,
unless the Conversion is not completed within 45 days after the conclusion of
the Subscription Offering, in which event subscribers may be given an
opportunity to increase, decrease, or rescind their order. In the event that the
Conversion is not consummated, all funds submitted pursuant to the offering will
be refunded promptly with interest.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares in the offering, provided that such IRAs are not maintained on deposit
with us. Persons with IRAs maintained with us must have their accounts
transferred to an unaffiliated institution or broker to purchase shares in the
offering. The Stock Information Center can assist you in transferring your
self-directed IRA. Because of the paperwork involved, persons owning IRAs with
us who wish to use their IRA account to purchase stock in the Offering, must
contact the Stock Information Center no later than December 5, 1997.
Trident may enter into agreements with broker-dealers ("Selected Dealers")
to assist in the sale of the shares in the Syndicated Community Offering. See
also "-- Plan of Distribution" and "-- Marketing Arrangements." No orders may be
placed or filled by or for a
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Selected Dealer during the Subscription Offering. If a Syndicated Community
Offering is utilized after the close of the Subscription Offering, Trident will
instruct Selected Dealers as to the number of shares to be allocated to each
Selected Dealer. Only after the close of the Subscription Offering and upon
allocation of shares to Selected Dealers may Selected Dealers take orders from
their customers. During the Subscription and Community Offerings, Selected
Dealers may only solicit indications of interest from their customers to place
orders with the Company as of a certain date ("Order Date") for the purchase of
shares. When and if Trident and the Company believe that sufficient orders have
not been received in the Subscription and the Community Offerings to consummate
the Conversion, Trident will request, as of the Order Date, Selected Dealers to
submit orders to purchase shares for which they have previously received
indications of interest from their customers. Selected Dealers will send
confirmations of the orders to their customers on the next business day after
the Order Date. Selected Dealers will debit the accounts of their customers on
the "Settlement Date". The Settlement Date will be three business days after the
Order Date. Customers who authorize Selected Dealers to debit their brokerage
accounts are required to have the funds for payment in their account by the
Settlement Date. On the Settlement Date, Selected Dealers will remit funds to
the account established by us for each Selected Dealer. Each customer's funds so
forwarded to us along with all other accounts held in the same title, will be
insured by the FDIC up to $100,000. After payment has been received by us from
Selected Dealers, funds will earn interest at our passbook savings account rate
until the consummation of the Conversion. Funds will be returned promptly, with
interest, in the event the Conversion is not consummated as described above.
However, Selected Dealers who do not hold or receive funds for customers or
carry accounts of, or for, customers will (1) instruct their customers who wish
to subscribe in the offering to make their checks payable to us and (2) will
transmit customer checks directly to us by noon of the next business day after
receipt by such Selected Dealer.
The ESOP may subscribe for shares by submitting its order form along with
evidence of a loan commitment from a financial institution or the Company for
the purchase of the shares during the Subscription Offering and by making
payment for shares on the date of completion of the Conversion.
Federal regulations prohibit us from lending funds or extending credit to
any person to purchase shares in the Conversion.
Delivery of Stock Certificates. Certificates representing shares of Common
Stock issued in the Conversion will be mailed to the person(s) at the address
noted on the order form, as soon as practicable following consummation of the
Conversion. Any certificates returned as undeliverable will be held until
properly claimed or otherwise disposed. Persons ordering shares might not be
able to sell their shares until they receive their stock certificates.
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Plan of Distribution
Materials for the offering have been distributed to eligible subscribers by
mail. Additional copies are available at our main office. Our officers may be
available to answer questions about the Conversion. Responses to questions about
us will be limited to the information contained in this Prospectus. Officers
will not be authorized to render investment advice. All subscribers for the
shares being offered will be instructed to send payment directly to us. The
funds will be held in a segregated special escrow account and will not be
released until the closing of the Conversion or its termination.
Marketing Arrangements
Trident has been engaged as our financial advisor in connection with the
offering. Trident has agreed to exercise its best efforts to assist us in the
sale of the shares in the offering. As compensation, Trident will receive a
commission equal to 1.5% of the aggregate dollar amount of capital stock sold to
investors, except no commissions shall be payable on shares purchased by
officers, directors, employees or their associates or employee benefit plans.
Based upon the sale of common stock at the midpoint of the EVR and purchases of
21,900 shares by directors and executive officers, Trident will receive
commissions of approximately $117,000. If shares are offered for sale in another
form of offering, Trident will organize and manage the offering for no
additional fee. Commissions to be paid to any such persons for such offering
will be at the discretion of the management of the Company and is not expected
to exceed 5%. Fees paid to Trident and to any other broker-dealer may be deemed
to be underwriting fees, and Trident and such broker-dealers may be deemed to be
underwriters. We have agreed to reimburse Trident for allocable expenses,
including legal fees, of up to $27,500 in the aggregate. Trident will also be
reimbursed for out-of-pocket expenses not to exceed $10,000. Also, we have
agreed to indemnify Trident for reasonable costs and expenses in connection with
certain claims or liabilities which might be asserted against Trident. This
indemnification covers the investigation, preparation of defense and defense of
any action, proceeding or claim relating to misrepresentation or breach of
warranty of the written agreement among Trident and us or the omission or
alleged omission of a material fact required to be stated or necessary in the
prospectus or other documents. Trident will also receive a fee of $10,000 for
proxy solicitation and Conversion Center management.
The shares will be offered principally by the distribution of this
Prospectus and through activities conducted at a Stock Information Center
located at our main office. The Stock Information Center is expected to operate
during our normal business hours throughout the offering. A registered
representative employed by Trident will be working at, and supervising the
operation of, the Stock Information Center. Trident will assist us in responding
to questions regarding the Conversion and the offering and processing order
forms. Our personnel will be present in the Stock Information Center to assist
Trident with clerical matters and to answer questions related solely to our
business.
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Stock Pricing
FinPro, an independent economic consulting and appraisal firm, which is
experienced in the evaluation and appraisal of business entities, including
savings institutions involved in the conversion process has been retained by us
to prepare an appraisal of our estimated pro forma market value. FinPro will
receive a fee of $14,000 for preparing the appraisal and $10,000 for its
assistance in connection with the preparation of the business plan required in
connection with the conversion and will be reimbursed reasonable out-of-pocket
expenses. We have agreed to indemnify FinPro under certain circumstances against
liabilities and expenses arising out of or based on any misstatement or untrue
statement of a material fact contained in the information supplied by us to
FinPro.
The appraisal was prepared by FinPro in reliance upon the information
contained herein, including the financial statements. The appraisal contains an
analysis of a number of factors including, but not limited to, our financial
condition and operating trends, the competitive environment within which we
operate, operating trends of certain savings institutions and savings and loan
holding companies, relevant economic conditions, both nationally and in the
state of Delaware which affect the operations of savings institutions, and stock
market values of certain savings institutions. In addition, FinPro has advised
us that it has considered the effect of the additional capital raised by the
sale of the shares on our estimated aggregate pro forma market value.
On the basis of the above, FinPro has determined, in its opinion, that as
of September 18, 1997 our estimated aggregate pro forma market value was
$8,750,000. OTS regulations require, however, that the appraiser establish a
range of value for the stock to allow for fluctuations in the aggregate value of
the stock due to changing market conditions and other factors. Accordingly,
FinPro has established a range of value from $7,440,000 to $10,060,000 for the
offering (the Estimated Valuation Range or EVR). The Estimated Valuation Range
will be updated by FinPro prior to consummation of the Conversion and the
Estimated Valuation Range may increase to $11,570,000.
The Board of Directors has reviewed the independent appraisal, including
the stated methodology of the independent appraiser and the assumptions used in
the preparation of the independent appraisal. The Board of Directors is relying
upon the expertise, experience and independence of the appraiser and is not
qualified to determine the appropriateness of the assumptions.
In order for stock sales to take place FinPro must confirm to the OTS that,
to the best of FinPro's knowledge and judgment, nothing of a material nature has
occurred which would cause FinPro to conclude that the Purchase Price on an
aggregate basis was materially incompatible with FinPro's estimate of our pro
forma market value of us in converted form at the time of the sale. If, however,
facts do not justify such a statement, an amended Estimated Valuation Range may
be established and a new Subscription and Community Offering may take place or
such other actions as the Board of Directors may determine or OTS may require.
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The appraisal is not a recommendation of any kind as to the advisability of
purchasing these shares. In preparing the appraisal, FinPro has relied upon and
assumed the accuracy and completeness of financial and statistical information
provided by us. FinPro did not independently verify the financial statements and
other information provided by us, nor did FinPro value independently our assets
and liabilities. The appraisal considers us only as a going concern and should
not be considered as our liquidation value. Moreover, because the appraisal is
based upon estimates and projections of a number of matters which are subject to
change, the market price of the Common Stock could decline below $10.00 per
share.
Change in Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the completion
of the Subscription and Community Offerings, we may significantly increase or
decrease the number of shares to be issued in the Conversion. In the event of an
increase in the valuation, we may increase the total number of shares to be
issued in the Conversion. An increase in the total number of shares to be issued
in the Conversion would decrease a subscriber's percentage ownership interest
and the pro forma net worth (book value) per share and increase the pro forma
net income and net worth (book value) on an aggregate basis. In the event of a
material reduction in the valuation, we may decrease the number of shares to be
issued to reflect the reduced valuation. A decrease in the number of shares to
be issued in the Conversion would increase a subscriber's percentage ownership
interest and the pro forma net worth (book value) per share and decrease pro
forma net income and net worth on an aggregate basis.
Persons ordering shares will not be permitted to modify or cancel their
orders unless the change in the number of shares to be issued in the Conversion
results in an offering which is either less than $7,440,000 or more than
$11,570,000.
In the event market or financial conditions change so as to cause the
aggregate number of shares issued in the Conversion to be below the EVR, or more
than 15% above the maximum of the EVR, if the Plan is not terminated by the
Company and the Bank after consultation with the OTS, purchasers will be
resolicited (i.e., permitted to continue their orders in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscription funds will be promptly
refunded, or permitted to modify or rescind their subscriptions). Any change in
the EVR must be approved by the OTS. If the number of shares issued in the
Conversion increase, persons who subscribe to the maximum number of shares will
not be given to the opportunity to subscribe for an adjusted maximum number of
shares, except for the ESOP which will able to be subscribed for an adjusted
amount.
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Limitations on Purchases and Transfer of Shares
The Plan provides for certain additional limitations to be placed upon the
purchase of the shares in the Conversion. The minimum purchase is 25 shares and
the maximum purchase for any individual person is 10,000 shares (including a
joint account) or 20,000 shares when the total purchases of associates is
included. No persons, together with associates, or group of persons acting in
concert, may purchase more than 20,000 shares except for the ESOP which may
purchase up to 8% of the shares sold. The OTS regulations governing the
Conversion provide that officers and directors and their associates may not
purchase, in the aggregate, more than 33% of the shares issued pursuant to the
Conversion.
Depending on market conditions and the results of the offering, the Board
of Directors may increase or decrease any of the purchase limitations without
the approval of our members and without resoliciting subscribers. If the maximum
purchase limitation is increased, persons who ordered the maximum amount will be
given the first opportunity to increase their orders. In doing so, the
preference categories in the offerings will be followed.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the EVR of up to 15% (the "Adjusted Maximum"),
the additional shares will be allocated in the following order of priority: (i)
in the event of an oversubscription by Eligible Account Holders to fill the ESOP
subscription of up to 8% of the Adjusted Maximum number of shares (the ESOP
currently intends to subscribe for 8%); (ii) in the event that there is an
oversubscription by Eligible Account Holders, to fill unfilled subscriptions of
Eligible Account Holders inclusive of the Adjusted Maximum; (iii) in the event
that there is an oversubscription by Supplemental Eligible Account Holders, to
fill unfilled subscriptions to Supplemental Eligible Account Holders inclusive
of the Adjusted Maximum; (iv) in the event that there is an oversubscription by
Other Members, to fill unfilled subscriptions of Other Members inclusive of the
Adjusted Maximum; and (v) to fill unfilled subscriptions in the Community
Offering to the extent possible, inclusive of the Adjusted Maximum.
The term "associate" of a person means (i) any corporation or organization
(other than us or a majority-owned subsidiary of ours) of which such person is
an officer or partner or is, directly or indirectly, the beneficial owner of 10%
or more of any class of equity securities, (ii) any trust or other estate in
which such person has a substantial beneficial interest or as to which such
person serves as director or in a similar fiduciary capacity (excluding
tax-qualified employee stock benefit plans), and (iii) any relative or spouse of
such person or any relative of such spouse, who has the same home as such person
or who is a director or officer of us, or any of our subsidiaries. For example,
a corporation of which a person serves as a trustee would be an associate of
that person, and therefore all shares purchased by that corporation would be
included with the number of shares which that person individually could purchase
under the above limitations.
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The term "officer" may include our president, vice presidents in charge of
principal business functions, Secretary and Treasurer and any other officer
performing similar functions. All references herein to an officer have the same
meaning as used for an officer in the Plan.
The term "residing," as used in relation to the preference afforded natural
persons residing in the Local Community, means any natural person who occupies a
dwelling within the Local Community, has an intention to remain within the Local
Community (manifested by establishing a physical, on-going, non-transitory
presence within the Local Community), and continues to reside in the Local
Community at the time of the Subscription and Community Offering. We may utilize
deposit or loan records or such other evidence provided to us to make the
determination whether a person is residing in the Local Community. To the extent
the person is a personal benefit plan, the circumstances of the beneficiary
shall be utilized. Such determination will be in our sole discretion.
To order shares in the Conversion, persons must certify that their purchase
does not conflict with the purchase limitations. In the event that the purchase
limitations are violated by any person (including any associate or group of
persons affiliated or otherwise acting in concert with such persons), we will
have the right to purchase from that person at $10.00 per share all shares
acquired by that person in excess of the purchase limitations. If the excess
shares have been sold by that person, we may recover the profit from the sale of
the shares by that person. We may assign our right either to purchase the excess
shares or to recover the profits from their sale.
Shares of Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by our directors and officers. For
certain restrictions on the shares purchased by directors and officers, see "--
Restrictions on Sales and Purchases of Shares by Directors and Officers."
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with subscription rights and to certain reporting
requirements upon purchase of such securities.
Restrictions on Repurchase of Shares
Generally, during the first year following the Conversion, the Company may
not repurchase its shares and during each of the second and third years
following the Conversion, the Company may repurchase five percent of the
outstanding shares provided they are purchased in open-market transactions.
Repurchases must not cause us to become undercapitalized and at least 10 days
prior notice of the repurchase must be provided to the OTS. The OTS may
disapprove a repurchase program upon a determination that (1) the repurchase
program would adversely affect our financial condition, (2) the information
submitted is insufficient upon which to base a conclusion as to whether the
financial condition would be adversely affected, or (3) a valid business purpose
was not demonstrated. However,
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the OTS may grant special permission to repurchase shares after six months
following the Conversion and to repurchase more than five percent during each of
the second and third years. In addition, SEC rules also govern the method, time,
price, and number of shares of Common Stock that may be repurchased by the
Company and affiliated purchasers. If, in the future, the rules and regulations
regarding the repurchase of stock are liberalized, the Company may utilize the
rules and regulations then in effect.
Restrictions on Sales and Purchases of Shares by Directors and Officers
Shares purchased by directors and officers of the Company may not be sold
for one year following completion of the Conversion. An exception to this rule
is a disposition of shares in the event of the death of the director or officer.
Any shares issued to directors and officers as a stock dividend, stock split, or
otherwise with respect to restricted stock shall be subject to the same
restrictions.
For three years following the Conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the OTS has approved the purchase or the purchase is an arm's
length transaction and involves more than one percent of the outstanding shares.
Interpretation and Amendment of the Plan
We have the authority to interpret and amend the Plan. Our interpretations
are final. Amendments to the Plan after the receipt of member approval will not
need further member approval unless required by the OTS.
Conditions and Termination
Completion of the Conversion requires (i) the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes
eligible to be cast by our members; and (ii) completion of the sale of shares
within 24 months following approval of the Plan by our members. If these
conditions are not satisfied, the Plan will be terminated and we will continue
our business in the mutual form of organization. We may terminate the Plan at
any time prior to the meeting of members to vote on the Plan or at any time
thereafter with the approval of the OTS.
Other
All statements made in this Prospectus are hereby qualified by the contents
of the Plan of Conversion, the material terms of which are set forth herein. The
Plan of Conversion is attached to the Proxy Statement. Copies of the Plan are
available from us and we should be consulted for further information. Adoption
of the Plan by our members authorizes us to interpret, amend or terminate the
Plan.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is intended to assist you in understanding our financial condition
and results of operations. The information in this section should also be read
with our Financial Statements and Notes to the Financial Statements beginning at
page F-1.
General
The Company has recently been formed and accordingly, has no results of
operations. The following discussion relates only to the financial condition and
results of operations of Ninth Ward.
The Bank's principal business consists of accepting deposits from the
general public and investing these funds primarily in loans, investment
securities and mortgage-backed securities. Our loans presently consist primarily
of fixed rate loans secured by residential real estate located in our market
area.
The Bank has operated as a traditional savings and loan association raising
money by offering FDIC-insured savings products of relatively short duration and
lending this money for the purpose of home financing. Historically, our strategy
has been to originate fixed rate mortgage loans for sale in the secondary market
to FNMA or FHLMC. In 1996, due to changes in the interest rate environment, we
began to hold a substantial amount of these loans in our portfolio, causing our
assets to increase substantially. As of June 30, 1997, 77.5% of our loans were
first mortgage loans with fixed rates. Although the Bank makes adjustable rate
mortgages and secured home equity loans, these loans have not been a significant
part of our activity. Our results of operations depend primarily on net interest
income, which is determined by (i) the difference between rates of interest we
earn on our interest-earning assets and the rates we pay on interest-bearing
liabilities ("interest rate spread"), and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. Our results of
operations are also affected by (i) non-interest income, which includes income
from customer deposit account service charges, loan servicing fee income, gains
and losses from the sale of loans, investments and mortgage-backed securities
and (ii) non-interest expense, which includes compensation and employee
benefits, federal deposit insurance premiums, office occupancy costs,
advertising costs and data processing costs. Our results of operations also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, all of which are beyond our control.
The Bank is currently operating under a Supervisory Agreement with the OTS
which requires the Bank to take certain actions, including, but not limited to,
addressing the Bank's interest rate risk profile. The Supervisory Agreement will
remain in place until terminated by the OTS, although it provides that the OTS
Regional Director will consider requests for termination after the first Report
of Examination of the Bank is concluded following May 21, 1997, which was the
effective date of the Supervisory Agreement. See "-- Asset/Liability Management"
and "BUSINESS OF NINTH WARD SAVINGS BANK--Supervisory Agreement."
47
<PAGE>
Asset/Liability Management
Our assets and liabilities may be analyzed by examining the extent to which
our assets and liabilities are interest rate sensitive and by evaluating the
expected effects of interest rate changes on our net portfolio value. The
ability to maintain consistent net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities that either reprice or mature within a given period
of time.
Thus, an asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. The difference or interest rate
repricing "Gap" provides an indication of the extent to which an institution's
interest rate spread will be affected by changes in interest rates. A Gap is
considered positive when the amount of interest rate sensitive assets maturing
or repricing within a given period exceeds the amount of interest rate sensitive
liabilities maturing or repricing within such period. A Gap is considered
negative when the amount of interest-bearing liabilities repricing or maturing
within a given period exceeds the amount of interest rate sensitive assets
repricing or maturing within such period.
Our lending activities have historically emphasized long-term fixed rate
mortgage loans secured by one-to-four family residences. Currently, 77.5% of all
of our loans are of this type. Conversely, our deposit rates mature or are
subject to repricing within a relatively short period of time. These factors
have historically caused the income earned by us on our loan portfolio to adjust
more slowly to changes in interest rates than the interest we pay on our
deposits.
In recent years we have sought to manage our interest rate risk by selling
portions of our fixed rate loans to the FHLMC or another financial institution
(while retaining the servicing of those loans). We have also sought to manage
interest rate risk by lengthening the maturities of our certificates of deposit
and through longer term borrowings from the FHLB of Pittsburgh. However, the
imbalance between our assets and liabilities has caused our interest rate risk
to remain high.
Our Supervisory Agreement with the OTS identifies our interest rate risk
level as unacceptably high and requires us to develop and pursue strategies to
reduce interest-rate risk. The strategies we have been considering include
adjustment of FHLB advances by replacing short-term variable advances with the
proceeds of longer termed fixed rate advances. We have also sold or are
considering the sale of certain fixed rate loans to the FHLMC in order to help
48
<PAGE>
manage our interest-rate risk. The proceeds of these sales will be used to
either acquire short term variable rate assets or to repay short term variable
rate borrowings.
On June 26, 1997, we adopted a revised interest rate risk policy and also
took certain actions to implement this policy, including loan sales and
lengthening the maturities of some FHLB borrowings. At June 30, 1997 we had $5.5
million in loans held for sale. We anticipate taking additional actions of this
nature in order to reduce our interest rate sensitivity. In implementing these
strategies, we will attempt to balance the need to improve our interest rate
risk against the impact such restructuring will have on profitability. Following
the Conversion, we will experience an increase in investable assets
approximately equal to the net proceeds from the sale of Common Stock in the
Conversion less the amount of the ESOP loan. The investment of these net
proceeds can be expected to increase any positive Gap and reduce any negative
Gap because such investment will add short-term interest sensitive assets while
there will be no immediate corresponding increase in short-term interest
sensitive liabilities.
The following table, often referred to as a "Gap Table," sets forth asset
and liability balances at June 30, 1997 which are expected to reprice and mature
in each of the future periods indicated. Loans with adjustable rates are shown
as being due in the next adjustment period. Passbook accounts, money market
deposit accounts and NOW accounts are not assumed to be subject to immediate
repricing and are placed in repricing periods based upon assumptions prepared by
management.
49
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
More than More than More than
1 Month 2 Months 3 Months More than 6 More than
Less Month through through Months 1 Year
than 1 through 3 6 through 1 through More than
Month 2 Months Months Months Year 3 Years 3 Years
----- -------- ------ ------ ---- ------- -------
(Dollars in thousands)
Interest-Earning Assets
Cash and Interest Earning
<S> <C> <C> <C> <C> <C> <C> <C>
Deposits .................... $ 2,838 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Investments ................... 1,996 500 501 0 2,995 0 0
FHLB Stock .................... 0 0 1,333 0 0 0 0
Equity Loans/Lines ............ 2,963 3 5 8 37 1,120 6,770
Collateral Loans .............. 710 0 0 0 0 0 0
Mortgage-Backed Securities .... 0 0 0 0 0 190 0
Adjustable Rate Mortgages .... 35 822 270 1,206 4,063 4,130 50
Balloon Mortgages(1) .......... 43 43 43 129 258 1,463 2,746
Fixed Rate Mortgages(2) ....... 482 487 486 1,455 3,016 11,618 49,783
Fixed Rate Mortgages -
Available for Sale .......... 5,548 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
TOTAL INTEREST-
EARNING ASSETS .............. $ 14,615 $ 1,855 $ 2,638 $ 2,798 $ 10,369 $ 18,521 $ 59,349
======== ======== ======== ======== ======== ======== ========
Interest-bearing
liabilities
Passbook Accounts(3) .......... 32 32 32 97 193 387 3,093
Checking Accounts(4) .......... 0 0 0 0 0 0 1,125
Money Market Deposit
Accounts(5) ................. 681 681 681 1,438 454 1,817 1,819
Fixed Rate Fixed Term
Deposits .................... 3,542 4,196 5,282 9,224 21,959 17,953 3,633
FHLB Advances -
Adjustable Rate ............. 0 0 0 0 0 0 0
FHLB Advances -
Fixed Rate and Term ......... 5,000 1,500 1,500 1,300 1,800 9,500 4,600
Escrow Deposits ............... 20 20 1,839 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
TOTAL INTEREST-BEARING
LIABILITIES ................. $ 9,275 $ 6,429 $ 9,334 $ 12,059 $ 24,406 $ 29,657 $ 14,270
======== ======== ======== ======== ======== ======== ========
Excess (Deficiency) of
Interest-Earning Assets
over Interest-Bearing
Liabilities ................. $ 5,340 ($ 4,574) ($ 6,696) ($ 9,261) ($14,037) ($11,136) $ 45,079
======== ======== ======== ======== ======== ======== ========
Cumulative Excess
(Deficiency) of Interest-
Earning Assets Over
Interest-Bearing
Liabilities at
June 30, 1997 ............. $ 5,340 $ 766 ($ 5,930) ($15,191) ($29,228) ($40,364) $ 4,715
======== ======== ======== ======== ======== ======== ========
Cumulative Excess
(Deficiency) of Interest-
Earning Assets Over
Interest-Bearing
Liabilities as a
Percent of Total Assets
at June 30, 1997 .......... 4.74% 0.68% (5.27%) (13.49%) (25.96%) (35.86%) 4.19%
======== ======== ======== ======== ======== ======== ========
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
More than More than More than
1 Month 2 Months 3 Months More than 6 More than
Less Month through through Months 1 Year
than 1 through 3 6 through 1 through More than
Month 2 Months Months Months Year 3 Years 3 Years
----- -------- ------ ------ ---- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative Excess
(Deficiency) of Interest-
Earning Assets over
Interest-Bearing
Liabilities as a percent
of Total Interest-Earning
Assets....................... 4.85% 0.70% (5.38)% (13.79)% (26.54)% (36.65)% 4.28%
======== ======== ======== ======== ======== ======== ========
Cumulative Excess
(Deficiency) of Interest-
Earning Assets over
Interest-Bearing
Liabilities as a
percent of Cumulative
Interest-Bearing Liabilities... 58.54% 4.88% (23.68)% (40.95)% (47.52)% (44.28)% 4.47%
======== ======== ======== ======== ======== ======== ========
</TABLE>
(Footnotes on next page)
51
<PAGE>
- ----------
1. 12% annual prepayment rate is based on assumptions provided by the OTS.
2. 9% annual prepayment rate for 30 year loans and 8% annual prepayment rate
for 15 year loans is based on assumptions provided by the OTS.
3. Repricing rate is estimated at 10% for year 1, 10% for 1-3 yrs., and 80%
for 3+ years.
4. Repricing rate is estimated 100% for 3 plus years.
5. Repricing is based on the assumption that approximately 40% of accounts
with balances greater than $10,000 to reprice evenly over 6 months. The
remainder of accounts, assumed to be core deposits, reprice evenly over all
time periods.
Interest Rate Sensitivity Analysis
We have measured our interest rate sensitivity by computing the "Gap"
between the assets and liabilities which were expected to mature or reprice
within certain time periods, based on assumptions regarding loan prepayment and
deposit repricing provided by the OTS and management, respectively. However, in
order to encourage savings associations such as ours to reduce interest rate
risk, the OTS added an interest rate risk component to its risk-based capital
rules. The OTS requires the computation of the net present value of an
institution's cash flow from assets, liabilities and off balance sheet items
(the institution's net portfolio value or "NPV") and measures the change in NPV
in the event of a range of assumed changes in market interest rates.
Qualitative Risk Analysis. The OTS measures an institution's interest rate
risk by the change in its NPV as a result of a hypothetical 200 basis point
("bp") change in market rates. A resulting change in NPV of more than 2% of the
estimated present value of total assets ("PV") will require us to add to our
capital 50% of that excess change. The rules provide that the OTS will calculate
the IRR component quarterly for each institution such as ours. Although the
regulation has been adopted, the OTS is not enforcing the additional capital
provision at this time. Nevertheless, the following table estimates the effect
on our NPV from instantaneous and permanent 1% to 4% (100 to 400 basis points)
increases and decreases in market interest rates. The following table presents
our NPV at June 30, 1997, which is based upon quarterly information that we
provide to the OTS and which is calculated for us by the OTS.
NET PORTFOLIO VALUE AT JUNE 30, 1997 NPV AS % OF PV OF ASSETS
------------------------------------ ------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
- --------------- -------- -------- -------- --------- ------
(Dollars in thousands)
+400 bp (2,089) (9,885) (127%) (2.09%) (8.91)%
+300 bp 253 (7,543) (97%) 0.24% (6.57)%
+200 bp 2,745 (5,052) (65%) 2.56% (4.25)%
+100 bp 5,318 (2,478) (32%) 4.80% (2.02)%
0 bp 7,796 0 0 6.82% 0
-100 bp 9,724 1,928 25% 8.28% 1.46%
-200 bp 10,458 2,661 34% 8.76% 1.94%
-300 bp 10,299 2,503 32% 8.56% 1.74%
-400 bp 10,372 2,576 33% 8.53% 1.71%
52
<PAGE>
The above calculations indicate that we would be deemed to have an
excessive level of interest rate risk under applicable regulatory requirements.
In the event of a 200 bp change in interest rates, the Bank would experience a
34% increase in NPV in a declining rate environment and a 65% decrease in NPV in
a rising rate environment. Additional capital would have been required had we
been subject to the rule. The OTS has the authority to require otherwise exempt
institutions to comply with the rule.
Qualitative Risk Analysis. While we cannot predict future interest rates or
their effects on our "Gap," NPV or net interest income, we do not expect current
interest rates to have a material adverse effect on our NPV or net interest
income in the near future. Computations of prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit run-offs and should not
be relied upon as indicative of actual results. Certain shortcomings are
inherent in such computations. Although certain assets and liabilities may have
similar maturity or periods of repricing, they may react at different times and
in different degrees to changes in the market interest rates. The interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while rates on other types of assets and liabilities
may lag behind changes in market interest rates. Certain assets, such as
adjustable rate mortgages, generally have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. In the
event of a change in interest rates, prepayments and early withdrawal levels
could deviate significantly from those assumed in making calculations set forth
above. Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Interest Risk Analysis and Monitoring. The Bank has established an
Asset/Liability Committee which is currently comprised of non-employee directors
Thomas L. Cloud, Chairman, Alan B. Levin, Dr. Robert L. Schweitzer as well as
the Bank's CEO, Ronald P. Crouch. This committee meets periodically and reviews
the maturity of our assets and liabilities and discusses and recommends policies
and strategies designed to regulate our flow of funds and to coordinate the
sources, uses and pricing of such funds. The first priority in structuring and
pricing of our assets and liabilities is to maintain an acceptable interest rate
spread while reducing the net effects of changes in interest rates.
The Board of Directors also reviews our asset and liability policies. The
Board of Directors meets monthly to review interest rate risk and interest rate
trends, as well as liquidity and capital ratios and requirements. Management
administers the policy and determinations of the Board of Directors with respect
to our asset and liability goals and strategies. We expect that our asset and
liability policy and strategies will continue as described so long as
competitive and regulatory conditions in the financial institution industry and
market interest rates continue as they have in recent years.
53
<PAGE>
Analysis of Net Interest Income
Our earnings have historically depended upon our net interest income, which
is the difference between interest income earned on loans and investments (the
"interest-earning assets") and interest paid on deposits and any borrowed funds
(the "interest-bearing liabilities"). It is the single largest component of our
operating income. Net interest income is affected by (i) the difference between
rates of interest earned on our interest-earning assets and rates paid on our
interest-earning liabilities (the "interest rate spread") and (ii) the relative
amounts of our interest-earning assets and interest-bearing liabilities.
The following tables present an analysis of certain aspects of our
operations during the recent periods indicated. The first table presents the
average balances of and the interest and dividends earned or paid on each major
class of our interest earning assets and interest-bearing liabilities. Average
balances are daily average balances. The yields and costs include fees which are
considered adjustments to yields.
54
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995
-------------------------------------- ------------------------------------
Average Daily Interest & Yield/ Average Daily Interest & Yield/
Balance Dividends Rate Balance Dividends Rate
------- --------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets
Loans receivable, net(1) ................... $ 91,061,307 $ 7,092,065 7.79% $ 78,025,302 $ 6,408,566 8.21%
Investment securities(2) ................... 12,644,840 709,493 5.61% 13,455,339 763,764 5.68
Interest-bearing deposits .................. 2,412,209 120,551 5.00% 1,717,488 120,417 7.01
------------ ------------ ------------ ------------
Total interest-earning assets ............. 106,118,356 7,922,109 7.47% 93,198,129 7,292,747 7.83
Non-interest-earning assets .................. 3,621,634 3,268,610
------------ ------------
Total assets ................................. $109,739,990 $ 96,466,739
============ ============
Liabilities and Retained
Earnings:
Interest-bearing liabilities
Deposits ................................... $ 80,199,233 $ 4,497,657 5.61% $ 77,715,774 $ 4,351,008 5.60%
Advances from FHLB ........................... 20,868,039 1,252,482 6.00% 10,957,934 704,133 6.43%
------------ ------------ ------------ ------------
Total interest-bearing
liabilities ............................ 101,067,272 5,750,139 5.69% 88,673,708 5,055,141 5.70%
Non-interest-
bearing liabilities ........................ 2,386,544 1,776,907
------------ ------------
Total liabilities ............................ $103,453,816 $ 90,450,615
Retained earnings ............................ 6,286,174 6,016,124
------------ ------------
Total liabilities and
retained earnings .......................... $109,739,990 $ 96,466,739
============ ============
Net interest income/Interest
rate spread(3) ............................. $ 2,171,970 1.78% $ 2,237,606 2.13%
============ ============
Net interest-earning
assets/net interest
margin(4) ................................... 5,051,084 2.05% 4,524,421 2.40%
Interest-earning assets to
interest-bearing
liabilities ................................ 105.00% 105.10%
</TABLE>
- ----------
(1) The inclusion of nonaccrual loans in average daily balance and loan fees in
interest and dividends has been deemed to have an immaterial impact on this
analysis.
(2) Includes mortgage-backed securities
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average rate on interest-bearing
liabilities.
(4) Net interest margin represents income before the provision for loan losses
divided by average interest-earning assets.
55
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-----------------------------------------------------------------------------
1996 1995
-------------------------------------- ------------------------------------
Average Daily Interest & Yield/ Average Daily Interest & Yield/ Yield/
Balance Dividends Rate Balance Dividends Rate Balance Rate
------- --------- ---- ------- --------- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets
Loans receivable, net(1) $ 99,011,640 $ 3,797,982 7.74% $ 83,836,933 $ 3,346,748 8.05% $ 98,467,059 7.61%
Investment securities(2) 7,963,438 222,602 5.64% 12,943,599 364,433 5.68% 7,514,919 5.59%
Interest-bearing deposits 2,216,029 51,774 4.71% 2,342,926 51,466 4.43% 2,838,215 5.41%
------------ ------------ ----------- ----------- -----------
Total interest-earning
assets ................ 109,191,107 4,072,358 7.52% 99,123,458 3,762,647 7.66% 108,820,193 7.41%
Non-interest-earning assets 3,779,984 3,568,488 3,724,506
------------ ------------ -----------
Total assets .............. $112,971,091 $102,691,946 $112,544,699
============ ============ ===========
Liabilities and Retained
Earnings:
Interest-bearing
liabilities
Deposits ................ $ 78,725,866 $ 2,196,245 5.63% $ 81,604,579 $ 2,276,637 5.63% $ 78,351,363 5.64%
Advances from FHLB ........ 25,370,166 780,646 6.21% 12,314,174 364,473 5.97% 25,200,000 6.34%
------------ ------------ ------------ ------------ ------------
Total interest-bearing
liabilities ........... 104,096,032 2,976,891 5.77% 93,918,753 2,641,110 5.67% 103,551,363 5.81%
Non-interest-
bearing liabilities ..... 2,563,029 2,454,502 2,906,394
------------ ------------ ----------
Total liabilities ......... 106,659,061 96,373,255 106,457,757
Retained earnings ......... 6,312,030 6,318,691 6,086,942
------------ ------------ -----------
Total liabilities and
retained earnings ....... $112,971,091 102,691,946 $112,544,699
============ ============ ============
Net interest income/
Interest rate spread(3).. $ 1,095,467 1.75% $ 1,121,537 1.99% 1.60%
============ ============
Net interest-earning
assets/net interest
margin(4) ............... 5,095,075 2.01% 5,204,705 2.26%
Interest-earning assets
to interest-
bearing liabilities ..... 104.89% 105.54% 105.09%
</TABLE>
- ----------
(1) The inclusion of nonaccrual loans in average daily balance and loan fees in
interest and dividends has been deemed to have an immaterial impact on this
analysis.
(2) Includes mortgage-backed securities
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average rate on interest-bearing
liabilities.
(4) Net interest margin represents income before the provision for loan losses
divided by average interest-earning assets.
56
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes in our
interest income and interest expense for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by the old rate); (ii) changes in rate (changes in
rate multiplied by old volume); and (iii) total change in rate and volume. The
combined effects of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
57
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
Increase (Decrease) Increase (Decrease)
------------------------------------------ -----------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------------ -----------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest Income:
<S> <C> <C> <C> <C> <C> <C>
Loans ................... $ 586,374 $ (135,540) $ 451,234 $ 1,025,048 $ (341,549) $ 683,499
Investment securities ... (139,282) (2,549) (141,831) (45,053) (9,218) (54,271)
Interest-bearing deposits (2,885) 3,193 308 40,481 (40,347) 134
----------- ----------- ----------- ----------- ----------- -----------
Total interest income ..... 444,207 (134,496) 309,711 1,020,476 (391,114) 629,362
----------- ----------- ----------- ----------- ----------- -----------
Interest Expense:
Deposits ................ $ (80,392) $ -- $ (80,392) $ 138,888 $ 7,761 $ 146,649
Advances from FHLB ...... 401,856 14,317 416,173 598,343 (49,994) 548,349
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense .... 321,464 14,317 335,781 737,231 (42,233) 694,998
----------- ----------- ----------- ----------- ----------- -----------
Net interest income ....... $ 122,743 $ (148,813) $ (26,070) $ 283,245 $ (348,881) $ (65,636)
=========== =========== =========== =========== =========== ===========
</TABLE>
Year Ended December 31,
Increase (Decrease)
-----------------------------------------
1995 vs. 1994
-----------------------------------------
Volume Rate Net
------ ---- ---
Interest Income:
Loans ................... $ 992,930 $ 46,698 $ 1,039,628
Investment securities ... (10,443) 157,029 146,586
Interest-bearing deposits (58,143) 68,960 10,817
----------- ----------- -----------
Total interest income ..... 924,344 272,687 1,197,031
----------- ----------- -----------
Interest Expense:
Deposits ................ $ 286,691 $ 614,936 $ 901,627
Advances from FHLB ...... 298,670 41,557 340,227
----------- ----------- -----------
Total interest expense .... 585,361 656,493 1,241,854
----------- ----------- -----------
Net interest income ....... $ 338,983 $ (383,806) $ (44,823)
=========== =========== ===========
58
<PAGE>
Financial Condition
During 1995 we decided to increase our loan production through additional
mortgage and home equity lending. As a result of these efforts, total assets
increased by $15.3 million or 15.7% from $97.4 million at December 31, 1995 to
$112.7 million at December 31, 1996. At June 30, 1997, total assets were $112.5
million. Total liabilities increased by $15.4 million or 16.9% from $91.3
million at December 31, 1995 to $106.7 million at December 31, 1996. At June 30,
1997, total liabilities were $106.5 million. The increase in assets for the
period ended December 31, 1996 was primarily attributable to the growth in our
loan portfolio of $19.0 million which was the result of increased loan demand
and our decision to increase home equity lending. Loan growth was funded mainly
from sales of investment securities of approximately $3.3 million and Federal
Home Loan Bank advances of $17.9 million.
Comparison of Operating Results for the Six Months Ended June 30, 1997 and 1996
Net Income. The current operations of the Bank are governed by a wide
variety of economic and business factors. See "MANAGEMENT OF NINTH WARD SAVINGS
BANK, FSB -- Current Operations." We had net income of $122,000 for the six
months ended June 30, 1997 compared to net income of $41,000 for the six months
ended June 30, 1996. This increase was due primarily to a reduction in other
expenses from $1.2 million for the six months ended June 30, 1996 to $961,000
for the six months ended June 30, 1997. This was somewhat offset by a decrease
in other income from $157,000 to $85,000.
Net Interest Income. Net interest income for the six months ended June 30,
1997 was $1.1 million, which was approximately the same amount as the six months
ended June 30, 1996.
Interest income. Total interest and dividend income was $4.1 million for
the six months ended June 30, 1997 compared to $3.8 million for the six months
ended June 30, 1996, representing an increase of $300,000 or 7.9%. The increase
in 1997 was due primarily to an increase in interest on loans from $3.3 million
for the six months ended June 30, 1996 to $3.8 million for the six months ended
June 30, 1997 which was the result in an increase in the size of our loan
portfolio. This increase was slightly offset by a decrease in interest and
dividends on investments from $394,000 for the six months ended June 30, 1996 to
$268,000 for the six months ended June 30, 1997 and a decrease in interest on
mortgage-backed securities from $22,000 for the six months ended June 30, 1996
to $7,000 for the six months ended June 30, 1997.
Interest expense. Total interest expense, which consists primarily of
interest on savings deposits, increased from $2.6 million for the six months
ended June 30, 1996 to $3.0 million for the six months ended June 30, 1997, an
increase of $400,000 or 15.4%. This increase was primarily the result of an
increase in interest paid on FHLB advances.
Provision for Loan Losses. Provisions for loan losses are charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate by us to provide for probable loan losses based on prior loss
experience, volume and type of lending conducted by
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us, available peer group information, and past due loans in our loan portfolio.
Our policies require the review of assets on a quarterly basis. We appropriately
classify loans as well as other assets if warranted. See "BUSINES -- Lending
Activity." While we believe we use the best information available to make a
determination with respect to the allowance for loan losses, we recognize that
future adjustments may be necessary. We provided $26,000 for loan losses for the
six months ended June 30, 1996 while providing $10,000 for loan losses for the
six months ended June 30, 1997. The Bank continues to increase the provision for
loan losses due to the growth in the loan portfolio and due to the increase in
non-performing loans. As the loan portfolio continues to grow, the Bank
increases the provision for loan losses due to risk inherent in the loan
portfolio. In establishing such provisions, we considered the levels of the
Bank's non-performing loans which were $241,000 and $327,000 at June 30, 1996
and 1997, respectively.
Non-interest income. Total non-interest income decreased from $157,000 for
the six months ended June 30, 1996 to $85,000 for the six months ended June 30,
1997. This decrease in non-interest income was attributable to a decrease in
service fees of $51,000 and a decrease in gains from the sales of loans of
$32,000, offset by a gain of $11,000 realized market adjustment on loans.
Non-interest expense. Total other expenses decreased from $1.2 million for
the six months ended June 30, 1996 to $961,000 for the six months ended June 30,
1997, a decrease of $239,000 or 19.9%. Compensation and employee benefits
decreased from $511,000 for the six months ended June 30, 1996 to $478,000 for
the six months ended June 30, 1997. This was the result of a reduction in staff
due to a decline in loan originations and a decline in pension expenses,
partially offset by certain adjustments relating to accounting for loan
origination expenses pursuant to SFAS 91. Additionally, advertising expense
decreased from $142,000 for the six months ended June 30, 1996 to $101,000 for
the six months ended June 30, 1997 as the Bank attempted to manage interest rate
risk by reducing the volume of fixed rate mortgage loans and thus curbed its
marketing efforts for these loans. FDIC premiums decreased from $94,000 for the
six months ended June 30, 1996 to $15,000 for the six months ended June 30, 1997
due to a reduction in premiums upon the recapitalization of the SAIF.
Income taxes. Our income tax expense was $88,000 for the six months ended
June 30, 1997 compared to $30,000 for the six months ended June 30, 1996. Our
effective tax rate was 41.9% The increase was attributable to our increased
profitability for the six months ended June 30, 1997 compared to the six months
ended June 30, 1996.
Comparison of Operating Results for the Years Ending December 31, 1995 and 1996
Net Income. We had a net loss of $95,000 for the year ended December 31,
1996 compared to net income of $420,000 for the year ended December 31, 1995.
The loss was primarily due to the recognition of a one-time SAIF special
assessment in the amount of $492,000. This decrease from net income to a net
loss was the result of an increase in total interest expense from $5.1 million
for the year ended December 31, 1995 to $5.8 million for the year
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ended December 31, 1996, as well as an increase in the provision for loan losses
from $5,000 for the year ended December 31, 1995 to $47,000 for the year ended
December 31, 1996, and a decrease in total other income from $521,000 for the
year ended December 31, 1995 to $305,000 for the year ended December 31, 1996.
These decreases were offset by an increase in total interest income from $7.3
million for the year ended December 31, 1995 to $7.9 million for the year ended
December 31, 1996.
Net Interest Income. Net interest income was approximately $2.2 million for
each of the years ended December 31, 1996 and 1995. The ratio of average
interest-earning assets to average interest-earning liabilities remained fairly
constant.
Interest income. Total interest income was $7.9 million for the year ended
December 31, 1996 compared to $7.3 million for the year ended December 31, 1995,
representing an increase of $600,000 or 8.2%. Such increase was primarily due to
an increase in interest on loans, and was partially offset by a decrease on
interest and dividends from investments. Interest on loans increased from $6.4
million for the year ended December 31, 1995 to $7.1 million for the year ended
December 31, 1996. This increase of $700,000 or 10.9% was due primarily to an
increase in originations of loans secured by single family residential real
estate. The increase in average balances of loans receivable was partially
offset by a 42 basis point decrease in the average yield on loans receivable.
Interest and dividends on investments decreased from $844,000 at December 31,
1995 to $791,000 at December 31, 1996.
Interest expense. Total interest expense increased from $5.1 million
for the year ended December 31, 1995 to $5.8 million for the year ended December
31, 1996, an increase of $700,000 or 13.7%. Interest on savings deposits
increased $100,000 or 2.3% from $4.4 million for the year ended December 31,
1995 to $4.5 million for the year ended December 31, 1996. Such increase was due
primarily to an increase in average balances of total interest-bearing
liabilities. During the year ended December 31, 1996, we borrowed funds from the
FHLB to increase our mortgage and home equity loan portfolios. It was our
determination that FHLB advances were less costly, on a marginal basis, than
increasing rates on savings accounts and certificates of deposit to attract more
funds. As a result, interest on borrowings increased by $500,000 or 71.4% from
$700,000 for the year ended December 31, 1995 to $1.2 million for the year ended
December 31, 1996.
Provision for Loan Losses. We provided $5,000 and $47,000 for loan losses
for the years ended December 31, 1995 and 1996, respectively. In establishing
such provisions, management considered the levels of our non-performing loans
which were $244,000 and $376,000 at December 31, 1995 and 1996, respectively.
The increase in the loan loss provision was primarily due to the increase in our
loan portfolio. The size of our loan portfolio is a component in the model we
use to determine the amount of the provision.
Non-interest income. Total non-interest income decreased from $520,000 for
the year ended December 31, 1995 to $305,000 for the year ended December 31,
1996. This change was the result of the reduction of gains on sales of loans
from $439,000 for the year ended
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December 31, 1995 to $69,000 for the year ended December 31, 1996. This was the
result of our determination to hold a greater percentage of loans originated in
our portfolio as opposed to selling such loans in the secondary market. This
reduction was offset by an increase in service fees from $52,000 for the year
ended December 31, 1995 to $190,000 for the year ended December 31, 1996 and an
increase in other income from $18,000 to $47,000. The increase in fees for
December 31, 1996 was due to an increase in loan originations.
Non-interest expense. Other non-interest expense increased by $500,000
or 23.8% from $2.1 million for the year ended December 31, 1995 to $2.6 million
for the year ended December 31, 1996. The increase was attributable to a
one-time special SAIF assessment of $492,000. Pursuant to the Economic Growth
and Paperwork Reduction Act of 1996 (the "Act"), the FDIC imposed a special
assessment on SAIF members to recapitalize the SAIF at the designated reserve
level of 1.25% as of October 1, 1996. Based on the Bank's deposits as of March
31, 1995, the date for measuring the amount of the special assessment pursuant
to the Act, our special assessment was $492,000. The recapitalization of the
SAIF has had the effect of lowering premiums for deposit insurance for the
entire thrift industry that holds deposits insured by the SAIF. The SAIF
insurance assessment rate paid by us before the recapitalization of the SAIF was
23 basis points per $100 of deposit and has decreased to 6.4 basis points per
$100 of deposits after the recapitalization of the SAIF. Pursuant to the Act, we
will pay in addition to our normal insurance premium as a member of the SAIF an
annual amount equal to approximately 6.4 basis points of outstanding SAIF
deposits towards the retirement of the Financing Corporation bonds issued in the
1980's to assist in the recovery of the savings and loan industry. Beginning no
later than January 1, 2000, the rate paid to retire these bonds will be equal
for members of the BIF and the SAIF. Members of the BIF, by contrast, will pay
in addition to their normal deposit insurance premium approximately 1.3 basis
points. Because of the Supervisory Agreement of May 21, 1997, we anticipate that
our premiums will be increased by the FDIC. The Act also provides for the
merging of the BIF and the SAIF by January 1, 1999 provided there are no
financial institutions still chartered as federal savings associations at that
time.
Advertising costs increased from $169,000 for the year ended December 31,
1995 to $203,000 for the year ended December 31, 1996, or a $34,000 increase.
Salaries and employee benefits decreased from $941,000 for the year ended
December 31, 1995 to $917,000 for the year ended December 31, 1996. This
decrease was due to an increase in loan volume, which resulted in allocation of
salaries and employee benefits to loan origination costs. Occupancy expenses
also decreased from $237,000 for the year ended December 31, 1995 to $215,000
for the year ended December 31, 1996 because we use an accelerated method of
depreciation.
Income tax expense. Our income tax expense was a benefit of $69,000 for the
year ended December 31, 1996 compared to $265,000 owed for the year ended
December 31, 1995. This decrease in taxes was the result of our net loss of
$164,000, before taxes, for the year ended December 31, 1996.
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Liquidity and Capital Resources
We are 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 our
deposits and short-term borrowings. The required ratio currently is 5.0%. Our
liquidity ratio average was 14.8%, 11.2% and 8.8% at December 31, 1995, December
31, 1996, and June 30, 1997, respectively. The decrease in our average liquidity
rate at December 31, 1996 was the result of our sale of investments and increase
in short term borrowings. It is our belief that upon completion of the
Conversion our liquidity ratio will initially increase.
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and advances from the FHLB of
Pittsburgh. While scheduled repayments of loans and mortgage-backed securities
and maturities of investment securities are predictable, other sources of funds,
such as deposit flows and loan prepayments, can be greatly influenced by the
general level of interest rates, economic conditions and competition. We use our
liquidity resources principally to fund existing and future loan commitments, to
fund maturing certificates of deposit and demand deposit withdrawals, to invest
in other interest-earning assets, to maintain liquidity, and to meet operating
expenses.
Net cash used in our operating activities (i.e. cash items affecting net
income) for the six months ended June 30, 1997 was $353,000. In contrast, net
cash was provided by our operating activities for the year ended December 31,
1996 in the amount of $305,000, and in the amount of $551,000 for the year ended
December 31, 1995.
Net cash provided by our investing activities (i.e., cash receipts,
primarily from our investment securities and mortgage-backed securities
portfolios and our loan portfolio) for the six months ended June 30, 1997 was
$239,000. In contrast, net cash was used in our investing activities for the
year ended December 31, 1996 in the amount of $13.7 million, an increase of $6.6
million from the year ended December 31, 1995. The increase was primarily
attributable to a decrease in proceeds from loan sales.
Net cash provided by our financing activities (i.e., cash receipts
primarily from net increases in deposits and net FHLB advances) for 1996 totaled
$15.0 million. This is a result of an increase in net advances from the FHLB of
$22.9 million offset by a decrease in deposits of $14.1 million. The net
advances from the FHLB were used to fund loan growth.
Liquidity may be adversely affected by unexpected deposit outflows, higher
interest rates paid by competitors, and similar matters. Further, the disparity
in Financing Company ("FICO") bond interest payments as previously described
could result in the loss of deposits to BIF members that have this lower cost
and therefore are able to pay higher rates of interest on deposits. Management
monitors projected liquidity needs and determines the level desirable,
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based in part on our commitments to make loans and management's assessment of
our ability to generate funds.
We are subject to federal regulations that impose certain minimum capital
requirements. For a discussion on such capital levels, see "Historical and Pro
Forma Capital Compliance" and "Regulation Regulatory Capital Requirements."
Impact of Inflation and Changing Prices
Our financial statements and the accompanying notes presented elsewhere in
this Prospectus, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of our operations. As a
result, interest rates have a greater impact on our performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
Recent Accounting Pronouncements
FASB Statement on Accounting for Stock-Based Compensation. In October 1995,
the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based method"
of accounting for an employee stock option whereby compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period. FASB has encouraged all entities to adopt the fair value based
method, however, it will allow entities to continue the use of the "intrinsic
value based method" prescribed by Accounting Principles Board ("APB") Opinion
No. 25. Under the intrinsic value based method, compensation cost is the excess
of the market price of the stock at the grant date over the amount an employee
must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method had been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years beginning after December 15, 1995.
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. In June 1996, FASB issued SFAS No.
125, which will be effective, on a prospective basis, for fiscal years beginning
after December 31, 1996. SFAS No. 125 supersedes SFAS No. 122, Accounting for
Mortgage Servicing Rights. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends the "available for sale" and
"trading" approach of SFAS No. 115 to non-security financial assets that can be
contractually prepaid or otherwise settled in such a way that the holder of the
asset would not recover
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substantially all of its recorded investment. In addition, SFAS No. 125 amends
SFAS No. 115 to prevent a security from being classified as held to maturity if
the security can be prepaid or settled in such a manner that the holder of the
security would not recover substantially all of its recorded investment. The
extension of the SFAS No. 115 approach to certain non-security financial assets
and the amendment to SFAS No. 115 are effective for financial assets held on or
acquired after January 1, 1997. The FASB has proposed to defer the effective
date of SFAS No. 125 until January 1, 1998 for certain transactions including
repurchase agreements, dollar-roll, securities lending and similar transactions.
Further, in December 1996, the FASB issued SFAS No. 127, Deferral of Effective
Date of Certain Provisions of FASB Statement No. 125. SFAS No. 127 defers for
one (1) year the effective date of SFAS No. 125 as it relates to transactions
involving secured borrowings and collateral and transfers and servicing of
financial assets. It also provides additional guidance on these types of
transactions. We do not believe SFAS No. 125 will have a material impact on our
financial statements.
FASB Statement on Reporting Comprehensive Income. In June 1997, the FASB
issued 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 statement for earlier
periods provided for comparative purposes is required.
FASB Statement on Disclosure About Segments of an Enterprise and Related
Information. Also, in June of 1997, the FASB issued SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. This statement
establishes standards for disclosing segments of business based on management's
assessment of a business segment. This statement is effective for the fiscal
years beginning after December 15, 1997.
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued SOP 93-6 Employers' Accounting for Employee Stock Ownership
Plan. SOP 93-6 addresses accounting for shares of stock issued to employees by
an employee stock ownership plan. SOP 93-6 requires that the employer record
compensation expense in an amount equal to the fair value of shares committed to
be released from the ESOP to employees. SOP 93-6 is effective for fiscal years
beginning after December 15, 1993 and relates to shares purchased by an ESOP
after December 31, 1992. If the Common Stock appreciates over time, SOP 93-6
will increase compensation expense relative to the ESOP, as compared with prior
guidance that required recognition of compensation expense based on the cost of
the shares acquired by the ESOP. The amount of any such increase, however,
cannot be determined at this time because the expense will be based on the fair
value of the shares committed to be released to employees, which amount is not
determinable. See "PRO FORMA DATA."
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BUSINESS OF DELAWARE FIRST FINANCIAL CORPORATION
Delaware First Financial Corporation is not an operating company and has
not engaged in any significant business to date. It was formed in September 1997
as a Delaware chartered corporation to be the holding company for Ninth Ward
Savings Bank, FSB. The holding company structure and retention of proceeds will
facilitate: (i) diversification into non-banking activities, (ii) acquisitions
of other financial institutions, such as savings institutions, (iii) expansion
within existing and into new market areas and (iv) stock repurchases without
adverse tax consequences. There are no present plans regarding diversification,
acquisitions or expansion.
Since the Company will own only one savings association, it generally
will not be restricted in the types of business activities in which it may
engage provided that we retain a specified amount of our assets in
housing-related investments. The Company initially will not conduct any active
business and does not intend to employ any persons other than officers but will
utilize our support staff from time to time.
The office of the Company is located at 400 Delaware Avenue, Wilmington
Delaware 19801. The telephone number is (302) 421-9090.
BUSINESS OF NINTH WARD SAVINGS BANK, FSB
We were founded in 1922 as Ninth Ward Building & Loan Association, a
Delaware chartered institution. In 1954 our name was changed to Ninth Ward
Savings & Loan Association. In 1992 we adopted a federal savings association
charter, and our name was changed to Ninth Ward Savings Bank, FSB. Our business
has been conducted from a single location since our inception. It is our
intention to operate as an independent community-oriented savings association
following the Conversion. Our address, 400 Delaware Avenue, Wilmington, Delaware
19801, and telephone number, (302) 421-9090 is the same as that of the Company.
The principal sources of funds for our activities are deposits, repayments
of loans and mortgage-backed securities, maturities of investments and
interest-bearing deposits, funds provided from operations and advances from the
FHLB of Pittsburgh. Our funds are used principally for the origination of loans
secured by first mortgages on one- to four-family residences which are located
in our market area. Such loans totaled $82.6 million, or 88.9%, of our total
loan portfolio at June 30, 1997. Our principal source of revenue is the interest
we receive on loans, and our principal expense is the interest we pay on
deposits and FHLB advances.
After the Conversion we intend to use a portion of the proceeds from the
offering to expand our home equity lending program. We also expect to open an
additional branch or branches after evaluating the results of branch feasibility
studies. This will allow us to offer more convenience for our depositors, and to
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compete for their business based on accessible locations. We also anticipate
offering small business/commercial loans, which will add diversity to our loan
portfolio and help manage our interest rate risk.
Current Operations
We have operated from a single banking location in the central business
district of Wilmington since 1922. Branch offices are a way to bring convenient
banking services to customers in a bank's market area. Because of our single
location in downtown Wilmington, we have used other methods such as personal
service and competitively priced deposits to attract and retain customers.
Recently, the mix of business in central Wilmington has shifted from industrial
corporations to financial services companies, including large banks and credit
card lenders. That change has affected our ability to attract new customers
because the employees of these financial service companies have banking
relationships with their employers. The need to develop strategies to preserve
our customer base while operating from a single location has increased as our
customer base has changed and the financial services in our market has become
increasingly competitive.
Our single office structure has also affected the type of deposits we use
to attract loans. For a number of years our deposit structure has been comprised
of fixed rate, fixed term certificates of deposit. We have also used FHLB
advances as an alternate source of funds. We believe that as long as we operate
solely from a single office location it will be necessary to continue to rely on
certificates of deposit as our primary source of funds. At June 30, 1997, 84% of
our deposits were in certificate form. Moveover, of this amount, 18.3% were in
Jumbo Deposits, certificates of deposit of $100,000 or more. We believe that our
depositors are particularly sensitive to rate changes and that we could undergo
significant decay in these deposits if we attempted to reduce the rates paid on
certificates of deposit. As a result of our dependence on higher yielding
certificates of deposit and borrowings from the FHLB of Pittsburgh, our cost of
funds has been and is likely to remain higher than that of comparable thrift
institutions with more convenient banking facilities, and those which operate in
less competitive banking markets, until we are able to attract more core
deposits in the form of shorter term deposits and transaction accounts.
Depending on general market conditions and the presence of a suitable
location, we anticipate opening branch facilities within the next two years to
provide more convenient banking services to our existing customers and to
attract new customers. Upon the opening of a branch, should such occur, it is
likely that the initial expenses associated therewith could cause a decline in
earnings. At present, 82.56% of our assets are in loans but the establishment of
a new branch facility is likely to reduce that ratio and have an adverse impact
on earnings. Investment on the conversion proceeds in short term securities will
aslo reduce this ratio.
Our residential and home equity loan volume has increased significantly in
recent years. See "-- Lending Activities." The increase activity has been in
fixed rate loans, as result of refinancings during the recent low rate
environment. We believe the attractiveness of
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fixed rate loans and the reluctance of customers to accept ARM loans is in large
part due to the relative stability and low level of long term interest rates in
our market and in the nation as a whole. We, like most banks, have found that
when long term rates are relatively low, our borrowers prefer the certainty of a
fixed rate loan structure. As a result, over 87% of our first mortgage loans are
fixed rate loans while approximately only 13% are ARM loans. While some of our
fixed rate loans have been sold in the secondary market, we have held the
majority of these loans in portfolio. This concentration of long term, fixed
rate loans, coupled with our reliance on certificates of deposit, has exposed us
to substantial interest rate risk. See "RISK FACTORS--Potential Vulnerability to
Changes in Interest Rate Risk and Interest Rate Risk Profile."
Upon the completion of the Offering, we anticipate expanding our product
line by offering small business/commercial loans as well as expanding our home
equity program. These forms of lending are shorter term, higher yielding and
higher risk than residential lending. The implementation of a lending program of
this nature will also require the presence of an experienced commercial lending
officer. At the present time we do not emply such a person. The addition of
shorter term business loans to our loan portfolio may enable us to reduce our
dependence on fixed rate, long term mortgage loans and home equity loans and
enable us to work toward reduction of interest rate risk. For the Bank's
operating results, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
Market Area
Our primary market area consists of New Castle County, Delaware. New Castle
County, which contains the city of Wilmington, is the site of incorporation of
many of the nation's largest corporations. The largest industries are service,
nondurable goods manufacturing and finance, insurance and real estate.
Agriculture also plays a prominent part in the state's economy. We are located
approximately 15 miles from Newark, Delaware, site of the University of
Delaware. Delaware has two other state supported institutions and four private
schools awarding post-secondary degrees. Owing to its preferred location as the
state of incorporation for many of the nation's largest corporations, the city
has many law, accounting and consulting firms. The state of Delaware has the
fourth lowest population in the nation but has both high employment and higher
than average income levels.
The state of Delaware has adopted numerous favorable tax laws to attract
and retain businesses. Delaware has no sales tax and a relatively low real
property tax. Additionally, the state has a regressive bank franchise tax which
is favorable for large financial institutions. Several large banking companies
have established headquarters and other facilities here for credit card
operations. Delaware has also sought to augment the service-based sector of its
economy, having recently adopted a new trust law to facilitate the location of
trusts in Delaware.
Economic growth in our market area remains dependent upon the local
economy. In addition, our deposit and loan activity is significantly affected by
economic conditions in our market area. Based on our primary market area's
economic demographic history, we expect our market area to be relatively stable
in the future. However, significant banking competition will likely cause the
cost of funds to remain relatively high.
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Supervisory Agreement
Since May 21, 1997, the Bank has been operating under a Supervisory
Agreement with the OTS. Under the Supervisory Agreement we have agreed to take
actions to improve our compliance with certain OTS regulations in the area of
interest rate risk, develop a three year business plan, implement and
periodically follow up on the the Bank's interest rate risk policy, establish
procedures providing for detailed minutes of Board of Directors and committee
meetings, establish procedures to insure Board members are presented with
sufficient information in order to make informed judgments and improve
regulatory compliance. With regard to interest rate risk management, we have
adopted and submitted to the OTS a revised interest rate risk policy and
undertaken certain actions including the sale of fixed rate mortgage loans to
the FHLMC and lengthening the maturities of certain FHLB advances. The
Supervisory Agreement also required that we submit a three year written Business
Plan to the OTS which addresses goals and strategies for improving and
sustaining earnings. The Business Plan is required to identify major areas for
improving operating performance and achieving and maintaining adequate levels of
capital while addressing operating expenses (including management compensation),
our cost of funds and asset growth. The Business Plan is required to be updated
annually and reviewed by our Board at least quarterly. Pursuant to the
requirements of the Supervisory Agreement, the Business Plan was submitted to
the OTS regional office on August 28, 1997. The Supervisory Agreement also
requires the OTS be notified 30 days before a new director or executive officer
is appointed. Further, we must provide notice to the OTS prior to extending,
renewing, reviewing or entering into any compensation or benefit-related
contract with a senior executive officer or director of Ninth Ward. The
Supervisory Agreement remains in effect until terminated by the OTS, although it
states that the OTS Regional Director will consider requests for termination
after the first Report of Examination following the May 21, 1997 effective date
of the Supervisory Agreement. We anticipate asking the OTS to consider
termination of the Supervisory Agreement in early 1998 following the Conversion
and completion of the next Report of Examination.
Lending Activities
The following table sets forth information concerning the types of loans
held by us.
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<TABLE>
<CAPTION>
Composition of Loan Portfolio
---------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------
June 30, 1997 1996 1995
----------------------------- ------------------------------ ---------------------------
Amount Percent of Total Amount Percent of Total Amount Percent of Total
------ ---------------- ------ ---------------- ------ ----------------
Real estate loans:
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage ............. $82,625,969 88.92% $87,918,256 89.67% $67,937,470 86.18%
----------- ------ ----------- ------ ----------- ------
Total real estate loans ........ 82,625,969 88.92 87,918,256 89.67 67,937,470 86.18
Other loans:
Deposit account .................. 710,275 0.76 528,198 0.54 839,344 1.06
Home equity loans ................ 7,942,666 8.55 8,082,865 8.24 8,387,260 10.64
Equity lines of credit ........... 2,963,299 3.19 2,823,273 2.88 2,753,989 3.49
----------- ------ ----------- ------ ----------- ------
Total other loans .............. 11,616,240 12.50 11,434,336 11.66 11,980,593 15.19
Less:
Unamortized fees ................. 1,065,824 1.15 1,063,474 1.08 882,757 1.12
Allowance for loan losses ........ 257,000 0.27 247,000 0.25 200,000 0.25
----------- ------ ----------- ------ ----------- ------
Total loans, net ................... $92,919,385 100.00% $98,042,118 100.00% $78,835,306 100.00%
=========== ====== =========== ====== =========== ======
Mortgage-backed securities ......... 190,414 203,147 698,669
----------- ----------- -----------
Total ..................... $93,109,799 $98,245,265 $79,533,975
=========== =========== ===========
</TABLE>
70
<PAGE>
We are currently servicing loans for the benefit of others. Such loans
totaled $53.3 million, $54.3 million and $56.7 million at June 30, 1997,
December 31, 1996 and December 31, 1995, respectively. Servicing loans for
others generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. Loan
servicing fees generated by these activities were $48,000 for the six months
ended June 30, 1997, and $190,000 and $52,000 for the years ended December 31,
1996 and 1995, respectively. Additionally, at June 30, 1997 and December 31,
1996 we had outstanding loan origination commitments of $387,000 and $2.3
million, respectively, for fixed and adjustable rate loans with rates ranging
from 6.5% to 7.75% and 6.75% to 8.5%, respectively. These commitments are
expected to be funded within one year. Commitments are issued in accordance with
the same loan policies and underwriting standards as settled loans.
The following table sets forth the estimated maturity of our loan portfolio
at June 30, 1997. Scheduled contractual principal repayments of loans do not
reflect the actual life of such assets. The average life of the loan is
substantially less than its contractual terms because of prepayments. In
addition, due on sale clauses on loans generally give the Bank the right to
declare loans immediately due and payable in the event, among other things, that
the borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tend to increase, however, when the
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market rates.
All mortgage loans are shown as maturing based on the date of the last payment
required by the loan agreement except as noted.
Contractual Maturity of Loans and Mortgage-Backed Securities
<TABLE>
<CAPTION>
More than More than
Within 6 6 to 12 one year to three years Over 5
months months three years to five years years Total
------ ------ ----------- ------------- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential ........ $ 6 $ 111 $ 511 $ 1,889 $80,109 $82,626
mortgage
Deposit accounts ... 710 0 0 0 0 710
Home equity loans .. 16 37 1,120 2,175 4,595 7,943
Equity lines of
credit(1) ....... 2,963 0 0 0 0 2,963
------- ------- ------- ------- ------- -------
Total loans ........ 3,695 148 1,631 4,064 84,704 94,242
Mortgage-backed
securities ....... 0 0 190 0 0 190
------- ------- ------- ------- ------- -------
TOTAL ........... $ 3,695 $ 148 $ 1,821 $ 4,064 $84,704 $94,432
======= ======= ======= ======= ======= =======
</TABLE>
- ----------
(1) Equity lines of credit are open-ended and have no stated maturity date and
are shown as being due when interest rates are next subject to change.
71
<PAGE>
The following table sets forth the amount of fixed rate and adjustable rate
loans at June 30, 1997 which are due after June 30, 1998.
Loans at 6/30/97 due after 6/30/98
----------------------------------
Fixed Adjustable Total
----- ---------- -----
(Dollars in thousands)
Residential mortgage ................. $71,933 $10,576 $82,509
Deposit accounts ..................... 0 0 0
Home equity loans .................... 7,890 0 7,890
Equity lines of credit ............... 0 0 0
------- ------- -------
Total ....... $79,823 $10,576 $90,399
======= ======= =======
Percent of total loans ....... 85.91% 11.38% 97.29%
72
<PAGE>
The following table sets forth certain information with respect to our loan
origination, purchase and sales activity for the periods indicated.
<TABLE>
<CAPTION>
Loan Activity
-----------------------------------------------------------
Six Months Ended June 30, Year Ended December 31,
-------------------------- ----------------------------
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loans receivable
at beg. of period ........ $ 98,042,118 $ 78,835,306 $ 78,835,306 $ 72,134,479
Loans originated:
Real estate loans:
First mortgage loans .. $ 5,130,374 $ 17,578,611 $ 31,673,585 $ 41,250,431
Home equity loans ..... 1,208,392 1,257,800 3,139,302 2,701,850
Equity lines of credit 1,131,157 1,404,394 2,691,392 2,263,227
Collateral loans .......... 473,753 327,849 713,357 1,046,369
------------ ------------ ------------ ------------
Total loans originated $ 7,943,676 $ 20,568,654 $ 38,217,636 $ 47,261,877
Loans purchased:
Participations .......... 55,494 18,400 18,400 34,181
------------ ------------ ------------ ------------
Total loans purchased $ 55,494 $ 18,400 $ 18,400 $ 34,181
Loans sold:
Whole loans ............. (1,128,181) (1,013,297) (2,599,494) (26,010,908)
Participations .......... 0 0 (2,008,782) (3,859,071)
------------ ------------ ------------ ------------
Total loans sold ..... $ (1,128,181) $ (1,013,297) $ (4,608,276) $(29,869,979)
------------ ------------ ------------ ------------
Principal repayments ...... $ (6,451,198) $ (7,931,500) $(15,414,110) $ (9,726,497)
Allowance for losses
decrease (increase) ...... (10,000) (26,000) (47,000) (5,000)
Reclassifications-Held
for Sale ................. (5,547,674) 1,020,000 1,020,000 (1,020,000)
Other activity, net ....... 15,150 (88,868) 20,162 26,245
Net loan increase
(decrease) ............... (5,122,733) 12,547,389 19,206,812 6,700,827
------------ ------------ ------------ ------------
Net loans receivable at
end of period ............ $ 92,919,385 $ 91,382,695 $ 98,042,118 $ 78,835,306
============ ============ ============ ============
</TABLE>
73
<PAGE>
Most of our loans are first or second mortgage and equity loans which are
secured by one- to four-family residences. We also make loans on savings
accounts. Following the Conversion, we expect to continue making one- to four-
family real estate loans and anticipate placing greater emphasis on our existing
home equity loan program. We also intend to emphasize small business/commercial
loans, which will require us to increase our staff and add another executive
officer experienced in such lending. However, this is a new area of lending for
the Bank and one that is highly competitive in our market. Accordingly, our
ability to originate small business/commercial loans in a manner which is both
profitable and in which risks are maintained at acceptable levels is not
assured. Further, small business/commercial lending entails significantly
greater risk than traditional real estate lending. The repayment of these loans
typically is dependent on the successful operation and income stream of the
borrower. Such risks can be significantly affected by economic conditions.
At June 30, 1997, total loans were $92.9 million of which $82.6 million or
88.9% were first mortgage loans secured by one- to four-family residences. The
majority of our loans have interest rates which are fixed for the term of the
loan ("fixed rate"). To a much lesser extent when market conditions are
favorable, we originate loans with rates of interest which may adjust from
period to period during the term of the loan ("adjustable rate"). Our emphasis
on fixed rate loans has made us more susceptible to changes in interest rates
and as a result both our capital and our interest income could be adversely
affected in a rising interest rate environment. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- Interest Rate Risk."
We presently do not originate small business/commercial loans. After the
Conversion, we expect to make small business/commercial lending part of our
lending activities. Commercial loans are business loans which may be secured by
real estate or may be unsecured. In connection with this program, we may offer
loans on property such as small apartment buildings and small office buildings,
shopping centers, and commercial and industrial buildings. Such loans will
typically be originated on an adjustable rate basis. Small business/commercial
lending has an inherently greater risk than residential 1-to-4 family lending.
See, "RISK FACTORS -- Expansion into Small Business/Commercial Lending and
Creation of Branches."
We obtain mortgage loans from a variety of sources. The most frequently
utilized method of obtaining mortgage loans is through employee originators who
handle telephone calls, walk-in customers and referrals from real estate
brokers. In previous years, we have obtained mortgage loans from a third party
originator.
An appraisal on each property which secures a first mortgage loan made by
us is obtained from an independent appraisal firm. These appraisers are approved
by our Appraisal Committee, and certain appraisals are reviewed randomly by the
Committee throughout the year. Each appraiser must annually submit updated
licenses and evidence of insurance coverage to maintain their status as an
approved appraiser. The appraised value of a property is determined by a
physical inspection of the property and comparison of the property to at
74
<PAGE>
least three comparable properties in the immediate area. The appraised value is
used as a basis for determining loan to value ratios unless the sale price of
the property is less than the appraisal value. In that case, the sale price is
used.
Loans are approved by the Loan Committee, a committee consisting of the
President, Executive Vice President and Vice President of Servicing. Every loan
we make is presented to the Loan Committee for approval. The approval of the
majority of the committee is required to approve a loan. This committee meets as
needed to review loan applications. Promptly after we approve a loan we provide
a commitment letter to the borrower which specifies the terms and conditions of
the proposed loan including the amount of the loan, the interest rate, the
amortization term, a brief description of the required collateral and required
insurance coverage, including fire and casualty insurance, and flood insurance
as required. We also require each loan to have title insurance. At June 30, 1997
we had commitments to originate $387,000 in mortgage loans.
We do not purchase whole loans. However, we do occasionally purchase
participation interests in loans and make loans secured by deposits held by us.
For the six months ended June 30, 1997, we purchased a $55,000 participation in
loans originated by Delaware Community Investment Corporation ("DCIC").
We require private mortgage insurance on all first mortgage loans when the
loan-to-value ratio exceeds 80%. We retain servicing on all loans originated.
From time to time we also sell some of the loans or participation interests in
some of the loans we originate. The only loans we sell are fixed-rate
residential mortgage loans. For the six months ended June 30, 1997 and the year
ended December 31, 1996, we sold $1.1 million and $4.6 million, respectively, of
such loans. Such loans are sold to either the FHLMC, FNMA, or another financial
institution.
Loans collateralized by deposits held by us must be approved by the Vice
President of Deposit Administration or her designee. Loans of this type in
excess of $25,000 must be approved by either the Vice President of Deposit
Administration, directly, the Treasurer or the President.
Originations, Purchases and Sales of Loans. As a federal association we are
permitted to make and/or purchase loans nationwide. We originate and purchase
participations in loans secured by real estate located only in our market area.
Recently, our purchasing activities have been limited to purchase participations
from DCIC. We make home mortgage loans secured by owner and nonowner occupied
dwellings, second mortgage loans secured by real estate. We occasionally make
construction loans secured by residential real estate and loans secured by
savings accounts. To a lesser extent we, from time to time, participate in
permanent or construction loans originated by other federally-insured financial
institutions. We also participate in permanent mortgages originated by the DCIC
secured by multi-family dwelling units.
75
<PAGE>
Our ability to originate loans is based on several factors. These include
the level of interest rates, the needs of our customers, our asset and liability
funding needs and the success of our marketing efforts. In 1995 we began to
increase our mortgage lending and hold loans in portfolio, rather than selling
them into the secondary market. The growth was largely due to our desire to
increase income through additional mortgage lending and a high refinancing
demand of consumers. Nearly all of these loans were fixed rate loans with terms
of 15 to 30 years. Holding these long-term loans with fixed rates, while
assisting in our income growth, caused our interest rate risk to increase and
made us more susceptible to declines in our interest income if interest rates
increased. Accordingly, in the last quarter of 1996 we reduced our lending
activities so that we could better manage our interest rate risk. This reduction
was also the result of less refinancing activity. Our 1997 mortgage loan
originations through June 30 were $5.1 million compared to $17.6 million for the
six months ended June 30, 1996.
One-to-Four Family Residential Loans. Our primary lending activity consists
of the origination of one-to-four-family residential mortgage loans secured by
property located in our primary market area. We generally originate conforming
one-to-four family owner occupied residential mortgage loans in amounts up to
95% loan-to-value ratio -- 97% in the case of some first time home buyer
programs -- with private mortgage insurance required on loans with a
loan-to-value ratio in excess of 80%. The maximum loan-to-value ratio on
mortgage loans secured by nonowner occupied properties generally is limited to
75%. We primarily originate fixed-rate loans having terms from five to 30 years,
with principal and interest payments calculated using up to a 30-year
amortization period. At June 30, 1997, approximately 11.4% of our one- to
four-family residential loans had adjustable rates of interest.
Home Equity. Our portfolio also contains fixed-rate home equity loans and
variable rate equity lines of credit. These loans and lines of credit totaled
$10.9 million and comprised 11.7% of our total loan portfolio at June 30, 1997.
We originate fixed rate home equity loans for a minimum of three years and
a maximum of 15 years in amounts of $5,000 to $150,000. The maximum
loan-to-value ratio is 100%. However, we only lend up to 90% of loan-to-value
ratio on loans with first mortgages that have been outstanding for one year or
less. During the six months ended June 30, 1997, we originated $1.2 million in
home equity loans. At June 30, 1997, all of our home equity loans were secured
by first or second mortgages.
We also originate variable rate home equity lines of credit. These lines of
credit range in amounts from $10,000 to $100,000 and also require a perfected
second lien on owner occupied real property. For variable rate equity lines of
credit, the maximum loan-to-value ratio is 90%. For the six months ended June
30, 1997 we advanced $1.1 million on home equity lines of credit.
76
<PAGE>
Loans to One Borrower. Federal law requires that, in general, the maximum
amount of loans which we may make to any one borrower may not exceed the greater
of $500,000 or 15% of our unimpaired capital and unimpaired surplus. Higher
limits apply to loans to develop domestic housing units. We may lend an
additional 10% of our unimpaired capital and unimpaired surplus if the loan is
fully secured by readily marketable collateral. Our maximum loan-to-one borrower
limit was approximately $900,000 at June 30, 1997. At June 30, 1997, the
aggregate loans outstanding to our three largest borrowers and related entities
were $396,979, $393,022 and $340,699, respectively. Each of these loans was
secured and performing.
Nonperforming and Problem Assets
Loan Delinquencies. We classify a loan as delinquent when payment is 16
days past due. When a mortgage loan becomes 16 days past due, a computer
generated notice of nonpayment is sent to the borrower. On the 21st day, a
personal call is made to verify receipt of the first notice and to request
payment. A second delinquency notice is then mailed on the 30th day. If, after
60 days, payment is still delinquent, we will advise a borrower in writing of
our intent to commence foreclosure. If the loan continues in a delinquent status
for 90 days and no repayment plan is in effect, the delinquent account is
referred to an attorney for foreclosure. At June 30, 1997, our total delinquent
loans were $2.1 million, or 2.3% of our total loan portfolio.
The following table shows our total delinquent loans at the times
indicated:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 December 31, 1995
------------------------------- ------------------------------- --------------------------------
Loans Percentage Percentage Percentage
Delinquent For Number Amount of Portfolio Number Amount of Portfolio Number Amount of Portfolio
- -------------- ------ ------ ------------ ------ ------ ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days ........... 32 $1,310,549 1.41% 35 1,438,199 1.47% 31 962,353 1.22%
60-89 days ........... 9 480,040 0.52% 8 130,490 0.13% 13 448,159 0.57%
90 days and
over ............... 7 327,117 0.35% 9 375,509 0.38% 6 244,177 0.31%
--- ---------- ---- --- ---------- ---- --- ---------- ----
Total delinquent
loans .............. 48 $2,117,706 2.28% 52 $1,944,198 1.98% 50 $1,654,689 2.10%
=== ========== ==== === ========== ==== === ========== ====
</TABLE>
77
<PAGE>
The following table shows our delinquent loans by loan type:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 December 31, 1995
------------------------- --------------------------- ----------------------------
Percentage of Percentage of Percentage of
Delinquent Delinquent Delinquent
Loan Type Amount Loans Amount Loans Amount Loans
--------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage .................. $1,888,520 89.18% $1,740,229 89.51% $1,271,381 76.83%
Deposit accounts ...................... 122,206 5.77% 56,417 2.90% 123,127 7.44%
Home equity loans ..................... 79,800 3.77% 108,147 5.56% 99,044 5.99%
Equity lines of credit ................ 27,180 1.28% 39,405 2.03% 161,137 9.74%
---------- ------ ---------- ------ ---------- ------
Total ............................. $2,117,706 100.00% $1,944,198 100.00% $1,654,689 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
Loans are reviewed on a quarterly basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent or when,
in our opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information regarding
nonaccrual loans and real estate owned. As of the dates indicated, we had no
loans categorized as troubled debt restructurings within the meaning of SFAS 15.
Interest income that would have been recorded on loans accounted for on a
nonaccrual basis under the original terms of such loans was immaterial for the
years ended December 31, 1995 and December 31, 1996, respectively. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Provision For Loan Losses."
Nonperforming and Restructured Assets
December 31,
------------------------
June 30, 1997 1996 1995
------------- ---- ----
(Dollars in thousands)
Non-accrual loans .................... $ 327(1) $ 376(2) $ 244(3)
Accruing loans delinquent
90 days or more ................... 0 0 0
Real estate owned .................... 0 0 0
------- ------- -------
Total non-performing loans ........... $ 327 $ 376 $ 244
======= ======= =======
Percentage of total loan portfolio ... 0.35% 0.38% 0.31%
Percentage of total assets ........... 0.29% 0.33% 0.25%
- ----------
(1) Consists of $321,000 in residential mortgage loans and $6,000 of loans
secured by deposit accounts held by us.
(2) Consists of $229,000 in residential mortgage loans, $108,000 in home equity
loans and $39,000 in equity line of credit loans.
(3) Consists of $244,000 in residential mortgage loans.
78
<PAGE>
Classification of Assets. OTS regulations provide for a classification
system for loans and other assets of savings associations. Under this
classification system, problem assets of savings associations are classified as
"substandard," "doubtful," or "loss." An asset is considered substandard if it
is inadequately protected by the current net worth and paying capacity of the
borrower or of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the savings association will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard,
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as loss are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets may be designated "special mention" because of potential weakness that do
not currently warrant classification in one of the aforementioned categories.
When a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings association classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. A savings association's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining a savings association's regulatory capital. Specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
79
<PAGE>
The following table presents our classified assets at the dates indicated:
Classified Assets
December 31,
-----------------
Classification June 30, 1997 1996 1995
------------- ---- ----
(Dollars in thousands)
Substandard ............................. $272(1) $303(2) $244(3)
Doubtful ................................ 0 0 0
Loss .................................... 0 0 0
---- ---- ----
Total Classified Assets ........... $272 $303 $244
==== ==== ====
- ------
(1) Consists of $149,000 in residential mortgage loans classified as
substandard, $42,000 in home equity loans classified as substandard and
$81,000 in equity line of credit loans classified as substandard.
(2) Consists of $168,000 in residential mortgage loans classified as
substandard, $88,000 in home equity loans classified as substandard, and
$47,000 in equity line of credit loans classified as substandard.
(3) Consists of $244,000 in residential mortgage loans classified as
substandard.
Allowances for Loan Losses. Our policy is to provide for losses based on
management's estimate of the losses that may be incurred with respect to our
loan portfolio. When we increase the allowances for loan losses we do so by
establishing a charge against our income. The estimate, including a review of
all loans on which full collectibility of interest and principal may not be
reasonably assured, considers: (i) our past loan loss experience, (ii) known and
inherent risks in our portfolio, (iii) adverse situations that may affect the
borrower's ability to repay, (iv) the estimated value of any underlying
collateral, and (v) current economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance for
loan losses at a level that we consider to be adequate for the inherent risk of
loss in its loan portfolio, future losses could exceed estimated amounts and
additional provisions for loan losses could be required. In addition, our
determination as to the amount of allowance for loan losses is subject to review
by the OTS, as part of its examination process. After a review of the
information available, the OTS might require the establishment of an additional
provision.
80
<PAGE>
The following table sets forth an analysis of our allowance for loan losses
at the dates indicated:
Allowance for Loan Losses
Six Months Ended June 30, Year Ended December 31,
------------------------ -----------------------
1997 1996 1996 1995
-------- -------- -------- --------
(Dollars in thousands)
Gross Loan Principal
Balance Outstanding ....... $94,242 $92,580 $99,353 $79,918
Average Loans Outstanding .. 99,012 83,837 91,061 78,025
Allowance Balance
(at beginning of period) .. 247 200 200 195
Loans charged off .......... 0 0 0 0
Recoveries ................. 0 0 0 0
Net loans charged-off ...... 0 0 0 0
Provision for possible
loan losses ............... 10 26 47 5
------- ------- ------- -------
Allowance Balance
at end of period .......... $ 257 $ 226 $ 247 $ 200
======= ======= ======= =======
Allowance for loan
losses to total loans ..... 0.27% 0.24% 0.25% 0.25%
Ratio of Allowance for
loan losses to total
non- performing loans ..... 78.59% 93.78% 65.69% 81.97%
Allocation of Allowance for Loan Losses. The following table presents an
allocation of the entire allowance for loan losses among various loan
classifications and sets forth the percentage of loan type to total loans. The
allowance shown in the table should not be interpreted as an indication that
charge-offs in future periods will occur in these amounts or proportions or that
the analysis indicates future charge-off trends.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
June 30, 1997 1996 1995
------------------ ------------------- -------------------
Percentage of Percentage of Percentage of
Amount Total Loans Amount Total Loans Amount Total Loans
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans ..... $179 88% $169 89% $104 86%
Home equity loans ........ 10 8% 10 8% 34 10%
Equity lines of credit ... 67 3% 67 2% 61 3%
Collateral loans ......... 1 1% 1 1% 1 1%
---- ----- ---- ----- ---- -----
Total ........... $257 100% $247 100% $200 100%
==== ===== ==== ===== ==== =====
</TABLE>
81
<PAGE>
Investment Activities
General. We are permitted under federal law to make certain investments,
including investments in securities issued by various federal agencies, state
and municipal governments, deposits at the FHLB of Pittsburgh, certificates of
deposit in federally insured institutions, certain bankers' acceptances and
federal funds. We may also invest, subject to certain limitations, in commercial
paper rated in one of the two highest investment rating categories of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds. Federal regulations require us to maintain an
investment in FHLB stock and a minimum amount of liquid assets which may be
invested in cash and specified securities. From time to time, the OTS adjusts
the percentage of liquid assets which savings banks are required to maintain.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
The goals of our investment policy are to (i) maintain profitability; (ii)
invest in relatively high quality securities; (iii) maintain adequate liquidity
levels for meeting cash demands; (iv) maintain compliance with regulations; and
(v) provide a short-term source of funds for the funding of loans designated for
sale.
Investment decisions will include these objectives as well as a review of
risk-based capital established for each type of security.
During periods when mortgage loan demand is moderate, we have invested our
funds in certain investment securities rather than originating whole loans.
The investment securities we purchase consist primarily of securities
issued or guaranteed by the U.S. government or agencies thereof and
mortgage-backed securities. At June 30, 1997, 100% of our mortgage-backed
securities were FHLMC pass-throughs. Investment and aggregate investment
limitations and credit quality parameters of each class of investment are
prescribed in our investment policy. We perform analyses on mortgage-related
securities prior to purchase and on an ongoing basis to determine the impact on
earnings and market value under various interest rate and prepayment conditions.
Under our current investment policy, the President and his designee(s) have been
delegated the authority by the Board of Directors to execute agreements,
transactions and any other appropriate material in order to effectuate
investment transactions authorized by the investment policy. The Board of
Directors reviews all securities transactions on a monthly basis.
We have adopted SFAS No. 115. This statement requires that we classify our
investment securities as either "trading," "available for sale" or "held to
maturity." We have no securities designated as "trading." Securities designated
as held to maturity are those assets which we have ability and intent to hold to
maturity. A held to maturity investment portfolio is carried at amortized cost.
In contrast, those securities designated as available for sale are those assets
which are not classified as trading securities or held to maturity.
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<PAGE>
Securities designated as "available for sale" are carried at market value with
unrealized gains or losses, net of tax effect, recognized in retained earnings.
On November 29, 1996, in order to increase our capital ratios, we sold
investment securities with a book value of $3.0 million from our held to
maturity portfolio resulting in a loss of $2,000. Included in these securities
were investments with a book value of $998,000 that had a maturity of April 17,
1997 which exceeded the three month example discussed in the SFAS No. 115,
accounting for certain investments in debt and equity securities. As a result of
the sale, we transferred all securities previously classified as held to
maturity to available for sale. As a result of this sale, all of our investment
securities are now classified as available for sale.
Mortgage-backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us. The
quasi-governmental agencies, FHLMC, Government National Mortgage Association
("GNMA"), and FNMA, guarantee the payment of principal and interest to investors
As with our investment portfolio discussed above, on November 29, 1996, in
order to increase our capital ratios, we sold mortgage-backed securities with a
book value of $336,000 from our held-to-maturity portfolio resulting in a net
gain of $9,000. Included in these securities was a mortgage-backed security with
a book value of $173,000 that had a maturity of March 1, 1997 which exceeded the
three month example discussed in SFAS No. 115. As a result of this sale, we
transferred all mortgage- backed securities previously classified as
held-to-maturity to available for sale. Consequently, all of our mortgage-backed
securities are now classified as available for sale. Each security was issued by
the FHLMC. Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to prepay
obligations with or without prepayment penalties.
Mortgage-backed securities are typically issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate
or adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages.
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<PAGE>
The following table sets forth the carrying value of our investment
securities and mortgage-backed securities, at the dates indicated.
Investment Portfolio
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
June 30, 1997(1) 1996(1) 1995(2)
-------------------------- ------------------------- --------------------------
Estimated Estimated Estimated
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Federal Farm Credit Bank ................. -- -- -- -- $ 3,499,715 $ 3,495,131
Federal Home Loan Bank ................... $ 1,993,885 $ 1,993,885 $ 2,484,465 $ 2,484,465 2,490,745 2,478,061
Federal Home Loan Mortgage
Corporation ............................ 500,065 500,065 499,500 499,500 1,500,000 1,492,544
Federal National Mortgage
Association ............................ 497,675 497,675 495,805 495,805 1,000,000 1,000,922
Student Loan Marketing Association ....... 998,190 998,190 992,510 992,510 1,500,000 1,475,667
U.S. Treasury Notes ...................... 2,002,190 2,002,190 2,003,520 2,003,520 1,497,732 1,506,831
----------- ----------- ----------- ----------- ----------- -----------
Total Investment securities .......... $ 5,992,005 $ 5,992,005 $ 6,475,800 $ 6,475,800 $11,488,192 $11,449,156
=========== =========== =========== =========== =========== ===========
Mortgage-backed securities ............... 190,414 190,414 203,147 203,147 698,669 705,680
Federal Home Loan Bank
capital stock, at cost ................. 1,332,500 1,332,500 1,500,000 1,500,000 727,500 727,500
----------- ----------- ----------- ----------- ----------- -----------
Total .................................... $ 7,514,919 $ 7,514,919 $ 8,178,947 $ 8,178,947 $12,914,361 $12,882,336
=========== =========== =========== =========== =========== ===========
</TABLE>
- ----------
(1) All of our investment portfolio was classified as "Available for Sale" at
June 30, 1997 and December 31, 1996 pursuant to SFAS No. 115.
(2) All of our investment portfolio was classified as "Held to Maturity" at
December 31, 1995 pursuant to SFAS No. 115.
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<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair market values, and weighted
average yields for our investment securities portfolio at June 30, 1997. The
following table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.
Investment Portfolio Maturity
At June 30, 1997
<TABLE>
<CAPTION>
One Year or Less One to Five Years Total Investment Securities
----------------------- --------------------- -------------------------------------
Annualized Annualized Annualized
Weighted Weighted Approximate Weighted
Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Value Yield
---------- ---------- -------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Obligations of U.S.
Government agencies ....... $5,992,005 5.36% $ 0 N/A $5,992,005 $5,992,005 5.36%
Mortgage-backed
securities ................ 0 N/A 190,414 7.01% 190,414 190,414 7.01%
FHLB stock(1) .............. 1,332,500 6.38% 0 N/A 1,332,500 1,332,500 6.38%
---------- -------- --------- ----------
Total investment
securities portfolio ...... $7,324,505 5.54% $190,414 7.01% $7,514,919 $7,514,919 5.58%
========== ======== ========== ==========
</TABLE>
- ----------
(1) FHLB stock has no stated maturity, but has been classified based upon its
next stated dividend payment date. As a member of the FHLB of Pittsburgh,
the Bank is required to maintain an investment in stock of the FHLB of
Pittsburgh equal to the greater of 1.0% of the Bank's outstanding home
mortgage related assets or 5.0% of its outstanding advances from the FHLB
of Pittsburgh.
Sources of Funds
Deposits are the major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans, prepayment of loans advances from the FHLB and, to a much lesser extent,
maturities of investment securities and mortgage-backed securities, and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments may be
significantly influenced by general interest rates and market conditions.
Deposits. Consumer deposits are attracted principally from within our
primary market area through the offering of deposit accounts including regular
savings accounts, checking accounts, money market accounts, term certificate
accounts and IRA accounts. Deposit account terms vary according to the minimum
balance required, the time period the funds must remain on deposit, and the
interest rate.
We compete for deposits with other institutions in our market area by
offering competitively priced accounts which are tailored to the needs of our
customers. Additionally, we seek to meet our customers' needs by providing
personalized customer service to the community. To provide additional
convenience, we participate in the MAC(R)and Plus(R)automatic teller machine
network at locations throughout Delaware and the United States, through which
customers can gain access to their accounts at any time. We do not actively
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<PAGE>
solicit certificate accounts in excess of $100,000 nor do we use brokers to
obtain deposits or solicit deposits outside our market area.
The interest rates paid by us on deposits are set as needed at the
direction of our senior management. Rates on deposits are determined based on
our liquidity requirements, interest rates paid by our competitors, the general
levels of interest rates, our growth goals and applicable regulatory
restrictions and requirements.
Our deposit base is characterized by a relatively small amount of passbook
depositors and a significantly higher amount of certificates of deposit.
Passbook savings, money market and transaction accounts totalled $12.6 million,
or 16.0%, of our deposit portfolio at June 30, 1997. As of June 30, 1997,
certificates of deposit were $66.0 million or 84.0% of our deposit portfolio.
$14.3 million or 18.3% of the deposit portfolio were certificates of deposit
with balances of $100,000 or more.
We believe that a portion of our depositors are sensitive to changes in
interest rates. Accordingly, some of the funds placed in certificates of deposit
with us are susceptible to withdrawal if alternative investments pay a higher
returns or our rates do not adjust as rapidly as the competition. These deposits
cannot, therefore, be viewed as core deposits, which is also generally the case
for deposits at or in excess of $100,000. However, our certificates are not
derived from brokered deposits, and the majority of those in excess of $100,000
are deposits of long-standing customers of the Bank. See "RISK FACTORS - Source
of Funds."
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<PAGE>
The following table sets forth our distribution of deposit accounts at the
dates indicated and the weighted average interest rate on each category of
deposits represented.
Account Distribution Balances
(Dollars in thousands)
<TABLE>
<CAPTION>
At June 30, 1997 At December 31, 1996 At December 31, 1995
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Percent of Average Percent of Average Percent of Average
Amount Total Rate Amount Total Rate Amount Total Rate
------ ----- ---- ------ ----- ---- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook Savings ................ $ 2,537 3.24% 4.14% $ 2,536 3.23% 4.14% $ 2,867 3.52% 4.14%
Money Market Accounts ........... 8,904 11.36% 3.37% 8,246 10.52% 3.35% 8,725 10.70% 3.17%
IRA Certificates of
Deposit ....................... 11,750 15.00% 6.52% 12,073 15.40% 6.47% 12,507 15.34% 6.89%
Certificates of deposit
with an original term to
maturity of:
Less than 1 year ............ 8,528 10.88% 5.52% 9,962 12.71% 5.46% 10,375 12.73% 5.57%
1 to 3 years ............... 34,163 43.60% 5.92% 33,193 42.33% 5.83% 34,265 42.03% 6.21%
More than 3 years ........... 11,344 14.48% 6.46% 11,517 14.69% 6.46% 12,193 14.96% 6.64%
Checking & Other ................ 1,125 1.44% 2.05% 881 1.12% 2.05% 590 0.72% 2.05%
------- ------ ------- ------ ------- ------
Total Deposits .................. $78,351 100.00% 5.64% $78,408 100.00% 5.62% $81,522 100.00% 5.87%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth our monthly average balance and interest
rates of deposit accounts for the periods shown.
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended December 31,
------------------------ -----------------------------------------------------
June 30, 1997 1996 1997
------------------------ ------------------------ ------------------------
Monthly Weighted Monthly Weighted Monthly Weighted
Average Interest Average Interest Average Interest
Amount Rate Amount Rate Amount Rate
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Passbook Savings....... $ 2,512 4.14% $ 2,682 4.14% $ 3,284 4.14%
Money Market Accounts.. 8,601 3.38% 8,662 3.23% 10,396 3.15%
IRA Accounts........... 11,949 6.48% 12,297 6.62% 11,726 6.89%
Certificates of
deposits
Less than 1 year..... 9,411 5.49% 10,485 5.31% 9,327 5.88%
1 to 3 years......... 33,967 5.87% 33,363 5.96% 31,131 5.80%
More than 3 years.... 11,465 6.46% 12,073 6.55% 11,438 6.88%
Checking & Other....... 1,029 2.05% 765 2.05% 590 2.05%
------- ------- -------
Total Deposits...... $78,934 5.68% $80,327 5.67% $77,892 5.68%
======= ======= =======
</TABLE>
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<PAGE>
The following table sets forth the amounts and maturities of our time
deposits at the dates indicated.
Certificate of Deposit Maturities
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1999 June 30, 2000 June 30, 2001 Total
------------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
2.00 to 4.00% .... $ 0 $ 5,377 $ 0 $ 0 $ 5,377
4.01 to 6.00% .... 41,603,352 7,598,587 691,265 3,022,847 52,916,051
6.01 to 8.00% .... 2,596,052 1,690,307 7,967,315 610,357 12,864,031
8.01 to 10.00%.... 0 0 0 0 0
10.01 to 12.00%... 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
Total ............ $44,199,404 $ 9,294,271 $ 8,658,580 $ 3,633,204 $65,785,459
=========== =========== =========== =========== ===========
</TABLE>
The following table indicates the amount of our certificates of deposit of
$100,000 or more by time remaining until maturity as of June 30, 1997.
Certificates of Deposit of $100,000 or more
Primary Maturity Period Amount
----------------------- ------
(In Thousands)
3 months or less $ 2,480
Over 3 months to 6 months 1,408
Over 6 months to 12 months 5,798
Over 12 months 4,634
-------
Total $14,320
=======
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<PAGE>
The following table sets forth net changes in our deposit accounts for the
periods shown.
Net Changes in Deposit Activity
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
-------------------------------- ---------------------------------
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net increase (decrease) before
interest credited ............................. ($2,007,131) ($4,184,761) ($7,074,384) $ 7,420,188
Interest credited ............................... 1,949,701 2,049,752 3,960,928 3,605,511
----------- ----------- ----------- -----------
Net deposit account increase
(decrease) .................................... ($ 57,430) ($2,135,009) ($3,113,456) $11,025,699
=========== =========== =========== ===========
Weighted average cost of deposits
during the period ............................. 5.63% 5.63% 5.61% 5.60%
Weighted average cost of deposits
at end of period ............................. 5.64% 5.59% 5.62% 5.87%
</TABLE>
Borrowings. We may obtain advances (borrowings) from the FHLB of Pittsburgh
to supplement our supply of lendable funds. Advances from the FHLB of Pittsburgh
are typically secured by a pledge of our stock in the FHLB of Pittsburgh, a
portion of our first mortgage loans and other assets. Each FHLB credit program
has its own interest rate, which may be fixed or adjustable, and range of
maturities. If the need arises, we may also access the Federal Reserve Bank
discount window to supplement our supply of lendable funds and to meet deposit
withdrawal requirements. At June 30, 1997, borrowings from the FHLB of
Pittsburgh totaled $25.2 million.
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<PAGE>
The following table sets forth information concerning our borrowings from
the FHLB of Pittsburgh.
Borrowings
At or For the At or For the
Six Months Ended June 30, Year Ended December 31,
------------------------- --------------------------
1997 1996 1996 1995
---- ---- ---- ----
FHLB Advances:
Average balance(1) .. $25,370,166 12,314,174 20,868,039 10,957,934
Maximum balance at
any month-end ...... 25,700,000 22,700,000 33,700,000 14,500,000
Balance at period end 25,200,000 22,700,000 25,900,000 7,950,000
Weighted average
interest rate during
the period ......... 6.21% 5.97% 6.00% 6.43%
Weighted average
interest rate at
period end ......... 6.34% 6.00% 6.33% 6.19%
- ----------
(1) The average balance was computed using an average of monthly balances
during the year.
Competition
Competition for deposits and loans comes from commercial banks, thrift
institutions, credit unions, finance companies, credits card banks, mortgage
bankers and multi-state regional banks in our market area, many of whom have
greater resources than us. Competition for deposits also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers.
We operate from a single office and until recent years relied extensively
on the presence of employees of several corporations located near our single
office for deposit growth. Our convenience enabled us to attract and maintain
funds that were reasonably priced. The relocation of corporate offices and the
transfer of employees to suburban locations has manifested itself in a decline
in the number of downtown Wilmington customer relationships and has required us
to seek deposits from other parts of New Castle County and to become more
reliant on Jumbo Certificates. In addition, the Bank has increased its
borrowings from the FHLB of Pittsburgh. This , in turn, has forced us to offer
higher interest rates on deposits which has increased our cost of funds. We have
been able to maintain our position in mortgage loan originations, market share,
and deposit accounts throughout our market areas by virtue of our local
presence, competitive pricing, and referrals from existing customers.
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<PAGE>
Properties
The following table sets forth our location and related information at June
30, 1997.
Net Book Value at
Location Leased or Owned Year Acquired June 30, 1997 (1)
- -------- --------------- ------------- -----------------
MAIN OFFICE:
400 Delaware Avenue
Wilmington, Delaware 19801 Owned 1953 $1,824,690
- ----------
(1) Net book value is calculated by totaling the estimated value of land and
buildings, $2,278,764, and then subtracting accumulated depreciation of
$454,074.
Personnel
At June 30, 1997 we had 19 full-time employees and one full-time seasonal
employee. None of our employees are represented by a collective bargaining
group. We believe that our relationship with our employees is good.
Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial condition
or results of operations.
REGULATION
Set forth below is a brief description of certain laws which relate to us.
The description is not complete and is qualified in its entirety by references
to applicable laws and regulation.
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<PAGE>
Savings and Loan Holding Company Regulation
General. The Company will be required to register and file reports with the
OTS and will be subject to regulation and examination by the OTS. In addition,
the OTS will have enforcement authority over the Company and any non-savings
institution subsidiaries. This will permit the OTS to restrict or prohibit
activities that it determines to be a serious risk to us. This regulation is
intended primarily for the protection of our depositors and not for the benefit
of you, as stockholders of the Company.
QTL Test. Since the Company will only own one savings institution, it will
be able to diversify its operations into activities not related to banking, but
only so long as we satisfy the QTL test. If the Company controls more than one
savings institution, it would lose the ability to diversify its operations into
non-banking related activities, unless such other savings institutions each also
qualify as a QTL or were acquired in a supervised acquisition. See "- Qualified
Thrift Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the OTS
before acquiring control of any other SAIF-insured savings institution. No
person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
Bank Regulation
General. As a federally chartered, SAIF-insured savings bank, we are
subject to extensive regulation by the OTS and the FDIC. Our lending activities
and other investments must comply with various federal and state statutory and
regulatory requirements. We are also subject to certain reserve requirements
promulgated by the Board of Governors of the Federal Reserve System ("Federal
Reserve System").
The OTS, in conjunction with the FDIC, regularly examines us and prepares
reports for the consideration of our Board of Directors on any deficiencies that
the OTS finds in our operations. Our relationship with our depositors and
borrowers is also regulated to a great extent by federal and state law,
especially in such matters as the ownership of savings accounts and the form and
content of our mortgage documents.
We must file reports with the OTS and the FDIC concerning our activities
and financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
financial institutions. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection
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<PAGE>
with their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any change
in regulations, whether by the OTS, the FDIC or any other government agency,
could have a material adverse impact on our operations.
Insurance of Deposit Accounts. The FDIC is authorized to establish separate
annual assessment rates for deposit insurance for members of the BIF and the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such assessment rates if such target
level are met. The FDIC has established a risk-based assessment system for both
SAIF and BIF members. Under this system, assessments are set within a range,
based on the risk the institution poses to its deposit insurance fund. This risk
level is determined based on the institution's capital level and the FDIC's
level of supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior savings institution
failures, the reserves of the SAIF were below the level required by law at the
end of 1995. The BIF had, however, met its required reserve level during the
third calendar quarter of 1995. As a result, deposit insurance premiums for
deposits insured by the BIF were substantially less than premiums for deposits
such as ours which are insured by the SAIF. Legislation to recapitalize the SAIF
and to eliminate the significant premium disparity between the BIF and the SAIF
became effective September 30, 1996. The recapitalization plan provided for a
special assessment equal to $.657 per $100 of SAIF deposits held at March 31,
1995, in order to increase SAIF reserves to the level required by law. Certain
BIF institutions holding SAIF-insured deposits were required to pay a lower
special assessment. Based on its deposits at March 31, 1995, on November 27,
1996, we paid a pre-tax special assessment of approximately $492,000.
The recapitalization plan also provides that the cost of prior failures,
which were funded through the issuance of the Financing Corporation Bonds, will
be shared by members of both the SAIF and the BIF. This will increase BIF
assessments for healthy banks to approximately $.013 per $100 of deposits in
1997. SAIF assessments for healthy savings institutions in 1997 will be
approximately $.064 per $100 in deposits and may be reduced, but not below the
level set for healthy BIF institutions.
Pursuant to the recapitalization plan, the FDIC has lowered the rates on
assessments paid to the SAIF and widened the spread of those rates. The FDIC's
action established a base assessment schedule for the SAIF with rates ranging
from 4 to 31 basis points, and an adjusted assessment schedule that reduces
these rates by 4 basis points. As a result, the effective SAIF rates range from
0 to 27 basis points as of October 1, 1996. In addition, the FDIC's final rule
prescribed a special interim schedule of rates ranging from 18 to 27 basis
points for SAIF-member savings institutions for the last quarter of calendar
1996, to reflect the assessments paid to the Financing Corp. Finally, the FDIC's
action established a procedure for making
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<PAGE>
limited adjustments to the base assessment rates by rulemaking without notice
and comment, for both the SAIF and the BIF.
The recapitalization plan also provides for the merger of the SAIF and BIF
effective January 1, 1999, assuming there are no savings institutions chartered
under federal law. Under separate proposed legislation, Congress is considering
the elimination of the federal thrift charter and the separate federal
regulation of thrifts. As a result, we might have to convert to a different
financial institution charter and be regulated under federal law as a bank,
including being subject to the more restrictive activity limitations imposed on
national banks. We cannot predict the impact of our conversion to, or regulation
as, a bank until the legislation requiring such change is enacted. See "RISK
FACTORS -- Financial Institution Regulation and Future of the Thrift Industry."
Under regulations of the FDIC relating to premiums paid for deposit
insurance, we are also required to pay more for federal deposit insurance than
we previously have because of our Supervisory Agreement. That additional cost
will continue as long as the Supervisory Agreement remains in effect and will
prevent us from achieving the full benefit of the recapitalization plan. The
lowest premium is available only to those institutions that are well-capitalized
and meet other requirements set by the FDIC. We do not qualify for the lowest
premium because of the Supervisory Agreement.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for our capital
ratios.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as Common Stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
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<PAGE>
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift
Financial Report and using the interest rate risk measurement model adopted by
the OTS. The amount of the interest rate risk component, if any, to be deducted
from an institution's total capital will be based on the institution's Thrift
Financial Report filed two quarters earlier. Savings institutions with less than
$300 million in assets and a risk-based capital ratio above 12% are generally
exempt from filing the interest rate risk schedule with their Thrift Financial
Reports. However, the OTS may require any exempt institution that it determines
may have a high level of interest rate risk exposure to file such schedule on a
quarterly basis and may be subject to an additional capital requirement based
upon its level of interest rate risk as compared to its peers. See MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Interest Rate Risk."
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company. The OTS has the authority under its
supervisory powers to prohibit the payment of dividends by us to the Company. In
addition, we may not declare or pay a cash dividend on the Bank's capital stock
if the effect would be to reduce our regulatory capital below the amount
required for the liquidation account to be established at the time of the
Conversion. See "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of Ninth Ward Savings Bank, FSB."
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
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charged against capital. The rule establishes three tiers of institutions based
primarily on an institution's capital level. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 institution") and has not been advised by the OTS that it
is in need of more than the normal supervision can, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of (i) 100% of its net income to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year, or (ii) 75% of its net income over the most
recent four quarter period. Any additional capital distributions require prior
regulatory notice. Based on our capital level at December 31, 1996, we qualified
as a Tier 1 institution.
In the event our capital falls below our fully phased-in requirement or the
OTS notifies us that we are in need of more than normal supervision, we would
become a Tier 2 or Tier 3 institution and as a result, our ability to make
capital distributions could be restricted. Tier 2 institutions, which are
institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75%
of net income over the most recent four quarter period. Tier 3 institutions,
which are institutions that do not meet current minimum capital requirements and
propose to make any capital distribution, and Tier 2 institutions that propose
to make a capital distribution in excess of the noted safe harbor level, must
obtain OTS approval prior to making such distribution. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. The OTS has
proposed rules relaxing certain approval and notice requirements for
well-capitalized institutions.
A savings institution is prohibited from making a capital distribution if,
after making the distribution, the savings institution would be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements).
Further, a savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
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Qualified Thrift Lender Test. Savings institutions must meet a qualified
thrift lender ("QTL") test. If we maintain an appropriate level of qualified
thrift investments ("QTLs") (primarily residential mortgages and related
investments, including certain mortgage-related securities) and otherwise
qualify as a QTL, we will continue to enjoy full borrowing privileges from the
FHLB of Pittsburgh. The required percentage of QTLs is 65% of portfolio assets
(defined as all assets minus intangible assets, property used by the institution
in conducting its business and liquid assets equal to 20% of total assets). In
addition, savings institutions may include shares of stock of the FHLBS, FNMA,
and FHLMC as QTLs. Compliance with the QTL test is determined on a monthly basis
in nine out of every 12 months. As of June 30, 1997, we were in compliance with
our QTL requirement with approximately 97.8% of our portfolio assets invested in
QTLs.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these transactions are restricted to an aggregate percentage of the savings
institution's capital or are prohibited altogether. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
the savings institution. Our affiliates include the Company and any company
which would be under common control with us. In addition, a savings institution
may not extend credit to any affiliate engaged in activities not permissible for
a bank holding company or acquire the securities of any affiliate that is not a
subsidiary. The OTS has the discretion to treat subsidiaries of savings
institution as affiliates on a case-by-case basis.
Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At June 30, 1997, our required liquid asset
ratio was 5% and our actual ratio was 8.8%. Monetary penalties may be imposed
upon associations for violations of liquidity requirements.
Federal Home Loan Savings Bank System. We are a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings institutions and proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Directors of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB of
Pittsburgh in an amount equal to at least 1% of our aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year. At June 30, 1997, the Bank held $1,332,500 in FHLB stock, at cost,
which was in compliance with this requirement. The FHLB imposes various
limitations on advances such as limiting the amount of certain types of real
estate related collateral to 30% of a member's capital and limiting total
advances to a member.
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The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future.
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At June 30,
1997, our reserve met the minimum level required by the Federal Reserve System.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. We had no borrowings from the Federal Reserve System at
June 30, 1997.
TAXATION
Federal Taxation
We are subject to the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), in the same general manner as other corporations. However,
prior to August 1996, savings institutions such as us, which met certain
definitional tests and other conditions prescribed by the Code, could benefit
from certain favorable provisions regarding deductions from taxable income for
annual additions to bad debt reserve. The amount of the bad debt deduction that
a qualifying savings institution could claim with respect to additions to its
reserve for bad debts was subject to certain limitations. We reviewed the most
favorable way to calculate the deduction attributable to an addition to our bad
debt reserve on an annual basis.
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In August 1996, the Code was revised to equalize the taxation of thrifts
and banks. Thrifts, such as us, no longer have a choice between the percentage
of taxable income method and the experience method in determining additions to
bad debt reserves. Thrifts with $500 million of assets or less may still use the
experience method, which is generally available to small banks currently. Larger
thrifts must use the specific charge off method regarding bad debts. Any reserve
amounts added after 1987 will be taxed over a six year period beginning in 1996;
however, bad debt reserves set aside through 1987 are generally not taxed. A
savings institution may delay recapturing into income its post-1987 bad debt
reserves for an additional two years if it meets a residential-lending test.
This law is not expected to have a material impact on us. At June 30, 1997, we
had approximately $330,000 of post 1987 bad-debt reserves.
Under the percentage of taxable income method, the bad debt deduction
attributable to "qualifying real property loans" could not exceed the greater of
(i) the amount deductible under the experience method, or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equaled the
amount by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeded the
sum of the surplus, undivided profits and reserves at the beginning of the
taxable year. The amount of the bad debt deduction attributable to qualifying
real property loans computed using the percentage of taxable income method was
permitted only to the extent that the institution's reserve for losses on
qualifying real property loans at the close of the taxable year did not exceed
6% of such loans outstanding at such time.
Under the experience method, the bad debt deduction may be based on (i) a
six-year moving average of actual losses on qualifying and non-qualifying loans,
or (ii) a fill-up to the institution's base year reserve amount, which is the
tax bad debt reserve determined as of December 31, 1987.
The percentage of specially computed taxable income that was used to
compute a savings institution's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8% at the
time the Code was revised. The percentage of taxable income bad debt deduction
thus computed was reduced by the amount permitted as a deduction for
non-qualifying loans under the experience method. The availability of the
percentage of taxable income method permitted qualifying savings institutions to
be taxed at a lower effective federal income tax rate than that applicable to
corporations generally (approximately 31.3% assuming the maximum percentage bad
debt deduction).
If a savings institution's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
institution may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a specified period , which is
immediately accruable for financial reporting purposes. As of December 31, 1996,
at least 60% of our assets were qualifying assets as defined in the Code. No
assurance can be given that we will meet the 60% test for subsequent taxable
years.
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Earnings appropriated to our pre-1988 bad debt reserve and claimed as a tax
deduction as well as our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution to you, our stockholders
(including distributions made on dissolution or liquidation), unless we include
the amount in income, along with the amount deemed necessary to pay the
resulting federal income tax. As of June 30, 1997, we had $1.3 million of
accumulated earnings, representing our base year tax reserve, for which federal
income taxes have not been provided. If such amount is used for any purpose
other than bad debt losses, including a dividend distribution or a distribution
in liquidation, it will be subject to federal income tax at the then current
rate.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss
carryovers of which we currently have none. AMTI is also adjusted by determining
the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items. Thus, our AMTI
is increased by an amount equal to 75% of the amount by which our adjusted
current earnings exceeds our AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses).
The Company may exclude from its income 100% of dividends received from us
as a member of the same affiliated group of corporations. A 70% dividends
received deduction generally applies with respect to dividends received from
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if the Company owns more than 20% of the
stock of a corporation paying a dividend. The above exclusion amounts, with the
exception of the affiliated group figure, were reduced in years in which we
availed ourselves of the percentage of taxable income bad debt deduction method.
Our federal income tax returns have not been audited by the IRS for at
least the last five years.
Delaware State Taxation
The State of Delaware imposes a franchise tax on financial institutions of
8.7% of taxable income. Taxable income, for this purpose, is 56% of net
operating income after adjustments. These taxes have not been a material expense
for us.
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As a Delaware holding company earning income in Delaware, the Company is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. Minimum tax is generally equal to $5,000 for each 100,000
shares of authorized capital stock regardless of whether such stock has been
issued.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of the same individuals who
serve as directors of our subsidiary, Ninth Ward Savings Bank, FSB. Our
certificate and bylaws require that directors be divided into three classes, as
nearly equal in number as possible. Each class of directors serves for a
three-year period, with approximately one-third of the directors elected each
year. Our officers will be elected annually by the board and serve at the
board's discretion. See "MANAGEMENT OF NINTH WARD SAVINGS BANK, FSB."
MANAGEMENT OF NINTH WARD SAVINGS BANK, FSB
Directors and Executive Officers
Our Board of Directors is composed of eight members each of whom serves for
a term of three years. Our proposed stock charter and bylaws require that
directors be divided into three classes, as nearly equal in number as possible.
Each class of directors serves for a three-year period, with approximately
one-third of the directors elected each year. Our executive officers are elected
annually by our board and serve at the board's discretion.
The following table sets forth information with respect to our directors
and executive officers, all of whom will continue to serve in the same
capacities after the Conversion. We have no other executive officers.
Age at Current
June 30, Director Term
Name 1997 Position Since Expires
- ---- -------- -------- -------- -------
Dr. William R. Baldt 61 Director 1988 1998
J. Bayard Cloud 84 Chairman 1945 1999
Thomas B. Cloud 48 Director 1972 2000
Ronald P. Crouch 49 President, Chief
Executive Officer
and Director 1983 1998
Larry D. Gehrke 51 Director 1988 2000
Alan B. Levin 42 Director 1993 1999
Ernest J. Peoples 64 Vice Chairman 1964 1998
Dr. Robert L. Schweitzer 48 Director 1997 2000
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Other Executive Officers
Age at
June 30,
Name 1997 Position
---- -------- --------
Jerome P. Arrison 46 Executive Vice President, Chief
Operating Officer and Treasurer
Genevieve B. Marino 32 Vice President, Retail
Banking Services
Lori N. Richards 34 Vice President, Finance and
Administration
The principal occupation and business experience of each of the directors
is set forth below. Unless otherwise noted, the information applies for the past
five years. There are no arrangements or understandings between the Bank and any
person pursuant to which such person has been elected as a director.
Dr. William R. Baldt is currently President Emeritus of Goldey-Beacom
College in Wilmington, Delaware. Until August 30, 1996, he was the President of
the college.
J. Bayard Cloud has been Chairman of the Board since January 1, 1983. He
previously served as President of Ninth Ward from 1961 to 1982. He is the father
of Thomas B. Cloud.
Thomas B. Cloud, since December 1, 1995, has been President and Chief
Executive Officer of United Electric Supply Company, Inc. where he has been
employed since 1973 in various capacities including Controller, Vice President
of Finance and Chief Financial Officer and Executive Vice President. The firm
employs over 190 individuals and distributes electric products to industrial,
institutional and electrical construction customers in a five state area. Mr.
Cloud is the son of J. Bayard Cloud.
Ronald P. Crouch currently serves as President and Chief Executive Officer
of Ninth Ward, a position he has held since 1983. Mr. Crouch is a Certified
Public Accountant and served as a director of the Federal Home Loan Bank of
Pittsburgh from 1989 to 1996. He is a trustee of Goldey-Beacom College.
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Larry D. Gehrke is a director and Vice President of Bellevue Holding
Company of Wilmington, Delaware, a real estate development concern. He has been
employed there since 1972. He holds real estate brokerage licenses from the
State of Delaware and the Commonwealth of Pennsylvania.
Alan B. Levin is Chairman, President and Chief Executive Officer of Happy
Harry's, Inc., a privately held pharmacy chain in Delaware with approximately
1,100 employees. He is a member of the Delaware Bar and a former chairman of the
Delaware Workforce Development Council and Delaware Private Industry Council. He
was formerly a member of the State Attorney General's Office in Delaware.
Ernest J. Peoples is the Vice Chairman of the board. He was a Vice
President of Ninth Ward. He is retired and was formerly an owner of a building
and construction firm.
Dr. Robert W. Schweitzer is Professor of Finance at the University of
Delaware, located in Newark, Delaware. He also serves as a faculty member of the
Stonier School of Banking and the National School of Banking at Fairfield
University.
Executive Officers Who Are Not Directors
The following executive officers do not serve on the Board of Directors.
There are no arrangements or understandings between Ninth Ward and any person
pursuant to which such person serves as an executive officer. Except as
otherwise noted, they have been employed by Ninth Ward for the last five years.
Jerome P. Arrison has been employed by Ninth Ward since August 1989. He is
currently the Chief Operating Officer, Executive Vice President and Treasurer.
Genevieve B. Marino has been employed by Ninth Ward since November 1995 as
the Director of Marketing and Communications. She assumed her current position,
Vice President of Retail Banking Services, in July 1997. From November 1993 to
November 1995 she was the Advertising and Communications Manager of Wilmington
Savings Fund Society, FSB. Prior to that, she served in other capacities in the
Wilmington Savings Fund Society marketing department.
Lori N. Richards assumed her current position as Vice President of Finance
and Administration in July 1997. From June 1996 to July 1997 she was the
Controller of Ninth Ward. From September 1994 to June 1996 she was an accounting
supervisor at Lanxide Corporation located in Newark, Delaware. From May 1991 to
September 1994 she served as a senior financial accountant at TA Instruments,
Inc. in New Castle, Delaware. She is a Certified Public Accountant.
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Board Meetings and Committees
The Board of Directors conducts its business through meetings and
activities of its committees. During the year ended December 31, 1996, the Board
of Directors held 12 regular meetings. No director attended fewer than 75% of
the total meetings of the Board of Directors and committees on which such
director served during the year ended December 31, 1996. The standing committees
of the Board include the following:
Executive Committee - The Executive Committee meets as needed. It makes
recommendations to the full Board and acts on policies adopted by the full Board
in the absence of the meeting of the entire full Board. The committee did not
meet during the year ended December 31, 1996. The committee is composed of
Messrs. Peoples (Chairman), J. Bayard Cloud, Thomas Cloud and Crouch.
Appraisal Committee - The Appraisal Committee consists of Messrs. Peoples
(Chairman), J. Bayard Cloud and Gehrke. The members of the committee review the
appraisals of the real estate collateral for certain loans. The Appraisal
Committee met five times in 1996.
Personnel Committee - The Personnel Committee reviews and prepares
recommendations for annual salary adjustment and bonuses. The committee also
administers Ninth Ward's various benefit plans. It consists of Messrs. Gehrke
(Chairman), Levin and Dr. Schweitzer. The committee met 7 times during 1996.
Budget Committee - The Budget Committee is responsible for determining the
capital needs of Ninth Ward and making recommendations regarding how those needs
may be satisfied. The Budget Committee did not meet during 1996. It consists of
Dr. Baldt (Chairman) and Messrs. Gehrke and Crouch.
Audit Committee - The Audit Committee meets with our independent certified
public accountants annually to review the results of the annual audit and other
related matters. This committee consists of Dr. Baldt (Chairman) and Messrs.
Peoples and Levin. It did not meet during 1996 because the Bank's auditors met
with the entire Board of Directors.
Asset/Liability Committee - The Asset/Liability Committee was established
in 1997. and currently meets monthly. It consists of Messrs. Thomas Cloud
(Chairman), Levin, Crouch and Dr. Schweitzer. It is principally responsible for
management of our interest rate risk.
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Director Compensation
Each of the non-employee directors is paid an annual retainer of $2,000.
Additionally, each non-employee director receives $300 for each board meeting
attended and $300 for each committee meeting attended. The maximum fee for
meetings attended for any director is $300 per day so that if we hold both a
board and committee meeting on the same day the maximum payment for attendance
is $300. Mr. Crouch receives no fees for his services on our board.
J. Bayard Cloud, the Chairman of the Board, receives a special retainer of
$28,800 per year and Ernest J. Peoples, the Vice Chairman, receives a special
retainer of $27,000 per year. These retainers are paid based on their service as
Chair and Vice Chair of the Board and for their review of appraisals.
Additionally, we currently pay a supplemental pension benefit to J. Bayard
Cloud. For 1996 the amount of that benefit was $14,291. We also pay the
Wilmington wage tax for all of our non-employe directors. This tax is currently
1.25% of gross earnings. Wilmington wage withholding for 1996 was $1,131. Total
aggregate fees paid to the current directors for the year ended December 31,
1996 were $106,920.
Deferred Non-employee Director Compensation Program
We have a deferred non-employee director compensation program, whereby
directors may defer their fees. Currently, Dr. Baldt and Mr. Gehrke participate
in this program. Pursuant to this program, directors defer their fees until
their retirement or resignation from the Board of Directors. For the year ended
December 31, 1996, $11,590 of fees were deferred pursuant to this program. Fees
deferred pursuant to this program are subject to the general rights of the
Bank's creditors.
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Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our President and Executive Vice
President for the year ended December 31, 1996. No other employee earned in
excess of $100,000 in salary and bonus for the year ended December 31, 1996.
<TABLE>
<CAPTION>
Other Annual All Other
Name and Principal Position Salary Bonus Compensation(1) Compensation(2)
- --------------------------- -------- ------- -------------- --------------
<S> <C> <C> <C> <C>
Ronald P. Crouch, President and
Chief Executive Officer $116,595 $11,132 $0 $12,873
Jerome P. Arrison, Executive
Vice President and Chief
Operating Officer $ 96,606 $ 8,921 $0 $12,840
</TABLE>
- ----------
(1) Under the Other Annual Compensation category, perquisites for the year
ended December 31, 1996, did not exceed the lesser of $50,000 or 10% of the
salary and bonus as reported for Mr. Crouch.
(2) Includes amounts contributed to the pension plan for Mr. Crouch and Mr.
Arrison, respectively, during 1996.
Bonus Compensation. We have a bonus compensation plan pursuant to which our
officers can receive bonus compensation up to 20% of their salaries if certain
performance goals are met at the discretion of the Board of Directors. During
1996, Mr. Crouch and Mr. Arrison were paid bonuses of $11,132 and $8,921,
respectively. These bonuses were paid based on the Bank's performance for the
year ended December 31, 1995.
401(k) Plan. In 1997 we established a contributory savings plan for
employees which meets the requirements of Section 401(k) of the Code. All
employees who are at least 21 years old and who have completed at least one year
of service with us may elect to contribute a percentage of their compensation to
the plan each year subject to certain maximums imposed by federal law. We will
match 25% of each employee's contribution, on the first 2% of that employee's
contribution.
Participants are fully vested in the amounts they contribute to the 401(k).
Participants are fully vested in amounts contributed to the plan on their behalf
by us as employer matching contributions after seven years of service. Benefits
under the 401(k) plan are payable in the event of a participant's retirement,
death, disability, or termination of employment. Normal retirement age under the
401(k) plan is 65 years of age.
Pension Plan. We maintain a noncontributory tax-qualified defined pension
benefit plan for eligible employees. All employees and officers with more than
1,000 hours of service per year who have attained the age of 21 and completed
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one year of service are eligible to participate in the pension plan. The pension
plan provides a benefit for each participant. The annual benefit is equal to a
percentage of the average of the participant's highest five years' consecutive
salary. A participant is fully vested in his or her pension after seven years of
service. The pension plan is funded by us on an actuarial basis and all assets
are held in trust by the pension plan trustee. The following table illustrates
the annual benefit payable upon normal retirement at age 65 in the normal form
of benefit under the pension plan at various levels of average annual
compensation and years of service under the pension plan. Compensation upon
which pension is based is the average of the highest five year consecutive
salary.
Pension Plan Table
Years of Credited Service
------------------------------------------------------
Renumeration 15 20 25 30 35
------------ ------ ------ ------ ------ ------
$30,000 6,676 8,902 11,127 13,352 15,579
$50,000 12,246 16,327 20,409 24,491 28,573
$70,000 18,471 24,628 30,785 36,942 43,099
$90,000 24,696 32,928 41,160 49,392 57,625
$100,000 30,922 41,229 51,536 61,483 72,150
$120,000 34,034 45,379 56,724 68,068 79,413
Mr. Crouch and Mr. Arrison have 19 years and 8 years of credited service,
respectively, at June 30, 1997.
We anticipate we will terminate the pension plan soon after the
consummation of the conversion and adoption of the ESOP.
Employee Stock Ownership Plan. The Bank has established an employee stock
ownership plan (the "ESOP") to allow participating employees to share in its
growth and profits, effective upon the successful completion of the public
offering of Bank stock following the Conversion. Participating employees are all
employees who have completed one year of service with the Bank and have attained
the age of 21. An application for a letter of determination as to the
tax-qualified status of the ESOP will be submitted to the Internal Revenue
Service ("IRS"). Although no assurance can be given, it is expected that the
ESOP will receive a favorable letter of determination from the IRS.
The ESOP is to be funded by tax-deductible contributions made by the Bank
in cash or common stock. All contributions to the ESOP will be held in the trust
which is part of the ESOP and will be invested primarily in Bank stock. Shares
sold above the maximum of the EVR (i.e., more than 1,006,000 shares) may be sold
to the ESOP before satisfying remaining unfilled orders of Eligible Account
Holders to fill the ESOP's subscription, or the ESOP may purchase some or all of
the shares covered by its subscription after the Conversion in the open market.
The ESOP may borrow funds to acquire common stock of the Bank to be issued in
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the Conversion either at the time of the Conversion or after the Conversion
through open market purchases. The ESOP intends to borrow funds from the Company
(the "ESOP Loan") to purchase up to 8% of the common stock to be issued in the
offering (i.e., $700,000, based on the midpoint of the EVR). The ESOP Loan is
expected to be for a term of 10 years at an annual interest rate equal to the
prime rate as published in The Wall Street Journal with principal repayable in
equal installments. The ESOP Loan will be secured by a pledge of the shares
purchased by the ESOP. Shares purchased with the ESOP Loan will initially be
held in a suspense account within the ESOP. These financed shares will be
released from suspense and allocated to participants' accounts within the ESOP
as of the last day of each plan (calendar) year in proportion to the principal
paid down on the ESOP Loan during the year. The shares released from the ESOP
suspense account will be allocated among participants' accounts on the basis of
each participant's W-2 compensation from the Bank (up to a maximum of $150,000)
for the prior calendar year, plus any elective deferrals made to the Bank's
401(k) plan. The Bank anticipates contributing approximately $137,000 to the
ESOP for its first full year to meet the obligations for principal and interest
under the proposed ESOP Loan. The Bank may prepay a portion of the ESOP Loan, or
contribute additional cash or shares of Bank stock directly to the ESOP in any
year, subject to IRS rules which limit the maximum deductible employer
contributions to employee stock ownership plans. Any such contributions in
excess of the cash required to repay the ESOP Loan will be allocated among
participants on the basis of their compensation in the manner described above.
To receive an allocation, a participant must be credited with at least
1,000 hours of service during the year and be employed by the Bank on the last
day of the year, or have terminated employment during the year as a result of
death, Disability (as defined in the ESOP) or retirement at or after attaining
age 65. A participant becomes vested in his account balance as follows: after 1
year of service - 20%, 2 years - 40%, 3 years - 60%, 4 years - 80%, 5 years or
more - 100%. Full vesting is accelerated upon retirement at or after age 65,
death, Disability, or termination of the ESOP.
A participant is entitled to receive a distribution of his account balance
after the last day of the calendar quarter in which his employment terminates.
If the value of the account exceeds $3,500, a participant may defer distribution
until he attains age 65. ESOP distributions are made in a lump sum in the form
of shares of Bank stock, with the value of fractional shares distributed in
cash. A partially-vested participant who terminates service will forfeit the
nonvested portion of his ESOP account upon the earlier of (i) receiving a
distribution of his vested balance or (ii) after incurring five consecutive
One-Year Breaks in Service. A One-Year Break in Service is a calendar year
during which the participant is not credited with more than 500 hours of
service. Forfeitures are reallocated to remaining participants on the same basis
as Bank contributions to the ESOP (i.e., on the basis of compensation). A
terminated participant who is rehired before incurring five consecutive One-Year
Breaks in Service will have his forfeiture restored if he repays the full amount
of the prior ESOP distribution, without interest, within five years after being
rehired.
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The Board of Directors has appointed the Personnel Committee to administer
the ESOP and to serve as the initial ESOP Trustees. The Personnel Committee is
responsible for administering the ESOP and for instructing the ESOP Trustees
regarding the investment of any ESOP funds which cannot be invested in Bank
stock. The ESOP Trustees must vote ESOP shares which are allocated to a
participant's account in accordance with the instructions of the participant.
Unallocated shares held in the suspense account for which no timely direction is
received will be voted by the ESOP Trustees in the same proportion as allocated
shares for which voting instructions are received, subject to the Trustees'
fiduciary obligations. Allocated shares for which no instruction is received
shall not be voted. The Board of Directors may remove or replace Trustees and
members of the ESOP Committee, and may amend or terminate the ESOP at any time,
except that no amendment may be made which would reduce the interest of an
employee in the ESOP Trust, or divert assets of the ESOP to purposes which would
not benefit employees or their beneficiaries.
Proposed Future Stock Benefit Plans
Stock Option Plan. The Board of Directors of the Company intends to adopt a
stock option plan (the Option Plan) following the Conversion, subject to
approval by you and the Company stockholders, at a stockholders meeting to be
held no sooner than six months after the Conversion. The Option Plan will be in
compliance with the OTS regulations in effect. See "-- Restrictions on Benefit
Plans." If the Option Plan is implemented within one year after the Conversion,
in accordance with OTS regulations, a number of shares equal to 10% of the
aggregate shares of Common Stock to be issued in the offering (i.e., 87,500
shares based upon the sale of 875,000 shares at the midpoint of the EVR) would
be reserved for issuance by the Company upon exercise of stock options to be
granted to our officers, directors and employees from time to time under the
Option Plan. The purpose of the Option Plan would be to provide additional
performance and retention incentives to certain officers, directors and
employees by facilitating their purchase of a stock interest in the Company.
Under the OTS regulations, the Option Plan, would provide for a term of 10
years, after which no awards could be made, unless earlier terminated by the
Board of Directors pursuant to the Option Plan and the options would vest over a
five year period (i.e., 20% per year), beginning one year after the date of
grant of the option. Options would be granted based upon several factors,
including seniority, job duties and responsibilities, job performance, our
financial performance and a comparison of awards given by other savings
institutions converting from mutual to stock form. Options would be either
"incentive stock options" or non-qualified stock options.
The Company would receive no monetary consideration for the granting of
stock options under the Option Plan. It would receive the option price for each
share issued to optionees upon the exercise of such options. Shares issued as a
result of the exercise of options will be either authorized but unissued shares
or shares purchased in the open market by the Company. Shares purchased in the
open market would reduce the percentage of ownership of the conversion shares.
However, no purchases in the open market will be made that would violate
applicable regulations restricting purchases by the Company. The exercise
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of options and payment for the shares received would contribute to the equity of
the Company. The Option Plan we issued to you in the Conversion would be
administered by the Personnel Committee.
If the Option Plan is implemented more than one year after the Conversion,
the Option Plan will comply with OTS regulations and policies that are
applicable at such time.
Restricted Stock Plan. The Board of Directors of the Company intends to
adopt the RSP following the Conversion, the objective of which is to enable us
to retain personnel and directors of experience and ability in key positions of
responsibility. The Company expects to hold a stockholders' meeting no sooner
than six months after the Conversion in order for stockholders to vote to
approve the RSP. If the RSP is implemented within one year after the Conversion,
in accordance with applicable OTS regulations, the shares granted under the RSP
will be in the form of restricted stock vesting over a five year period (i.e.,
20% per year) beginning one year after the date of grant of the award.
Compensation expense in the amount of the fair market value of the Common Stock
granted will be recognized pro rata over the years during which the shares are
payable. Until they have vested, such shares may not be sold, pledged or
otherwise disposed of and are required to be held in escrow. Any shares not so
allocated would be voted by the RSP Trustees. The RSP will be implemented in
accordance with applicable OTS regulations. See "-- Restrictions on Stock
Benefit Plans." Awards would be granted based upon a number of factors,
including seniority, job duties and responsibilities, job performance, our
performance and a comparison of awards given by other institutions converting
from mutual to stock form. The RSP would be managed by a committee of
non-employee directors (the "RSP Trustees"). The RSP Trustees would have the
responsibility to invest all funds contributed by us to the trust created for
the RSP (the "RSP Trust").
We expect to contribute sufficient funds to the RSP so that the RSP Trust
can purchase, in the aggregate, up to 4% of the amount of Common Stock that is
sold in the Conversion. The shares purchased by the RSP would be authorized but
unissued shares or would be purchased in the open market. In the event the
market price of the Common Stock is greater than $10.00 per share, our
contribution of funds will be increased. Likewise, in the event the market price
is lower than $10.00 per share, our contribution will be decreased. In
recognition of their prior and expected services to us and the Company, as the
case may be, the officers, other employees and directors responsible for
implementation of the policies adopted by the Board of Directors and our
profitable operation will, without cost to them, be awarded stock under the RSP.
Based upon the sale of 875,000 shares of Common Stock in the offering at the
midpoint of the EVR, the RSP Trust is expected to purchase up to 35,000 shares
of Common Stock.
If the RSP is implemented more than one year after the Conversion, the RSP
will comply with such OTS regulations and policies that are applicable at such
time.
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Restrictions on Stock Benefit Plans. OTS regulations provide that in the
event we implement stock option or management and/or employee stock benefit
plans within one year from the date of Conversion, such plans must comply with
the following restrictions, unless an exception is granted by the OTS: (1) the
plans must be fully disclosed in the prospectus, (2) for stock option plans, the
total number of shares for which options may be granted may not exceed 10% of
the shares issued in the Conversion, (3) for restricted stock plans, the shares
may not exceed 3% of the shares issued in the Conversion (4% for institutions
with 10% or greater tangible capital), (4) no individual employee may receive
more than 25% of the available awards under the Option Plan or the RSP, (5)
directors who are not employees may not receive more than 5% individually or 30%
in the aggregate of the awards under any plan, (6) all plans must be approved by
a majority of the total votes eligible to be cast at any duly called meeting of
the Company stockholders held no earlier than six months following the
Conversion, (7) for stock option plans, the exercise price must be at least
equal to the market price of the stock at the time of grant, (8) for restricted
stock plans, no stock issued in a conversion may be used to fund the plan, (9)
neither stock option awards nor restricted stock awards may vest earlier than
20% as of one year after the date of stockholder approval and 20% per year
thereafter, and vesting may be accelerated only in the case of disability or
death (or if not inconsistent with applicable OTS regulations in effect at such
time, in the event of a change in control), (10) the proxy material must clearly
state that the OTS in no way endorses or approves of the plans, and (11) prior
to implementing the plans, all plans must be submitted to the Regional Director
of the OTS within five days after stockholder approval with a certification that
the plans approved by the stockholders are the same plans that were filed with
and disclosed in the proxy materials relating to the meeting at which
stockholder approval was received.
Certain Related Transactions
We offer loans to our directors and officers. These loans are currently
made in the ordinary course of business with the same collateral, interest rates
and underwriting criteria as those of comparable transactions prevailing at the
time and do not involve more than the normal risk of collectibility or present
other unfavorable features. Under current law, our loans to directors and
executive officers are required to be made on substantially the same terms,
including interest rates, as those prevailing for comparable transactions and
must not involve more than the normal risk of repayment or present other
unfavorable features. Additionally, all loans to such persons must be approved
in advanced by a disinterested majority of the Board of Directors. At June 30,
1997, our loans to directors and executive officers totalled approximately
$400,000, or 6.6% of our retained earnings at that date.
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PROPOSED MANAGEMENT PURCHASES
The following table sets forth information regarding the approximate number
of shares of Common Stock, each director, executive officer and their associates
intends to purchase in the Conversion. All shares will be purchased for
investment purposes and not for purposes of resale. For purposes of the
following table, it has been estimated that 875,000 shares (the mid-point of
the estimated value range (the "EVR"), of Common Stock will be sold at $10 per
share and that sufficient shares will be available to satisfy supscriptions in
all categories.
<TABLE>
<CAPTION>
Aggregate Price Percentage of
Total Shares of Shares Total Shares
Name Position Purchased(1) Purchased Offered
---- -------- ------------ --------- -------
<S> <C> <C> <C> <C>
Dr. William R. Baldt Director 1,000 $ 10,000 .1%
J. Bayard Cloud Chairman 1,000 $ 10,000 .1%
Thomas B. Cloud Director 5,000 $ 50,000 .6%
Ronald P. Crouch President, Chief
Executive Officer
and Director 2,000 $ 20,000 .2%
Larry D. Gehrke Director 5,000 $ 50,000 .6%
Alan B. Levin Director 1,500 $ 15,000 .2%
Ernest J. Peoples Vice Chairman 1,000 $ 10,000 .1%
Dr. Robert L. Schweitzer Director 300 $ 3,000 *
Jerome P. Arrison Executive Vice
President, Chief
Operating Officer
and Treasurer 100 $ 1,000 *
Genevieve B. Marino Vice President 1,500 $ 15,000 .2%
Lori N. Richards Vice President 2,500 $ 25,000 .3%
Total NA 21,900 $219,000 2.5%
</TABLE>
- ------------
* Represents less than .1% of outstanding shares.
(1) Does not include shares purchased by the ESOP or shares awarded to
participants in the RSP, if implemented, or under the Option Plan, if
implemented.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
A number of provisions of the Company's Certificate of Incorporation and
bylaws deal with matters of corporate governance and certain rights of
shareholders. These provisions allow the Board of Directors flexibility to
analyze and consider corporate transactions in order to maximize benefits to
shareholders. However, they may also serve to prevent individual shareholders
from participating in a transaction if the Board does not deem the transaction
to be beneficial to shareholders, even if individual shareholders desire to do
so. The following discussion is a general summary of certain provisions of the
Company's Certificate of Incorporation and Bylaws and certain other statutory
and regulatory provisions relating to stock ownership and transfers, the Board
of Directors and business combinations, which might be deemed to have a
potential "anti-takeover" effect. Such provisions may have the effect of
rendering the removal of the current Board of Directors of the Company more
difficult. The following description of certain of the provisions of the
Certificate of Incorporation and bylaws of the Company is necessarily general
and reference should be made in each case to such Certificate of Incorporation
and bylaws, which are incorporated herein by reference. See "ADDITIONAL
INFORMATION" for instructions on how to obtain a copy of these Prospectus.
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. In addition, no person may directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of equity securities of the Company. Beneficial ownership is
determined pursuant to Rule 13d-3 of the General Rules and Regulations
promulgated pursuant to the Exchange Act, and includes shares beneficially owned
by such person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire upon the exercise of conversion rights or options and shares as to which
such person and his affiliates have or share investment or voting power, but
shall not include shares beneficially owned by the benefit plans of the Board or
directors, officers and employees of the Bank or the Company as a group or
shares that are subject to a revocable proxy and that are not otherwise
beneficially owned, or deemed by the Company to be beneficially owned, by such
person and his affiliates. The Certificate of Incorporation of the Company
further provides that this provision limiting voting rights may only be amended
upon the vote of 80% of the outstanding shares of voting stock (after giving
effect to the limitation on voting rights).
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation
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and bylaws provide that the size of the Board shall be determined by a majority
of the directors. The Certificate of Incorporation and the bylaws provide that
any vacancy occurring in the Board, including a vacancy 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. Further, if the director reaches normal
retirement age, and is no longer regularly employed in his trade profession or
business, he shall be deemed to have retired from the Board as well within 120
days of such retirement. Directors who have not reached normal retirement age
and who intend to resume their trade profession or business are not deemed to
have retired from the Board. Directors who were directors of the Company at the
time of its incorporation are not covered by this provision.
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 3,000,000 shares of Common Stock and 500,000 shares of preferred stock. The
shares of Common Stock and preferred stock were authorized in an amount greater
than that to be issued pursuant to the Conversion to provide the Company's Board
of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks
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control, and thereby assist management to retain its position. The Company's
Board of Directors currently has no plans for the issuance of additional shares
upon the exercise of stock options.
Shareholder Vote Required to Approve Business Combinations with Principal
Shareholders. 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 certain exceptions, be approved by the
vote of the holders of only a majority of the outstanding shares of Common Stock
of the Company and any other affected class of stock. Under the Certificate of
Incorporation, at least 80% approval of shareholders is required in connection
with any transaction involving an Interested Shareholder (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 Shareholder and were directors prior to the
time when the Interested Shareholder became an Interested Shareholder or (ii) if
the proposed transaction meets certain conditions set forth therein which are
designed to afford the shareholders a fair price in consideration for their
shares in which case, if a shareholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The term
"Interested Shareholder" 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, 15% 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 Shareholder or Affiliate (as defined in
the Certificate of Incorporation) of an Interested Shareholder; (ii) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Shareholder or Affiliate of 10% 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 Shareholder 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 10% 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 Shareholder 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.
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
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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 the vote of
a majority of the shares present in person or by proxy and entitled to a vote at
any annual or special meeting except for those instances where the Certificate
of Incorporation requires a vote of 80% of the total votes eligible to be voted
at a duly constituted meeting of shareholders for amendment.
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 give at least
120 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 shareholder'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 shareholder.
Benefit Plans. In addition to the provisions of the Company's certificate
and bylaws described above, certain benefit plans of ours adopted in connection
with the Conversion contain provisions which also may discourage hostile
takeover attempts which the boards of directors might conclude are not in the
best interests for us or our stockholders. For a description of the benefit
plans and the provisions of such plans relating to changes in control, see
"MANAGEMENT OF NINTH WARD SAVINGS BANK -- Proposed Future Stock Benefit Plans."
Regulatory Restrictions. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, OTS regulations prohibit any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is, or
after consummation of such acquisition would be, the beneficial owner of more
than 10% of such stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to a vote of stockholders.
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Federal law provides that no company, "directly or indirectly or acting in
concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of a savings
association or the power to control in any manner the election of a majority of
the directors of such institution.
Federal law also provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire control of
a savings association unless at least 60 days prior written notice has been
given to the OTS and the OTS has not objected to the proposed acquisition.
Control is defined for this purpose as the power, directly or indirectly, to
direct the management or policies of a savings association or to vote more than
25% of any class of voting securities of a savings association. Under federal
law (as well as the regulations referred to below) the term "savings
association" includes state-chartered and federally chartered SAIF-insured
institutions, federally chartered savings and loans and savings banks whose
accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an insured
institution, a person, other than a company, must give 60 days notice to the OTS
and have received no OTS objection to such acquisition of control, and a company
must apply for and receive OTS approval of the acquisition. Control, involves a
25% voting stock test, control in any manner of the election of a majority of
the institution's directors, or a determination by the OTS that the acquiror has
the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of an institution's voting stock, if the acquiror also is subject
to any one of either "control factors," constitutes a rebuttable determination
of control under the regulations. The determination of control may be rebutted
by submission to the OTS, prior to the acquisition of stock or the occurrence of
any other circumstances giving rise to such determination, of a statement
setting forth facts and circumstances which would support a finding that no
control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
Delaware Corporate Law
In addition, the state of Delaware has a statute designed to provide
Delaware corporations such as the Company with additional protection against
hostile takeovers. The takeover statute, which is codified in Section 203 of the
Delaware General Corporation law
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("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Shareholder") 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 Shareholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Shareholder, the Board of Directors approved either the business
combination or the transaction which resulted in the shareholder becoming an
Interested Shareholder; (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 Shareholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Shareholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Shareholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The Company is authorized to issue 3,000,000 shares of the Common Stock,
$0.01 par value per share, and 500,000 shares of serial preferred stock, $0.01
par value per share. The Company currently expects to issue up to 1,157,000
shares of Common Stock in the Conversion.
Dividends. The Company can pay dividends if and when declared by its Board
of Directors. See "DIVIDEND POLICY" and "REGULATION." The holders of Common
Stock of the Company will be entitled to receive and share equally in such
dividends as may be declared by the Board of Directors of the Company out of
funds legally available therefor. If the Company issues preferred stock, the
holders thereof may have a priority over the holders of the Common Stock with
respect to dividends.
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The Company does not intend to issue any shares of serial preferred stock
in the Conversion, nor are there any present plans to issue such preferred stock
following the Conversion. The aggregate par value of the issued shares will
constitute the capital account of the Company. The balance of the purchase price
will be recorded for accounting purposes as additional paid-in capital. See
"CAPITALIZATION." The capital stock of the Company will represent
nonwithdrawable capital and will not be insured by us, the FDIC, or any other
government agency.
Common Stock
Voting Rights. Each share of the Common Stock will have the same relative
rights and will be identical in all respects with every other share of the
Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of the
Common Stock will be entitled to only one vote for each share held of record on
all matters submitted to a vote of holders of the Common Stock and will not be
permitted to cumulate their votes in the election of the Company's directors.
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 all such stock
will be duly authorized, fully paid and nonassessable.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company (including all deposits with us and accrued interest thereon); (ii) any
accrued dividend claims; (iii) liquidation preferences of any serial preferred
stock which may be issued in the future; and (iv) any interests in the
liquidation account established upon the Conversion for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders who continue to have
their deposits with us.
Restrictions on Acquisition of the Common Stock. See "RESTRICTIONS ON
ACQUISITION OF THE COMPANY" for a discussion of the limitations on acquisition
of shares of the Common Stock.
Other Characteristics. Holders of the Common Stock will not have preemptive
rights with respect to any additional shares of the Common Stock which may be
issued. Therefore, the Board of Directors may sell shares of capital stock of
the Company without first offering such shares to existing stockholders of the
Company. The Common Stock is not subject to call for redemption.
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Issuance of Additional Shares. Except in the Subscription and Community
Offerings and possibly pursuant to the RSP or Option Plan, the Company has no
present plans, proposals, arrangements or understandings to issue additional
authorized shares of the Common Stock. In the future, the authorized but
unissued and unreserved shares of the Common Stock will be available for general
corporate purposes, including, but not limited to, possible issuance: (i) as
stock dividends; (ii) in connection with mergers or acquisitions; (iii) under a
cash dividend reinvestment or stock purchase plan; (iv) in a public or private
offering; or (v) under employee benefit plans. See "RISK FACTORS -- Possible
Dilutive Effect of RSP and Stock Options and Effect of Purchases by the RSP and
ESOP" and "PRO FORMA DATA." Normally no stockholder approval would be required
for the issuance of these shares, except as described herein or as otherwise
required to approve a transaction in which additional authorized shares of the
Common Stock are to be issued.
For additional information, see "DIVIDENDS," "REGULATION" and "TAXATION"
with respect to restrictions on the payment of cash dividends; and "RESTRICTIONS
ON ACQUISITION OF THE COMPANY" for information regarding restrictions on
acquiring Common Stock of the Company.
Serial Preferred Stock
None of the 500,000 authorized shares of serial preferred stock of the
Company will be issued in the Conversion. After the Conversion is completed, the
Board of Directors of the Company will be authorized to issue serial preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof, subject to regulatory approval but without stockholder
approval. If and when issued, the serial preferred stock is likely to rank prior
to the Common Stock as to dividend rights, liquidation preferences, or both, and
may have full or limited voting rights. The Board of Directors, without
stockholder approval, can issue serial preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the Common Stock. The Board of Directors has no present intention to issue
any of the serial preferred stock.
LEGAL AND TAX MATTERS
The legality of the Common Stock has been passed upon for us by Peabody &
Brown, Washington, D.C. Certain legal matters for Trident will be passed upon by
Elias, Matz, Tiernan & Herrick, L.L.P., Washington, D.C. The federal income tax
consequences of the Conversion have been passed upon for us by Peabody & Brown,
Washington, D.C. The Delaware income tax consequences of the Conversion have
been passed upon for us by Young, Conaway, Stargatt & Taylor.
120
<PAGE>
EXPERTS
The financial statements of Ninth Ward Savings Bank as of and for the years
ended December 31, 1996 and 1995 included in this Prospectus have been audited
by Deloitte & Touche, LLP, independent auditors, as set forth in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
FinPro has consented to the publication herein of a summary of its letters
to Ninth Ward Savings Bank setting forth its opinion as to the estimated pro
forma market value of us in the converted form and its opinion setting forth the
value of subscription rights and to the use of its name and statements with
respect to it appearing in this Prospectus.
REGISTRATION REQUIREMENTS
The Common Stock of the Company will be registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
prior to completion of the Conversion. The Company will be subject to the
information, proxy solicitation, insider trading restrictions, tender offer
rules, periodic reporting and other requirements of the SEC under the Exchange
Act. The Company may not deregister the Common Stock under the Exchange Act for
a period of at least three years following the Conversion.
ADDITIONAL INFORMATION
The Company and Ninth Ward Savings Bank are not currently subject to the
informational requirements of the Exchange Act.
The Company has filed with the SEC a registration statement on Form SB-2
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered in this Prospectus. As permitted by the rules and regulations of the
SEC, this Prospectus does not contain all the information set forth in the
registration statement. Such information can be examined without charge at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the SEC
at prescribed rates. The SEC also maintains an internet address ("Web site")
that contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
SEC. The address for this Web site is "http://www.sec.gov."
121
<PAGE>
Ninth Ward Savings Bank has filed an Application for Conversion with the
OTS with respect to the Conversion. Pursuant to the rules and regulations of the
OTS, this Prospectus omits certain information contained in that Application.
The Application may be examined at the principal office of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the Northeast Regional Office of the
OTS, 10 Exchange Place, 18th Floor, Jersey City, NJ 07302 without charge.
A copy of the Certificate and the Bylaws of the Company are available
without charge from Ninth Ward Savings Bank by contacting the Corporate
Secretary at (302) 421-9090.
122
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF
NINTH WARD SAVINGS BANK, FSB
Independent Auditors Report .............................................. F-1
Statements of Financial Condition as of December 31,
1996 and 1995 and (unaudited) June 30, 1997 .............................. F-2
Statements of Operations:
- -------------------------
For the years ended December 31, 1996 and 1995 and
(unaudited) for the six month periods ended June 30,
1997 and 1996 .......................................................... F-3
Statements of Changes in Retained Earnings:
- -------------------------------------------
For the years ended December 31, 1996 and 1995 and
(unaudited) for the six month periods ended June 30,
1997 and 1996 .......................................................... F-4
Statements of Cash Flows:
- -------------------------
For the years ended December 31, 1996 and 1995 and
(unaudited) for the six month periods ended June 30,
1997 and 1996 .......................................................... F-5
Notes to Financial Statements: ........................................... F-6
Schedules
All schedules are omitted because the required information is either not
applicable or is presented in the financial statements or related notes.
The financial statements of Delaware First Financial Corporation are not
provided since the entity is not an operating company and has not been engaged
in any significant business to date.
123
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Ninth Ward Savings Bank, FSB:
We have audited the accompanying statements of financial condition of Ninth Ward
Savings Bank, FSB (the "Bank") as of December 31, 1996 and 1995, and the related
statements of operations, changes in retained earnings, and cash flows for the
years then ended. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Ninth Ward Savings Bank, FSB at December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 7, 1997 (May 21, 1997 as to Note 10)
F-1
<PAGE>
NINTH WARD SAVINGS BANK, FSB
STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
June 30, ------------------
ASSETS 1997 1996 1995
- ------ ---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cash and cash equivalents ............ $ 2,838,215 $ 2,643,452 $ 1,060,856
Investment securities held to maturity
(fair value - $11,449,156) .......... 11,488,192
Investment securities available for
sale (amortized cost - 1997,
$5,998,746; 1996, $6,494,860) ....... 5,992,005 6,475,800
Mortgage-backed securities held to
maturity (fair value - $705,680) .... 698,669
Mortgage-backed securities available
for sale (amortized cost - 1997,
$188,666; 1996, $200,666) ........... 190,414 203,147
Loans receivable-net ................. 92,919,385 98,042,118 78,835,306
Loans held for sale .................. 5,547,674 1,020,000
Federal Home Loan Bank stock -
at cost ............................. 1,332,500 1,500,000 727,500
Accrued interest receivable:
Loans ............................... 999,064 975,244 664,189
Investments ......................... 94,666 93,526 180,304
Mortgage-backed securities .......... 1,111 1,171 3,886
Office property and equipment, net ... 1,983,423 2,020,957 2,103,463
Prepaid expenses and other assets .... 86,527 66,012 75,166
Prepaid income taxes ................. 63,564 166,850
Mortgage servicing rights ............ 322,533 317,435 297,969
Deferred taxes taxes ................. 173,618 177,506 221,704
------------ ------------ ------------
TOTAL ASSETS ......................... $112,544,699 $112,683,218 $ 97,377,204
============ ============ ============
LIABILITIES AND RETAINED EARNINGS
Liabilities:
Deposits............................. $ 78,351,363 $ 78,408,793 $ 81,522,249
Advances from Federal Home Loan Bank 25,200,000 25,900,000 7,950,000
Advances by borrowers for taxes
and insurance....................... 1,879,033 812,569 652,533
Accrued interest payable............. 276,461 265,764 220,553
Accrued income taxes................. 135,890
Accounts payable and accrued expenses 750,900 1,338,503 833,073
------------ ------------ -------------
Total liabilities.................. 106,457,757 106,725,629 91,314,298
Commitments and contingencies
Retained earnings
(partially restricted)............... 6,090,170 5,968,365 6,062,906
Unrealized losses on available for
sale securities, net of tax.......... (3,228) (10,776)
----------- ----------- ------------
Total retained earnings............. 6,086,942 5,957,589 6,062,906
----------- ----------- ------------
TOTAL LIABILITIES AND
RETAINED EARNINGS.................... $ 112,544,699 $ 112,683,218 $97,377,204
============= ============= ===========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
NINTH WARD SAVINGS BANK, FSB
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-Month Period Ended Year Ended
June 30, December 31,
------------------------ --------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans ................ $ 3,797,982 $ 3346,748 $ 7,092,065 $ 6,408,566
Interest on mortgage-backed
securities ...................... 6,821 22,141 38,982 40,336
Interest and dividends on
investments ..................... 267,555 393,758 791,062 843,845
----------- ----------- ----------- -----------
Total interest income ......... 4,072,358 3,762,647 7,922,109 7,292,747
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits ......................... 2,196,245 2276,637 4,497,657 4,351,008
Federal Home Loan Bank
advances ........................ 780,646 364,473 1,252,482 704,133
----------- ----------- ----------- -----------
Total interest expense ......... 2,976,891 2,641,110 5,750,139 5,055,141
----------- ----------- ----------- -----------
NET INTEREST INCOME ............... 1,095,467 1,121,537 2,171,970 2,237,606
PROVISION FOR LOAN LOSSES ......... 10,000 26,000 47,000 5,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ........ 1,085,467 1,095,537 2,124,970 2,232,606
----------- ----------- ----------- -----------
OTHER INCOME:
Service fees ..................... 47,563 98,840 189,604 51,700
Gain on sale of loans ............ 16,632 48,766 68,629 438,970
Realized market adjustment
on loans ........................ 10,691 11,060
Other ............................ 10,027 9,664 46,543 18,469
----------- ----------- ----------- -----------
Total other income ............. 84,913 157,270 304,776 520,199
----------- ----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits ... 477,953 511,016 916,635 941,086
Advertising ...................... 101,210 142,024 202,825 169,170
Federal insurance premiums ....... 15,265 94,053 187,057 171,097
SAIF Special Assessment .......... 491,992
Occupancy expense ................ 101,425 135,238 214,968 236,687
Data processing expense .......... 69,761 65,703 121,121 103,178
Directors fees ................... 53,738 57,046 105,817 99,036
Other general and administrative
expenses ........................ 141,223 176,881 352,872 347,957
----------- ----------- ----------- -----------
Total other expenses .......... 960,575 1,181,961 2,593,287 2,068,211
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES ....... 209,805 70,846 (163,541) 684,594
----------- ----------- ----------- -----------
PROVISION BENEFIT FOR INCOME TAXES:
Current .......................... 88,000 30,000 (119,000) 214,670
----------- ----------- ----------- -----------
Deferred ......................... 50,000 50,000
----------- ----------- ----------- -----------
Total provision (benefit) for
income taxes ................. 88,000 30,000 (69,000) 264,670
----------- ----------- ----------- -----------
NET INCOME (LOSS) ................. $ 121,805 $ 40,846 $(94,541) $419,924
=========== =========== =========== ===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
NINTH WARD SAVINGS BANK, FSB
STATEMENTS OF CHANGES IN RETAINED EARNINGS
- --------------------------------------------------------------------------------
Unrealized
Losses on
Available Total
Retained for Sale Retained
Earnings Securities Earnings
-------- ---------- --------
BALANCE, JANUARY 1, 1995 .............. $ 5,642,982 $ 5,642,982
Net income for the year ended
December 31, 1995 ................... 419,924 419,924
----------- -----------
BALANCE, DECEMBER 31, 1995 ............ 6,062,906 6,062,906
Net loss for the year ended
December 31, 1996 ................... (94,541) (94,541)
Unrealized losses on available
for sale securities, net of tax .... $(10,776) (10,776)
----------- --------- ----------
BALANCE, DECEMBER 31, 1996 ............ 5,968,365 (10,776) 5,957,589
Net income for the six-month
period ended June 30, 1997
(unaudited) .......................... 121,805 121,805
Change in unrealized losses
an available for sale securities,
net of tax (unaudited) .............. 7,548 7,548
----------- --------- ---------
BALANCE, JUNE 30, 1997 1997 (UNAUDITED) $ 6,090,170 $(3,228) $6,086,942
=========== ========= =========
See notes to financial statements.
F-4
<PAGE>
NINTH WARD SAVINGS BANK, FSB
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-Month Period Ended Year Ended
June 30, December 31,
-------------------------- -------------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............... $ 121,805 $ 40,846 $ (94,541) 5,419,924
Adjustments to reconcile
net income (loss) to net
cash (used in) provided by
operating activities:
Depreciation ................... 58,079 93,959 121,751 164,780
Provision for loan losses .... 10,000 26,000 47,000 5,000
Gain on sale of investment
and mortgage-backed
securities .................. (6,925)
Gain on sale of loans ........ (12,144) (16,727) (68,629) (438,970)
Realized market adjustment
on loans .................... (19,439) (11,060)
Amortization of:
Deferred loan fees .......... (40,988) (7l,159) (130,226) (126,475)
Discount on investment and
mortgage-backed securities .. (4,048) (3,803) (8,827) (6,782)
Changes in assets and
liabilities which provided
(used) cash:
Accrued interest receivable .. (24,900) (250,824) (221,562) (170,295)
Mortgage servicing rights .... (5,098) 58,868 (19,466) (297,969)
Prepaid expenses and other
assets ...................... (20,515) (2,230) 9,153 (7,296)
Accrued interest payable ..... 10,697 (46,108) 45,211 (24,932)
Accounts payable and
accrued expenses ............ (587,603) 177,515 505,430 28,720
Income taxes ................. 103,286 (340,140) (252,740) 452,205
Deferral of loan fees ........ 57,420 179,484 379,572 564,350
------------ ------------ ------------ ------------
Net cash (used in) provided
by operating activities ... (353,448) (154,319) 305,201 551,200
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from sale of investments
held to maturity ............... 2,996,406
Proceeds from maturity of
investments .................... 500,000 3,999,844 6,998,205 7,500,000
Principal collected on long-term
loans and mortgage-backed
securities ..................... 6,463,211 8,010,488 15,576,441 9,865,735
Long-term loans originated ...... (7,999,170) (20,587,053) (38,236,036) (47,296,058)
Proceeds from sale of loans ..... 1,128,181 1,013,297 4,407,397 29,869,979
Proceeds from sale of
mortgage-backed securities
held to maturity ............... 346,427
Sale of Federal Home Loan
Bank stock .................... 277,300 28,200 263,200 25,700
Purchase of Federal Home
Loan Bank stock .............. (109,800) (435,700) (1,035,700) (104,400)
Purchase of investments ........ (3,997,375) (4,996,281) (6,997,017)
Proceeds from sale of real
estate owned .................. 63,000
Purchases of premises and
equipment ..................... (20,545) (13,304) (39,244) (62,167)
------------ ------------ ------------ ------------
Net cash provided
by (used in) investing
activities ................ 239,177 (11,981,603) (13,719,185) (7,135,228)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Net (decrease) increase in
deposits ....................... (57,430) (2,135,009) (3,113,456) 11,025,699
Increase in advances by
borrowers for taxes and
insurance ...................... 1,066,464 1,125,935 160,036 123,382
Proceeds from Federal Home
Loan Bank advances ............. 38,345,726 41,031,957 79,119,823 26,950,000
Repayments of Federal Home
Loan Bank advances ............ (39,045,726) (26,281,957) (61,169,823) (31,900,000)
------------ ------------ ------------ ------------
Net cash provided by
financing activities ........ 309,034 13,740,926 14,996,580 6,199,081
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS ....... 194,763 1,605,004 1,582,596 (384,947)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ............. 2,643,452 1,060,856 1,060,856 1,445,803
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ................... $ 2,838,215 $ 2,665,860 $ 2,643,452 $ 1,060,856
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period
for:
Interest ...................... $ 2,966,194 $ 2,687,219 $ 5,704,928 $ 5,080,072
============ ============ ============ ============
Income taxes .................. $ 9,978 $ 310,140 $ 310,140 $ 31,018
============ ============ ============ ============
</TABLE>
See notes to financial statements
F-5
<PAGE>
NINTH WARD SAVINGS BANK, FSB
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Ninth Ward Savings Bank, FSB (the "Bank") is a federally chartered savings
and loan association. The Bank is a member of the Federal Home Loan Bank
System and has its savings accounts insured to the applicable limits by the
Federal Deposit Insurance Corporation ("FDIC").
The Bank's primary market is concentrated in New Castle County, Delaware,
to which it offers mainly conventional residential real estate loans on new
and existing properties and mortgage refinancing. Since 1994, the Bank has
been active in offering equity lines of credit.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and Liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Unaudited Financial Statements - The financial statements as of
June 30, 1997 and for the six-month periods ended June 30, 1997 and 1996
are unaudited, but in management's opinion, reflect all normal and
reoccurring adjustments necessary for a fair presentation.
Interest on Loans - The Bank recognizes interest on loans when earned. The
Bank does not recognize interest on loans deemed to be uncollectible,
generally when a loan is three months or more delinquent. Such interest
ultimately collected is credited to income in the period of recovery.
Investment and Mortgage-Backed Securities - The Bank accounts for debt and
equity securities as follows:
Held to Maturity - Debt securities that management has the positive
intent and ability to hold until maturity are classified as held to
maturity and are carried at their remaining unpaid principal balance,
net of unamortized premiums or unaccreted discounts. Premiums are
amortized and discounts are accreted using the interest method over
the period remaining until maturity.
Available for Sale - Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity, and changes in the availability of and the yield of
alternative investments, are classified as available for sale. These
assets are carried at fair value. Fair value is determined using
published quotes as of the close of business. Unrealized gains and
losses are excluded from earnings and are reported net of tax as a
separate component of retained earnings until realized.
F-6
<PAGE>
Office Property and Equipment - Office property and equipment is recorded
at cost. Depreciation is computed using either the straight-line method or
an accelerated method over the expected useful lives of the assets, ranging
from three to fifty years. The costs of maintenance and repairs are
expensed as they are incurred, and renewals and betterments are
capitalized.
Loan Fees - The Bank defers all loan fees, net of certain costs, and
accretes them into income over the contractual life of the loan using the
interest method.
Allowance for Loan Losses - The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based
on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current
economic conditions.
The Bank has adopted Statement of Financial Accounting Standards ("SFAS")
Nos. 114 and 118, Accounting by Creditors for Impairment of a Loan and
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, respectively. SFAS No. 114 requires that certain impaired
loans be measured based either on the present value of expected future cash
flows discounted at the loan's effective interest rate, or the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent.
Federal Home Loan Bank Advances - Periodically, the Bank borrows from the
Federal Home Loan Bank of Pittsburgh. These borrowings are collateralized
by Federal Home Loan Bank stock and qualified investments.
Income Taxes - Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash and interest-bearing accounts.
Interest Rate Risk - The Bank is principally engaged in the business of
attracting deposits from the general public and using these deposits,
together with borrowings and other funds, to make loans secured by real
estate and, to a lesser extent, consumer loans.
At December 31, 1996, the Bank had interest-earning assess of approximately
$108,885,000, haying a weighted average effective yield of 7.47% which have
a weighted average term to maturity greater than the interest-bearing
liabilities of approximately $104,309,000 having a weighted average
effective interest rate of 5.69%. At June 30, 1997, the Bank had interest
earring assets of approximately $108,820,000 having a weighted average
effective yield of 7.41% which have a weighted average term to maturity
greater than the interest-bearing liabilities of approximately $103,551,000
having a weighted average effective interest rate of 5.81%. The shorter
duration of the interest-sensitive liabilities indicates that the Bank is
exposed to interest rate risk because, in a rising rate environment,
liabilities will reprice faster than assets, thereby reducing the market
value of long-term assets and net interest income For this reason,
management regularly monitors the maturity structure of the Bank's assets
and liabilities in order to measure this risk and enact measures to manage
volatility of future interest rate movements.
F-7
<PAGE>
Mortgage Loans Held for Sale - The Bank originates mortgage loans for sale
in the secondary market to provide additional funds for lending. These
loans are carried at the lower of cost or market value, determined on a net
aggregate basis.
Real Estate Owned - Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations of foreclosed real estate and changes
in the valuation allowance are included in loss on foreclosed real estate.
Mortgage Servicing Rights - The Bank adopted SFAS No. 122, Accounting for
Mortgage Servicing Rights during 1995. The statement requires the Bank,
which services mortgage loans for others in return for servicing fees, to
recognize these servicing rights as assets, regardless if such assets were
acquired or originated. Additionally, the Bank is required to assess the
fair value of these assets at each reporting date to determine any
potential impairment.
Accounting Principles Issued and Not Adopted - In June 1996, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. The statement, which is effective for transactions occurring
after December 31, 1996, requires an entity to recognize, prospectively,
the financial and servicing assets it controls and the liabilities it has
incurred, derecognize financial assets when control has been surrendered,
and derecognize liabilities when extinguished. It requires that servicing
assets and other retained interests in transferred assets be measured by
allocating the previous carrying amounts between the asset sold, if any,
and retained interest, if any, based on their relative fair values at the
date of transfer. It also provides implementation guidance for servicing of
financial assets, securitizations, loan syndications and participations and
transfers of receivables with recourse. The statement supersedes SFAS No.
122, Accounting for Mortgage Servicing Rights. In December 1996, the FASB
issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125. SFAS No. 127 defers for one year the effective
date of Statement No. 125 as it relates to transactions involving secured
borrowings and collateral, and transfers and servicing of financial assets.
This statement also provides additional guidance on these types of
transactions. Management of the Bank does not believe the statement will
have a material impact on the Bank's results of operations or financial
position when adopted.
Reclassifications - Certain items in the 1995 and 1996 financial statements
have been reclassified to conform with the presentation in the 1997
financial statements.
F-8
<PAGE>
3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
June 30, 1997
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ---------- ---------- -----------
Available for sale:
Debt securities:
Obligations of U. S.
Government agencies-
Due in one year or less..... $5,998,746 S4,193 $(10,934) $5,992,005
---------- ------ -------- ----------
Total.......................... $5,998,746 $4,193 $(10,934) $5,992,005
========== ====== ======== ==========
December 31, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ---------- ---------- -----------
Available for sale:
Debt securities:
Obligations of U.S.
Government agencies:
Due in one year or less..... $2,499,285 $4,520 $(10,870) $2,492,935
Due after one year through
five years................. 3,995,575 2,899 (15,609) 3,982,865
---------- ------ -------- ----------
Total.......................... $6,494,860 $7,419 $(26,479) $6,475,800
========== ====== ======== ==========
F-9
<PAGE>
December 31,1995
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ---------- ---------- -----------
Held to maturity:
Debt securities:
Obligations of U.S.
Government agencies:
Due in one year or less..... $ 5,499,715 $10,336 $(13,840) $ 5,496,211
Due after one year through
five years................. 5,988,477 16,459 (51,991) 5,952,945
----------- ------- -------- -----------
Total.......................... $11,488,192 $26,795 $(65,831) $11,449,156
Included in investment securities are step-up and floating rate bonds with
various U.S. Government agencies. At June 30, 1997, December 31, 1996 and
1995, the par value of these bonds was $1,500,000, $1,500,000 and
$3,500,000, respectively.
On November 29, 1996, the Bank sold investment securities with a book value
of $2,998,205 from the held to maturity portfolio resulting in a net loss
of $1,798. Included in these securities were investments with a book value
of $998,205 that had a maturity of April 17, 1997, which exceeded the
three-month example as discussed in SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The securities were sold in
order to achieve "well capitalized" regulatory capital levels as defined by
the Office of Thrift Supervision. As a result of the sale, the Bank
transferred all securities previously classified as held to maturity to
available for sale.
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31 1996
--------------------------------------- --------------------------------------
Gross Gross
Amortized Unrealized Approximate Amortized Unrealized Approximate
Cost Gain Fair Value Cost Gain Fair Value
--------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Availiable for sale-FHLMC
pass-through certificates..... $ 188,666 $ 1,748 $ 190,414 $ 200,666 $ 2,481 $ 203,147
========= ======= ========= ========= ======= =========
December 31, 1995
--------------------------------------
Gross
Amortized Unrealized Approximate
Cost Gain Fair Value
--------- ---------- -----------
Held to maturity-FHLMC
pass-through certificates..... $ 698,669 $ 7,011 $ 705,680
========= ======= =========
</TABLE>
In connection with the sale discussed in Note 3, the Bank sold
mortgage-backed securities with a book value of $335,918 from the held to
maturity portfolio resulting m a net gain of $8,723. Included in these
securites was a mortgage-backed security with a book value of $173,227 that
had a maturity of March 1, 1997 which exceeded three-month example. As a
result of the sale, the Bank transferred all mortgage-backed securities
previously classified as held to maturity to available for sale.
F-10
<PAGE>
5. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31,
June 30, --------------------------
1997 1996 1995
----------- ----------- -----------
First mortgage loans (primarily
one to four-family residential).... $82,625,969 $87,918,256 $67,937,470
Loans on savings accounts........... 710,275 528,198 839,344
Home equity loans-fixed rate........ 7,942,666 8,082,865 8,387,260
Equity lines of credit-variable rate 2,963,299 2,823,273 2,753,989
----------- ----------- -----------
Total........................... 94,242,209 99,352,592 79,918,063
Less:
Allowance for loan losses......... (257,000) (247,000) (200,000)
Deferred loan fees................. (1,065,824) (1,063,474) (882,757)
----------- ----------- -----------
Total........................... $92,919,385 $98,042,118 $78,835,306
=========== =========== ===========
The Bank is servicing loans for the benefit of others totaling
approximately $53,286,000, $54,321,000 and $56,698,000 at June 30, 1997,
December 31, 1996 and 1995, respectively. Serving loans for others
generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. Loan
servicing income is recorded on the cash basis and includes servicing fees
from investors and certain charges collected from borrowers, such as late
payment fees. In connection with these loans serviced for others, the Bank
held borrowers' escrow balances of $710,679, $ 301,325 and $55,373 at June
30,1997, December 31,1996 and 1995, respectively.
At June 30,1997 and December 31,1996, the Bank had outstanding loan
origination commitments of $387,100 and $2,270,200, respectively, for fixed
and adjustable rate loans, with rates ranging from 6.50% to 7.75% and 6.75%
to 8.50%, respectively. These commitments are expected to be funded within
one year. Commitments are issued in accordance with the same loan policies
and underwriting standards as settled loans. Additionally, in November
1994, the Bank entered into an agreement with a community investment
company to purchase $250,000 of loans for low and moderate income housing
over the next three years. At June 30,1997, December 31,1996 and 1995, the
Bank had purchased $120,000, $64,000 and $46,000 of these loans,
respectively.
Certain directors and officers of the Bank have loans with the Bank. Such
loans were made in the ordinary course of business at the Bank's normal
credit terms, including interest rate and collateralization, and do not
represent more than a normal risk of collection. The following is a summary
of loans to these officers and directors:
December 31,
June 30, --------------------------
1997 1996 1995
----------- ----------- -----------
Balance, beginning of period........ $ 367,780 $ 394,195 $ 406,324
Additions........................... 59,300 34,000 25,000
Repayments.......................... (27,372) (60,415) (37,129)
--------- --------- ---------
Balance, end of period.......... $ 399,708 $ 367,780 $ 394,195
========= ========= =========
F-11
<PAGE>
The following is a summary changes in the allowance for loan losses:
Six-Month Period Ended Year Ended
June 30, December 31,
---------------------- ------------------
1997 1996 1996 1995
---- ---- ---- ----
Balance, beginning of period....... $247,000 $200,000 $200,000 $195,000
Provision charged to operations.... 10,000 26,000 47,000 5,000
-------- -------- -------- --------
Balance, end of period............. $257,000 $226,000 $247,000 $200,000
======== ======== ======== ========
Loans delinquent more than 90 days are placed on nonaccrual status.
Interest reserved from these loans amounted to $4,382, $3,123 and $4,351 at
June 30, 1997, December 31, 1996 and 1995, respectively.
The provision for loan losses charged to expense is based upon past loan
and loss experiences and an evaluation of estimated losses in the current
loan portfolio, including the evaluation of impaired loans under SFAS No.
114. A loan is considered to be impaired when, based upon current
information and events, it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan. An
insignificant delay or insignificant shortfall in amount of payments does
not require application of SFAS No. 114. For this purpose, delays less than
90 days are considered to be insignificant. As of June 30, 1997, December
31, 1996 and 1995, 100% of the impaired loan balance was measured for
impairment based on the fair value of the loan's collateral. Impairment
losses are included in the provision for loan losses. SFAS No. 114 does not
apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment except for those loans restructured
under a troubled debt restructuring. At June 30, 1997, December 31, 1996
and 1995, the Bank's impaired loans consisted of smaller balance
residential mortgage loans.
Interest income on impaired loans other than nonaccrual loans is recognized
on an accrual basis. Interest income on nonaccrual loans is recognized only
as collected.
6. OFFICE PROPERTY AND EQUIPMENT
Office property and equipment is summarized by major classification as
follows:
June 30, Deccember 31,
---------- ----------------------
1997 1996 1995
---- ---- ----
Land and buildings........... $2,278,764 $2,278,764 $2,268,948
Furniture and equipment..... 976,264 955,720 926,291
---------- ---------- ----------
Total......................... 3,255,028 3,234,484 3,195,239
Accumulated deprecation....... (1,271,605) (1,213,527) (1,091,776)
---------- ---------- ----------
Net........................... $1,983,423 $2,020,957 $2,103,463
=========== ========== ==========
Depreciation expense totaled $ 58,079 and $93,959 for the six-month periods
ended June 30, 1997 and 1996, respectively, and $ 121,751 and $ 164,780 for
the years ended December 31, 1996 and 1995, respectively.
F-12
<PAGE>
7. MORTGAGE SERVICING RIGHTS
The Bank adopted SFAS No. 122 effective January 1, 1995. The effect of
adopting this new statement was an increase of approximately $300,000 to
gain on sale of loans on the 1995 statement of operations, and to mortgage
servicing rights on the 1995 statement of financial condition. For
potential impairment evaluation purposes, the market value of the servicing
portfolio was determined through independent valuation of the aggregate
portfolio.
The Bank's servicing portfolio for which mortgage servicing rights have
been capitalized in accordance with SFAS No. 122 at December 31,1996
consists of fixed rate, predominately conforming mortgage loans, as
follows:
Whole Loans Sold - $25,366,132 - interest rates range from 6.50% to
8.875%; original terms range from 180 to 360 months with a weighted
average coupon of 7.479%, weighted average remaining maturity of 346
months, and an average servicing fee of 0.25%.
Participations Sold - $5,416,805 - interest rates range from 6.75% to
8.00%; original terms range from 120 months to 240 months with a
weighted average coupon of 7.316%, weighted average passthrough rate
of 7.10%, and a weighted average remaining term of 167 months.
The Bank's servicing portfolio for which mortgage servicing rights have
been capitalized at June 30, 1997 consists of fixed rate, predominately
conforming mortgage loans, as follows:
Whole Loans Sold - $25,832,170 - interest rates range from 6.50% to
8.875%; original teens range from 180 to 360 months with a weighted
average coupon of 7.486%, weighted average remaining maturity of 346
months, and an average servicing fee of 0.25%.
Participations Sold - $5,234,976 - interest rates range from 6.75% to
8.00%, original terms range from 120 months to 240 months with a
weighted average coupon of 7.315%, weighted average pass-through rate
of 7.09% and a weighted average remaining term of 163 months.
Evaluation of potential impairment of the carrying value of mortgage
servicing rights is determined based upon market valuation of loans within
specified interest rate ranges. At June 30, 1997, December 31, 1996 and
1995, the fair value of mortgage servicing rights approximates its carrying
value. Mortgage servicing rights are amortized in proportion to projected
net servicing revenue.
F-13
<PAGE>
8. DEPOSITS
Deposits by stated type are summarized as follows:
December 31,
------------------------------------
June 30, 1997 1996 1995
------------------ ----------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Demand deposit accounts:
1997:2.05% $1,124,691 1.4%
1996-2.05% $ 881,302 1.1%
1995-2.05% $ 590,286 0.7%
Passbook accounts:
1997-4.14% 2,537,459 3.2
1996-4.14% 2,536,443 3.2
1995-4.14% 2,866,884 3.5
Money market deposit
accounts:
1997-3.37% 8,903,754 11.4
1996-3.35% 8,246,455 10.5
1995-2.91% 8,724,919 10.7
91-day to five-year money
market certificates:
1997-4.94%-8.33% 65,785,459 84.0
1996-4.82%-8.33% 66,744,593 85.2
1995-4.93%-8.33% 69,340,160 85.1
----------- ----- ----------- ----- ----------- -----
Total $78,351,363 100.0% $78,408,793 100.0% $81,522,249 100.0%
The weighted average cost of funds was 5.64%, 5.62% and 5.87% at June
30,1997, December 31, 1996 and 1995, respectively.
A summary of certificates by maturity is as follows:
June 30, December 31,
1997 1996
----------- ------------
Less than 1 year............. $44,199,404 $41,736,900
1 to 3 years................. 17,952,851 16,073,655
3 years or more.............. 3,633,204 8,934,038
----------- ------------
Total........................ $65,785,459 $66,744,593
=========== ============
F-14
<PAGE>
A summary of interest expense on savings accounts is as follows:
Six-Month Period Ended Year Ended
June 30, December 31,
---------------------- --------------------------
1997 1996 1996 1995
---- ---- ---- ----
Passbooks.............. $ 50,261 $ 56,024 $ 109,303 $ 132,819
Demand deposit
accounts.............. 9,246 6,466 14,534 11,262
Money market deposit
accounts.............. 142,588 140,579 281,797 329,419
Certificates........... 1,994,150 2,073,568 4,092,023 3,877,508
--------- --------- --------- ---------
Total $2,196,245 $2,276,637 $4,497,657 $4,351,008
========= ========= ========= =========
At June 30, 1997, the Bank had $14,320,000 of deposits in denominations of
$ 100,000 or more. Deposits in excess of $100,000 are not federally insured
The Bank does not accept brokered deposits.
9. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consists of the following:
December 31,
June 30, -----------------------------------------
1997 1996 1995
------------------- ------------------ ---------------------
Weighted Weighted Weighted
Interest Interest Interest
Maturing Period Amount Rate Amount Rate Amount Rate
- --------------- ------ ---- ------ ---- ------ ----
Line of credit... $ 400,000 7.23% $1,850,000 6.05%
12 months
or less........ $11,100,000 5.96% 13,600,000 6.05 3,600,000 5.83
13 to 24 months.. 6,100,000 6.41 5,100,000 6.42 600,000 6.38
25 to 36 months.. 3,400,000 6.63 4,000,000 6.55 600,000 6.68
37 to 48 months.. 3,300,000 6.84 300,000 7.11 500,000 6.85
49 to 60 months.. 1,300,000 7.04 2,400,000 7.09 300,000 7.11
Thereafter 100,000 7.35 500,000 7.27
---------- --------- --------
Total $25,200,000 $25,900,000 $7,950,000
========== ========== =========
The weighted average interest rate for these advances at June 30, 1997,
December 31, 1996 and 1995 was 6.34%, 6.33% and 6.19%, respectively.
The advances are collateralized by Federal Home Loan Bank stock, qualified
investments and mortgage loans.
As of June 30, 1997 and December 31, 1996, the Bank had an unused line of
credit of $8,592,000 and $7,363,000, respectively, with the Federal Home
Loan Bank of Pittsburgh.
10. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
admministered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance sheet items as calculated under regulatory
F-15
<PAGE>
accounting practices. The Bank's capital amounts and classifications are
also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations)
to total adjusted assets (as defined), and of risk-based capital (as
defined) to risk-weighted assets (as defined). Management believes, as of
June 30, 1997 and December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
The most recent notification from the Office of Thrift Supervision (OTS)
(as of September 30, 1996) categorized the Bank as adequately-capitalized
under the regulatory framework for prompt corrective action. To be
categorized as adequately-capitalized, the Bank must maintain minimum
tangible, core and risk-based ratios as set forth in the table. Since the
most recent notification from the OTS, the Bank's ratios have improved. As
a result, management believes that the Bank would be considered
well-capitalized by the OTS at December 31, 1996 and June 30, 1997.
The Bank's actual capital amounts (in thousands) and ratios are presented
in the table below:
To be Considered
Well Capitalized
Required for Under Prompt
Capital Adequacy Correction Action
Actual Purposes Provisions
-------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
AT June 30, 1997:
Tangible............ $6,058 5.38% $1,688 1.5% N/A N/A
Core (Leverage)..... 6,058 5.38 3,375 3.0 $5,626 5.0%
Tier 1 risk-based... 6,058 9.86 N/A N/A 3,687 6.0
Total risk-based.... 6,315 10.28 4,916 8.0 6,145 10.0
At December 31, 1996:
Tangible............ $5,926 5.26% $1,690 1.5% N/A N/A
Core (Leverage)..... 5,926 5.26 3,380 3.0 $5,633 5.0%
Tier 1 risk-based... 5,926 9.63 N/A N/A 3,693 6.0
Total risk-based.... 6,173 10.03 4,924 8.0 6,155 10.0
At December 31, 1995:
Tangible............ $6,033 6.19% $1,461 1.5% N/A N/A
Core (Leverage)..... 6,033 6.19 2,922 3.0 $4,870 5.0%
Tier 1 risk-based... 6,033 11.33 N/A N/A 3,196 6.0
Total risk-based.... 6,233 11.70 4,261 8.0 5,326 10.0
Retained earnings for financial statement purposes differs from actual
(leverage) capital amounts by $32,000, $42,000 and $30,000 at June 30,
1997, 1966 and 1995, respectively. This difference represents the unallowed
portion of mortgage servicing rights.
Under the framework, an adequately-capitalized bank's capital levels will
not allow the Bank to accept brokered deposits without prior approval from
regulators.
On May 21, 1997, the Bank entered into a supervisory agreement with the OTS
which requires the Bank to develop, adopt and in some cases modify, certain
policies and procedures relating to interest rate risk management,
improvement of operating performance and capital adequacy.
F-16
<PAGE>
It is management's opinion, based on the Bank's compliance with all
regulatory capital requirements and compliance with various agreements and
directives, that no further regulatory action will be taken and that no
adjustments to the financial statements will be required.
11. INCOME TAXES
In August 1996, the Small Business Job Protection Act (the "Act") was
signed into law. The Act repealed the percentage of taxable income method
of accounting for bad debts for thrift institutions effective for years
beginning after December 31, 1995. The Act will require the Bank, as of
January 1, 1996 to change its method of computing reserves for bad debts to
the experience method. The bad debt deduction allowable under this method
is available to small banks with assets less than $500 million. Generally,
this method will allow the Bank to deduct an annual addition to the reserve
for bad debts equal to the increase in the balance of the Bank's reserve
for bad debts at the end of the year to an amount equal to the percentage
of total loans at the end of the year, computed using the ratio of the
previous six years' net charge-offs divided by the sum of the previous six
years' total outstanding loans at year end.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in a method of accounting
determined solely with respect to the "applicable excess reserves" of the
institution. The amount of the applicable excess reserves will be taken
into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after December 31, 1995. The timing of this
recapture may be delayed for a two-year period provided certain residential
lending requirements are met. For financial reporting purposes, the Bank
will not incur any additional tax expense due to previously provided
deferred taxes. At December 31, 1996 under SFAS No. 109, deferred taxes
were provided on the difference between the book reserve at December 31,
1996 and the applicable excess reserve in the amount equal to the Bank's
increase in the tax reserve from December 31, 1987 to December 31, 1996.
Retained earnings at June 30, 1997, December 31, 1996 and 1995 includes
approximately $1,300,000 representing bad debt deductions for which no
deferred income taxes have been provided.
F-17
<PAGE>
Income tax expense consists of the following components
<TABLE>
<CAPTION>
Six-Months Ended June 30, Year Ended December 31,
--------------------------------------------------------------------- -----------------------------------
1997 1996 1996
--------------------------------- --------------------------------- -----------------------------------
Federal State Total Federal State Total Federal State Total
------- ----- ----- ------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current tax provision $ 72,000 $ 16,000 $ 88,000 $ 26,000 $ 4,000 $ 30,000 $ (96,200) $ (22,800) $(119,000)
Deferred tax provision 50,000 50,000
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total ................ $ 72,000 $ 16,000 $ 88,000 $ 26,000 $ 4,000 $ 30,000 $ (46,200) $ (22,800) $ (69,000)
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Year Ended December 31,
---------------------------------
1995
---------------------------------
Federal State Total
------- ----- -----
Current tax provision $ 172,670 $ 42,000 $ 214,670
Deferred tax provision 50,000 50,000
--------- --------- ---------
Total ................ $ 222,670 $ 42,000 $ 264,670
========= ========= =========
The Bank's provision for income taxes differs from the amounts determined by
applying the statutory federal income tax rate to income before income taxes for
the following reasons:
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------------------------- ---------------------------------------------
1997 1996 1996 1995
---------------------- --------------------- ---------------------- ---------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate ............ $ 73,431 35.0% $ 24,796 35.0% $ (57,239) (35.0)% $ 239,607 35.0%
Increase (decrease)
resulting from:
Benefit of surtax
exemption ....................... (2,098) (1.0) (708) (1.0) 1,635 1.0 (6,845) (1.0)
State income taxes
net of federal income
tax benefit ..................... 10,560 5.0 2,640 3.7 (15,048) (9.2) 27,720 4.1
Other ............................ 6,107 2.9 3,272 4.6 1,652 1.0 4,188 0.6
--------- ---- --------- ---- --------- ---- -------- ----
Total .............................. $ 88,000 41.9% $ 30,000 42.3% $ (69,000) (42.2)% $ 264,670 38.7%
========= ==== ========= ==== ========= ==== ======== ====
</TABLE>
F-18
<PAGE>
Items that give rise to significant portions of the deferred tax accounts at
June 30, 1997, December 31, 1996 and 1995 are as follows:
December 31,
June 30, ------------------------
1997 1996 1995
---- ---- ----
Deferred tax assets:
Deferred loan fees .................. $ 260,120 $ 260,120 $ 240,702
Other ............................... 65,806 73,455 131,215
--------- --------- ---------
Total deferred tax assets ........... 325,926 333,575 371,917
--------- --------- ---------
Deferred tax liabilities:
Reserve for bad debts ............... (28,240) (28,240) (44,220)
Property ............................ (3,417) (3,417) (4,684)
Mortgage servicing rights ........... (120,651) (124,412) (101,309)
--------- --------- ---------
Total deferred tax liabilities ...... (152,308) (156,069) (150,213)
--------- --------- ---------
Net deferred tax assets ............. $ 173,618 $ 177,506 $ 221,704
========= ========= =========
12. PENSION PLAN
The Bank has a noncontributory defined benefit pension plan which covers
all eligible employees. Pension expense totaled $22,649, $18,000, $50,739
and $55,168 for the six-month periods ended June 30, 1997 and 1996 and for
the years ended December 31, 1996 and 1995, respectively.
Net pension expense, based on the latest data available, included the
following components:
December 31,
------------------------
1996 1995
---- ----
Service cost - benefits earned during the year ..... $ 69,168 $ 65,980
Interest cost on projected benefit obligation ...... 59,198 55,891
Actual return on assets ............................ (29,910) (116,479)
Net amortization of transition costs ............... (47,717) 49,776
--------- ---------
Net pension expense ................................ $ 50,739 $ 55,168
========= =========
F-19
<PAGE>
The following table sets forth the aggregate funded status of the pension
plan for the years ended:
December 31,
------------------------
1996 1995
---- ----
Actuarial present value of benefit obligation:
Vested ......................................... $ 545,453 $ 598,066
Nonvested ...................................... 22,727 30,011
--------- ---------
Total-accumulated benefit obligation ............. $ 568,180 $ 628,077
========= =========
Plan assets at fair value ........................ $ 950,845 $ 938,136
Projected benefit obligation ..................... (928,292) (902,284)
--------- ---------
Projected benefit obligation less than plan assets 22,553 35,852
Unrecognized:
Net gain from past experience .................. (95,462) (130,593)
Net transition asset ........................... (22,667) (24,411)
--------- ---------
Accrued pension liability ........................ $ (95,576) $(119,152)
========= =========
The projected benefit obligation was determined using a weighted average
assumed discount rate of 7% and a rate of compensation increase of 4.5%.
The expected weighted average long-term rate of return of plan assets is
7.75%. Assumed average remaining service lives of employees is
approximately 22 years.
The type of assets held by the plan are general trust investments including
rich equivalents, fixed income assets, and group annuities.
Deferred compensation agreements are in effect with certain members of the
Board of Directors. Payment of Director fees is being deferred until
retirement. For the years ended December 31, 1996 and 1995, $11,590 and
$15,348, respectively, of fees were deferred under these agreements. For
the six-month period ended June 30, 1997, $6,144 of fees were deferred
under these agreements.
13. CONCENTRATION OF CREDIT RISK
Most of the Bank's lending activity is with customers located within the
state of Delaware. Generally, the loans are secured by real estate
cosisting of single-family residential properties. The ultimate repayment
of these loans is dependent to a certain degree on the local economy.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Bank using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Bank could realize in a
current market exchange. The use of different market assertions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
F-20
<PAGE>
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------------
1997 1996 1995
---------------------- ------------------- --------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
(in thousands) (in thousands) (in thousands)
---------------------- ------------------- --------------------
Assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ............... $ 2,838 $ 2,838 $ 2,643 $ 2,643 $ 1,061 $ 1,061
Investment securities
held to maturity ....................... 11,488 11,449
Investment securities
available for sale ..................... 5,992 5,992 6,476 6,476
Mortgage-backed securities
held to maturity ....................... 699 706
Mortgage backed securities
available for sale ..................... 190 190 203 203
Loans, net .............................. 92,919 94,549 98,042 99,570 78,835 81,682
Loans held for sale ..................... 5,548 5,548 1,020 1,022
Liabilities:
Demand deposits and
passbook accounts ...................... 3,662 3,662 3,418 3,418 3,457 3,457
Money market accounts ................... 8,904 8,904 8,246 8,246 8,725 8,725
Savings certficates ..................... 65,785 65,876 66,745 67,391 69,340 69,402
Advances from Federal
Home Loan Bank ......................... 25,200 25,186 25,900 26,024 7,950 7,948
</TABLE>
Cash and Cash Equivalents - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investments and Mortgage-backed Securities - The fair value of investment
securities and mortgage-backed securities (including collateralized
mortgage obligations) is based on quoted market prices or dealer quotes.
Loans Receivable - The fair value of loans is estimated based on present
value using approximate current entry-value interest rates applicable to
each category of such financial instruments.
Loans Held for Sale - The fair value of loans held for sale is based upon
commitment prices from the Federal Home Loan Mortgage Corporation.
Demand Deposits, Passbook Accounts, Money Market Accounts, and Savings
Certificates - The fair value of demand deposits, passbook accounts and
money market accounts is the amount reported in the financial statements.
The fair value of savings certificates is based on a present value estimate
using rates currently offered for deposits of similar remaining maturity.
Advances from Federal Home Loan Bank - The fair value of advances is based
on a present value estimate using rates currently offered for Federal Home
Loan Bank borrowings of similar remaining maturity.
Commitments to Extend Credit and Letters of Credit - The majority of the
Bank's commitments to extend credit and letters of credit carry current
market interest rates if converted to loans. Because commitments to extend
credit and letters of credit are generally unassignable by either the Bank
or the borrower, they only have value to the Bank and the borrower. The
estimated fair value approximates the recorded amounts.
F-21
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The fair value estimates presented herein are based on pertinent
information available to management as of the date indicated. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since the dates
indicated and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein
15. SAVINGS ASSOCIATION INSURANCE FUND
On September 30, 1996, an omnibus appropriations bill for fiscal year 1997,
which included recapitalization of the Savings Association Insurance Fund
(SAIF) became law. Accordingly, all SAIF insured depository institutions
were charged a one-time special assessment based on their SAIF-assessable
deposits as of March 31, 1995 at the rate of 65.7 basis points.
Accordingly, the Bank incurred a pre-tax expose of $491,992 during the
third quarter of 1996.
16. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP (UNAUDITED)
On June 30, 1997, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federal chartered mutual savings and loan
association to a federal chartered capital stock savings bank with the
concurrent formation of a holding company, subject to approval by
regulatory authorities and depositors of the Bank. The conversion is
elected to be accomplished through amendment of the Bank's federal charter
and the sale of the holding company's common stock. A subscription offering
of the shares of common stock will be offered initially to eligible account
holders, employee benefit plans of the Bank, other members, directors,
officers, and employees of the Bank. Any shares of common stock not sold in
the subscription offering are expected to be sold by the underwriters to
the general public.
At the time of the conversion, the Bank will establish a liquidation
account in an amoums equal to its retained earnings as of the date of the
latest consolidated statement of financial condition appearing in the final
prospectus. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their accounts at the
Bank after the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases wil1 not restore
an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation of the Bank, each eligible account holder
will be entitled to receive a distribution from the liquidation account in
an amount proportionate to the current adjusted qualify 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 requirements.
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. As of June 30, 1997, conversion costs of
approximately $3,000 have been incurred and are included in other assets in
the statement of financial condition.
* * * * * *
F-22
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GLOSSARY
BIF Bank Insurance Fund of the FDIC
Code Internal Revenue Code of 1986, as amended
Community Offering Offering for sale to certain members of the general public
of any shares of Common Stock not subscribed for in the
Subscription Offering, including the possible offering of
Common Stock in a Syndicated Community Offering
Conversion Simultaneous conversion of Ninth Ward Savings Bank, FSB,
to stock form, the issuance of the Ninth Ward Savings
Bank, FSB's outstanding Common Stock to Delaware First
Financial Corporation and Delaware First Financial
Corporation's offer and sale of Common Stock
Eligible Account Savings account holders of the Savings Bank with account
Holders balances of at least $50 as of the close of business on
December 31, 1995
Employee Plans Tax-qualified employee benefit plans of Ninth Ward Savings
Bank, FSB
ERISA Employee Retirement Income Security of 1974, as amended
ESOP Employee Stock Ownership Plan
EVR or Estimated Estimated pro forma market value of the Common Stock
Valuation Range ranging from $7,440,000 to $10,060,000
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date 12:00 p.m., Wilmington, Delaware Time, on
December 18, 1997
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
G-1
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FNMA Federal National Mortgage Association
FinPro, Inc. Ninth Ward's independent appraiser located in Liberty
Corner, New Jersey
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
NASD National Association of Securities Dealers, Inc.
NASDAQ System National Association of Securities Dealers Automated
Quotation System
NPV Net portfolio value
Offering Subscription, Community and Syndicated Community Offerings,
collectively
Option Plan Stock option plan to be adopted within one year of the
Conversion
Order Form Form for ordering stock accompanied by a certification
concerning certain matters
Other Members Any person other than an Eligible Account Holder or
Supplemental Eligible Account Holder who is entitled to
vote at the Special Meeting due to the existence of a
savings account or a borrowing, respectively, on the
Voting Record Date for the Special Meeting.
OTC Bulletin Board An electronic stock data system operated by NASDAQ
OTS Office of Thrift Supervision
Pink Sheets Trademark name for the pink paper upon which stock data is
published by the National Quotation Bureau
Plan of Conversion Plan of Ninth Ward Savings Bank, FSB to convert from a
federally chartered mutual savings bank to a federally
chartered stock savings bank and the issuance of all of
Ninth Ward Savings Bank, FSB' s outstanding capital stock
to Delaware First Financial Corporation and the issuance
of Delaware First Financial Corporation's stock to the
public
G-2
<PAGE>
Purchase Price $10.00 per share price of the Common Stock
QTI Qualified thrift investment
QTL Qualified thrift lender
RSP Restricted stock plan to be adopted within one year of the
Conversion
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
SFAS Statement of Financial Accounting Standards adopted by FASB
Special Meeting Special Meeting of members of Ninth Ward Savings Bank, FSB
called for the purpose of approving the Plan
Subscription Offering of non-transferable rights to subscribe for the
Offering Common Stock, in order of priority, to Eligible Account
Holders, tax - qualified employee plans, Supplemental
Eligible Account Holders and Other Members
Supplemental Depositors, who are not Eligible Account Holders of Ninth
Eligible Account Ward Savings Bank, FSB, with account balances of at least
Holders $50 on September 30, 1997
Syndicated Offering of shares of Common Stock remaining after the
Community Offering Subscription and undertaken prior to the end of the
Offering Period and as part of the Community Offering, and
which may, at our discretion be made to the general public
on a best efforts basis by a selling group of
broker-dealers
Tax Qualified Plan Employee benefit plans that qualify under the Internal
Revenue Code such as an ESOP
Voting Record Date The close of business on October 31, 1997, the date for
determining members entitled to vote at the Special
Meeting
G-3
<PAGE>
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No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this Prospectus in connection
with the offering made hereby, and if given or made, such information or
representations must not be relied upon as having been authorized by Ninth Ward
Savings Bank, FSB, Delaware First Financial Corporation, or Trident Securities.
This Prospectus does not constitute an offer to sell, or the solicitation of an
offer to buy, any of the securities offered hereby to any person in any
jurisdiction in which such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus by Ninth Ward Savings Bank, FSB, Delaware First
Financial Corporation or Trident Securities nor any sale made hereunder shall in
any circumstances create an implication that there has been no change in the
affairs of Ninth Ward Savings Bank, FSB, since any of the dates as of which
information is furnished herein or since the date hereof.
DELAWARE FIRST FINANCIAL CORPORATION
Up to 1,157,000 Shares
(Maximum as Adusted)
Common Stock
---------------
PROSPECTUS
---------------
TRIDENT SECURITIES, INC.
Dated November 12, 1997
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until the later of December 18, 1997, or 25 days after the commencement of the
offering of Common Stock, all dealers that buy, sell or trade these securities,
whether or not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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