PROSPECTUS
Liberty Bancorp, Inc.
(Proposed Holding Company for Liberty Bank)
1,594,475 Shares of Common Stock
Liberty Bancorp, Inc., a federal corporation (the "Company"), is offering
up to 1,594,475 shares (subject to adjustment to up to 1,833,646 shares as
described herein) of its common stock, par value $1.00 per share (the "Common
Stock"), in connection with the mutual holding company reorganization (the
"Reorganization") of Axia Federal Savings Bank (the "Bank") pursuant to a Plan
of Reorganization from Mutual Savings Association to Mutual Holding Company and
Stock Issuance Plan (the "Plan of Reorganization"). As part of the
Reorganization, Axia Federal Savings Bank will convert from a federal mutual
savings bank to a federal stock savings bank, change its name to "Liberty Bank"
and become a wholly-owned subsidiary of the Company. The Company will issue a
majority of its Common Stock to Liberty Bancorp, MHC (the "Mutual Holding
Company") and sell a minority portion of its Common Stock to the public in a
subscription offering and possibly a community offering.
Non-transferable rights to subscribe for Common Stock in a subscription
offering (the "Subscription Offering") have been granted, in the following order
of priority: (i) depositors of the Bank with aggregate account balances of $50
or more as of September 30, 1996 (the "Eligibility Record Date," and such
account holders are defined as "Eligible Account Holders"); (ii) the Bank's
employee stock ownership plan and related trust (the "ESOP") in an amount up to
8% of the shares of Common Stock to be sold in the Offering (as defined below);
(iii) depositors of the Bank with aggregate account balances of $50 or more as
of March 31, 1998 (the "Supplemental Eligibility Record Date") who are not
Eligible Account Holders ("Supplemental Eligible Account Holders"); and (iv)
depositors of the Bank as of April 30, 1998 (the "Voting Record Date") and
borrowers of the Bank as of December 10, 1986 whose loans are outstanding as of
the Voting Record Date, who are not Eligible Account Holders or Supplemental
Eligible Account Holders ("Other Members"). Subscription rights are
nontransferable. Persons found to be transferring subscription rights will be
subject to the forfeiture of such rights and possible further sanctions and
penalties imposed by the Office of Thrift Supervision (the "OTS"). Shares of
Common Stock not subscribed for in the Subscription Offering may be offered for
sale in a community offering (the "Community Offering") to certain members of
the general public with preference given to natural persons residing in the New
Jersey counties of Union and Middlesex (the "Community"). The Community
Offering, if any, may commence at any time after the commencement of the
Subscription Offering. The Company retains the right, in its sole discretion, to
accept or reject any order in the Community Offering. The Subscription Offering
and Community Offering are referred to collectively as the "Offering."
(continued on next page)
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER AT
(732) 499-8207 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 17.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY
OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT
AGENCY.
<TABLE>
<CAPTION>
====================================================================================================================================
Estimated Underwriting
Estimated Minority Commissions and Other Estimated Net
Subscription Price (1) Ownership Interest (2) Fees and Expenses (3) Proceeds (4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum Price Per Share....... $10.00 N/A $.51 $9.49
Midpoint Price Per Share...... $10.00 N/A $.43 $9.57
Maximum Price Per Share....... $10.00 N/A $.38 $9.62
Minimum Total................. $11,785,250 47.0% $600,000 $11,185,250
Midpoint Total................ $13,865,000 47.0% $600,000 $13,265,000
Maximum Total................. $15,944,750 47.0% $600,000 $15,344,750
Adjusted Maximum Total (5).... $18,336,460 47.0% $600,000 $17,736,460
====================================================================================================================================
(footnotes on following page)
</TABLE>
[RYAN, BECK LOGO]
The date of this Prospectus is May 13, 1998
<PAGE>
Pursuant to the Plan, the Bank will organize the Mutual Holding Company as
a federally-chartered mutual holding company, which will own at least a majority
of the Common Stock of the Company for so long as the Mutual Holding Company
remains in existence. The Bank will be a wholly-owned subsidiary of the Company.
The shares of Common Stock sold in the Offering will represent a minority
ownership interest equal to 47% of the Common Stock of the Company. The
remaining issued and outstanding shares will be owned by the Mutual Holding
Company. References to the Bank shall include Axia Federal Savings Bank in its
current mutual form, or Liberty Bank as indicated by the context. References to
the "Stock Bank" shall mean Liberty Bank.
The minimum number of shares that may be purchased is 25 shares. Except for
the ESOP, no Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may in their capacities as such purchase in the Subscription
Offering more than $100,000 of Common Stock. No person, together with associates
of and persons acting in concert with such person, may purchase in the Offering
more than $200,000 of Common Stock; provided, however, that the maximum purchase
limitation may be increased or decreased at the sole discretion of the Company
and the Bank. See "The Reorganization--Subscription Offering and Subscription
Rights," "--Community Offering" and "--Limitations on Common Stock Purchases."
The Subscription Offering and Community Offering will terminate at 10:00
a.m., New Jersey time, on June 17, 1998 (the "Expiration Date") unless either or
both are extended by the Bank and the Company, with the approval of the OTS, if
necessary. The Bank and the Company are not required to give subscribers notice
of any such extension. The Community Offering must be completed within 45 days
after the expiration of the Subscription Offering unless extended by the Bank
and the Company with the approval of the OTS, if necessary. Orders submitted are
irrevocable until the completion or termination of the Reorganization; provided
that all subscribers will have their funds returned promptly, with interest, and
all withdrawal authorizations will be canceled if the Reorganization is not
completed within 45 days after the expiration of the Subscription Offering,
unless such period has been extended with the consent of the OTS, if necessary.
No such extension may be granted past June 24, 2000. See "The
Reorganization--Subscription Offering and Subscription Rights" and "--Procedure
for Purchasing Shares in Subscription and Community Offerings."
The Company has applied to have the Common Stock quoted on the Nasdaq
National Market under the symbol "LIBB." The Company has never issued stock to
the public or any person, and there can be no assurance that an active and
liquid trading market for the Common Stock will develop or that purchasers will
be able to sell their shares at or above the Subscription Price. Ryan, Beck &
Co., Inc. ("Ryan Beck") has advised the Company that it intends to act as a
market maker for the Common Stock following consummation of the Reorganization.
See "Market for the Common Stock."
- -----------------
(footnotes for preceding table)
(1) Determined in accordance with an independent appraisal prepared by FinPro,
Inc. ("FinPro") dated as of March 16, 1998, which states that the estimated
pro forma market value of the Common Stock ranged from $25,075,000 to
$33,925,000, with a midpoint of $29,500,000 (the "Valuation Range"). The
independent appraisal of FinPro is based upon estimates and projections
that are subject to change, and the valuation is not a recommendation for
purchasing the Common Stock nor an assurance as to the price for which a
purchaser of Common Stock will thereafter be able to sell the Common Stock.
The Boards of Directors of the Company and the Bank have determined to
offer 47% of the Company's to-be-outstanding shares of Common Stock to the
public in the Offering. Accordingly $11.8 million to $15.9 million of
Common Stock or between 1,178,525 and 1,594,475 shares of Common Stock are
being offered at the subscription price of $10.00 per share in the
Offering. See "The Reorganization and Offering--Stock Pricing and Number of
Shares to be Offered in the Offering."
(2) The Company will issue to the Mutual Holding Company 53% of the shares of
Common Stock that will be outstanding at the conclusion of the
Reorganization and Offering; 47% of the Company's to-be outstanding shares
will be sold in the Offering.
(3) Consists of the estimated costs to the Bank and the Company arising from
the Reorganization and Offering, including estimated expenses of
approximately $465,000, and marketing and advisory fees to be paid to Ryan
Beck of $135,000. See "The Reorganization and Offering--Plan of
Distribution and Selling Commissions." The actual fees and expenses may
vary from the estimates.
(4) Actual net proceeds may vary substantially from estimated amounts depending
upon the number of shares sold and other factors. Includes the purchase of
shares of Common Stock by the Bank's ESOP which is intended to be funded by
a loan to the ESOP from the Company or from a third party, which will be
deducted from the Company's stockholders' equity. See "Use of Proceeds" and
"Pro Forma Data."
(5) As adjusted to reflect a 15% increase in the maximum of the Valuation Range
and a corresponding 15% increase in the maximum of the Offering Range
immediately prior to the completion of the Offering due to regulatory
considerations or changes in market and financial conditions. See "Pro
Forma Data" and "The Reorganization and Offering--Stock Pricing and Number
of Shares to be Issued." For a discussion of the distribution and
allocation of the additional shares, if any, see "The Reorganization and
Offering--Subscription Offering and Subscription Rights," "--Community
Offering" and "--Limitations on Common Stock Purchases."
2
<PAGE>
[MAP APPEARS HERE]
3
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE REORGANIZATION AND OFFERING
Q: What is the purpose of the Reorganization and Offering?
A: The primary purpose of the Reorganization and Offering is to establish a
stock holding company and to raise additional capital for the Bank, which
will enable it to compete more effectively in the financial services
marketplace. The Reorganization will permit the Company to issue capital
stock, which is a source of capital not available to mutual savings banks,
and will enable depositors, employees, management and directors to obtain
an equity ownership interest in the Bank. The Reorganization also will
provide the Bank with greater flexibility to structure and finance the
expansion of its operations, including the potential acquisition of other
financial institutions, and to diversify into other financial services, to
the extent permissible by applicable law and regulation.
Q: Who will be the minority stockholders of the Company?
A: All persons who purchase Common Stock in the Offering, including the ESOP,
will be the minority stockholders (the "Minority Stockholders") of the
Company, and will own 47% of its Common Stock upon completion of the
Offering. The Mutual Holding Company will own 53% of the Common Stock of
the Company, and will remain its majority stockholder as long as the Mutual
Holding Company remains in existence.
Q: Why is the Bank forming a two-tier mutual holding company and conducting a
minority stock offering instead of undergoing a full conversion to stock
form?
A: The Bank's Board of Directors determined that the two-tier mutual holding
company structure was in the best interests of the Bank, its members and
the communities served by the Bank. In accordance with OTS regulatory
requirements, a savings institution that converts from the mutual to stock
form of organization using the mutual holding company structure sells less
than half of its shares to the public at the time of the Reorganization. By
doing so, the converting institution raises less than half the proceeds
that would be obtained in a full conversion. Management believes such
proceeds will provide the Bank with ample capital to implement its business
strategy without creating pressure to make investments that management
believes would be overly risky in order to deploy the capital that would be
raised in a full conversion.
In addition, because OTS regulations and policy generally prohibit the sale
of a savings association in the mutual holding company structure, the
Reorganization and Offering will permit the Bank to achieve the benefits of
a stock company without the threat of an acquisition by another
institution, as can occur following a standard conversion from mutual to
stock form. Sales of locally based, independent savings institutions to
larger, regional financial institutions can result in closed branches,
fewer choices for consumers, employee layoffs and the loss of community
support and involvement by local financial institutions.
Q: How do investors order Common Stock?
A: Prospective investors must complete the order form and certification
(together, the "Stock Order Form"), together with full payment for the
shares purchased, so that it is received at or before 10:00 a.m., New
Jersey time, on June 17, 1998.
Q: How much stock may be ordered?
A: The minimum number of shares that may be purchased is 25 shares. Except for
the ESOP, no Eligible Account Holder, Supplemental Eligible Account Holder
or Other Member may, in their capacities as such, purchase more than
$100,000 of Common Stock in the Subscription Offering. No person, together
with associates of and persons acting in concert with such person, may
purchase in the Offering more than
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<PAGE>
$200,000 of Common Stock. However, the maximum purchase limitation may be
increased or decreased at the sole discretion of the Company and the Bank,
provided that the aggregate purchase limitation may not be reduced below 1%
of the Common Stock issued in the Offering.
Q: What happens if there are not enough shares to fill all orders?
A: If the Offering is oversubscribed, the Bank will allocate shares based on
the purchase priorities that have been adopted in the Plan of
Reorganization. These purchase priorities are in accordance with OTS
regulations. If the Offering is oversubscribed in a particular category,
then shares will be allocated among all subscribers in that category based
on a formula that is described in detail in "The Reorganization and
Offering." The priorities are described in answer to the next question.
Q: Who will be permitted to purchase Common Stock?
A: The Common Stock will be offered on a priority basis to the following
persons:
o holders of deposit accounts in the Bank with aggregate account
balances of $50 or more on September 30, 1996 ("Eligible Account
Holders");
o the Bank's ESOP;
o holders of deposit accounts in the Bank with aggregate account
balances of $50 or more on March 31, 1998 ("Supplemental Eligible
Account Holders");
o holders of deposit accounts in the Bank on April 30, 1998, the voting
record date for the Special Meeting (the "Voting Record Date") and
borrowers of the Bank as of December 10, 1986 whose loans remain
outstanding as of the Voting Record Date, who are not Eligible Account
Holders or Supplemental Eligible Account Holders ("Other Members").
If the above persons do not subscribe for sufficient shares, the remaining
shares will be offered to certain members of the general public, with
preference given to natural persons residing in the New Jersey Counties of
Union and Middlesex.
Q: What will happen if a member does not order any Common Stock?
A: Members are not required to purchase Common Stock. Deposit accounts,
certificate accounts and any loans held with the Bank will not be affected
by the Reorganization.
Q: How should potential investors decide whether to buy Common Stock in the
Offering?
A: In order to make an informed investment decision, potential investors
should read this entire Prospectus, particularly the section titled "Risk
Factors."
Q: Who can help answer any questions about the Offering?
If you have any questions, please contact the Stock Information Center at
the following address:
Stock Information Center
Axia Federal Savings Bank
1410 St. Georges Avenue
Avenel, New Jersey 07001
(732) 499-8207
5
<PAGE>
SUMMARY
The following summary does not purport to be complete, and is qualified in
its entirety by the more detailed information including the Consolidated
Financial Statements and Notes thereto of the Bank appearing elsewhere in this
Prospectus.
The Reorganization and Offering
The Reorganization involves a number of steps, including the following:
o The Bank will establish the Company and the Mutual Holding Company,
neither of which will have any assets prior to the completion of the
Reorganization.
o The Bank will convert from a federal mutual savings bank to a federal
stock savings bank and issue 100% of its capital stock to the Company.
o The Company will issue between 2,507,500 and 3,392,500 shares of its
Common Stock in the Reorganization; 53% of these shares (or between
1,328,975 shares and 1,798,025 shares) will be issued to the Mutual
Holding Company, and 47% (or between 1,178,525 shares and 1,594,475
shares) will be sold to depositors and possibly the public.
o Membership interests that depositors and certain borrowers had in the
Bank will become membership interests in the Mutual Holding Company.
As a result, members of the Bank who controlled 100% of the votes
eligible to be cast by the Bank's members prior to the Reorganization
will, through the Mutual Holding Company, control 53% of the votes
eligible to be cast by the Company's stockholders immediately
following the Reorganization.
Description of the Mutual Holding Company Structure
Following completion of the Reorganization, the corporate structure of the
Bank will be as follows:
Minority
Liberty Bancorp, Stockholders
MHC (Including ESOP)
53% of the 47% of the
Common Common
Stock Stock
Liberty Bancorp, Inc.
100% of the
Common Stock
Liberty Bank
The mutual holding company structure differs in significant respects from
the holding company structure that is often used in a standard mutual-to-stock
conversion. In a standard conversion, a converting mutual institution or its
newly-formed holding company sells 100% of its common stock in a stock offering.
A savings institution that
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<PAGE>
converts from the mutual to stock form of organization using the mutual holding
company structure sells less than half of its shares at the time of the
reorganization. By doing so, a converting institution using the mutual holding
company structure will raise less than half the capital that it would have
raised in a standard mutual-to-stock conversion.
The shares that are issued to the Mutual Holding Company may be
subsequently sold to the Bank's depositors if the Mutual Holding Company
converts from the mutual to the stock form of organization. See "Conversion of
the Mutual Holding Company to the Stock Form of Organization." In addition,
because OTS regulations and policy generally prohibit the sale of a savings
association in the mutual holding company structure, the Reorganization and
Offering will permit the Bank to achieve the benefits of a stock company without
the threat of an acquisition by another institution, as can occur following a
standard conversion from mutual to stock form. Sales of locally based,
independent savings institutions to larger, regional financial institutions can
result in closed branches, fewer choices for consumers, employee layoffs and the
loss of community support and involvement by local financial institutions.
Because the Mutual Holding Company is a mutual corporation, its actions
will not necessarily always be in the best interests of the Company's
stockholders. In making business decisions, the Mutual Holding Company's Board
of Directors will consider a variety of constituencies, including the depositors
of the Bank, the employees of the Bank and the communities in which the Bank
operates. As the majority stockholder of the Company, the Mutual Holding
Consequently, the Mutual Holding Company will act in a manner that furthers the
general interests of all of its constituencies, including, but not limited to,
the interests of the stockholders of the Company. The Mutual Holding Company
believes that the interests of the stockholders of the Company and those of the
Mutual Holding Company's other constituencies are, in many circumstances the
same, such as the increased profitability of the Company and the Bank and
continued service to the communities in which the Bank operates.
Conversion of the Mutual Holding Company to the Stock Form of Organization
OTS regulations and the Plan of Reorganization permit the Mutual Holding
Company to convert from the mutual to the capital stock form of organization (a
"Conversion Transaction"). If the Mutual Holding Company were to undertake a
Conversion Transaction, the transaction would in most circumstances be
structured as follows:
o The Mutual Holding Company and the Company would cease to exist.
o The Bank would form a new stock holding company.
o The new stock holding company would sell shares of its common stock in
a subscription offering to certain of the Mutual Holding Company's
members.
o In addition to the shares it would sell in the subscription offering,
the new stock holding company would issue shares of its common stock
to the Company's stockholders in exchange for their shares of the
Company's Common Stock.
After the Conversion Transaction, the Company's Minority Stockholders would
own approximately the same percentage of the new stock holding company as they
owned of the Company. Purchasers in the Conversion Transaction subscription
offering would own approximately the same percentage of the new stock holding
company as the Mutual Holding Company owned in the Company prior to the
Conversion Transaction. However, if the Mutual Holding Company waived any
dividends paid by the Company prior to the Conversion Transaction, then the
Company's Minority Stockholders would receive a smaller percentage of the new
stock holding company's common stock. See "Regulation--Holding Company
Regulation." There can be no assurance that the Mutual Holding Company will
convert to the stock form, and the Board of Directors has no current plan to do
so.
7
<PAGE>
Liberty Bancorp, MHC
The Mutual Holding Company will be organized by the Bank as a
federally-chartered mutual holding company, and will own 53% of the Common Stock
of the Company upon completion of the Reorganization. It is expected that the
Mutual Holding Company will not engage in any business activity other than to
hold a majority of the Common Stock of the Company and to invest any funds held
by the Mutual Holding Company. The Mutual Holding Company's offices will be
located at 1410 St. Georges Avenue, Avenel, New Jersey 07001, and its telephone
number at that location will be (732) 499-7200. See "The Mutual Holding
Company."
Liberty Bancorp, Inc.
The Company will be organized by the Bank as a federally-chartered
corporation for the purpose of owning all of the capital stock of the Bank upon
completion of the Reorganization. It is expected that the Company will not
engage in any business activity other than to hold 100% of the common stock of
the Bank, to make the loan to the ESOP, and to invest up to 50% of the net
proceeds of the Offering as described in "Use of Proceeds." The Company's
offices will be located at 1410 St. Georges Avenue, Avenel, New Jersey 07001,
and its telephone number at that location will be (732) 499-7200. See "The
Company" and "Regulation--Holding Company Regulation."
Axia Federal Savings Bank
The Bank was organized as a building and loan association in 1927 and
became a federal savings and loan association in 1942. In 1986 it converted to a
federal mutual savings bank charter. The Bank conducts its business from its
corporate headquarters located in Avenel, New Jersey and three branch offices
located in Union and Middlesex Counties, New Jersey. The Bank has traditionally
operated as a community-oriented lender offering various mortgage and consumer
loan products. The Bank is primarily engaged in the business of offering savings
and other FDIC-insured deposits to the general public and using those funds to
originate loans secured by one-to-four family residences located in Union and
Middlesex Counties. Loans secured by one-to-four family residences totalled
$143.6 million, or 93.9%, of the Bank's total loan portfolio at December 31,
1997. At December 31, 1997, the Bank had total assets of $217.4 million, total
deposits of $198.4 million, and retained earnings of $16.5 million. Concurrent
with the completion of the Reorganization, the Bank will change its name to
"Liberty Bank." The Bank's executive offices are located at 1410 St. Georges
Avenue, Avenel, New Jersey 07001, and its telephone number at that location is
(732) 499-7200. See "The Bank" and "Business of the Bank."
The Stock Offering
The Company is offering for sale between 1,178,525 and 1,594,475 shares of
its Common Stock, for a price per share of $10.00. The Bank and the Company may
increase the Offering to up to 1,833,646 shares without further notice to
investors if the maximum of the Valuation Range is increased as a result of
regulatory consideration of market or financial conditions prior to completion
of the Offering. The number of shares that are sold in the Offering is subject
to approval of the OTS.
Stock Purchase Priorities
The Company will offer Common Stock on the basis of purchase priorities.
Certain depositors, borrowers and the ESOP will receive subscription rights to
purchase shares. The Company may offer shares not purchased in the Subscription
Offering to the general public in a Community Offering. The Bank has engaged
Ryan Beck to assist the Bank and the Company on a best efforts basis in selling
the Common Stock in the Offering.
Prohibition on Transfer of Subscription Rights
No person may sell or assign subscription rights. Any transfer of
subscription rights is prohibited by law. See "The Reorganization and
Offering--Restrictions on Transfer of Subscription Rights and Shares."
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<PAGE>
Stock Pricing and Number of Shares to be Issued
The Bank's Board of Directors set the subscription price per share at
$10.00 (the "Subscription Price"), the subscription price most commonly used in
stock offerings involving mutual-to-stock conversions of savings institutions.
The number of shares of Common Stock to be issued in the Offering is based on
the independent valuation prepared by FinPro, Inc., Liberty Corner, New Jersey
(the "Independent Valuation"). The Independent Valuation states that as of March
16, 1998, the estimated market value of the Company after giving effect to the
Reorganization ranged from a minimum of $25,075,000 to a maximum of $33,925,000,
with a midpoint of $29,500,000. Based on the Independent Valuation and the
Subscription Price, the number of shares of Common Stock that the Company will
issue will range from between 2,507,000 shares to 3,392,500 shares. The Board of
Directors has decided to offer 47% of these shares, or between 1,178,525 shares
and 1,594,475 shares (the "Offering Range"), to depositors and the public
pursuant to this Prospectus. The Board determined to sell 47% of the stock in
the Offering in order to raise the maximum amount of proceeds while permitting
the Company to issue additional shares of Common Stock in the future pursuant to
the restricted stock plan (the "Recognition Plan") and stock option plan (the
"Stock Option Plan") that the Company intends to adopt no sooner than six months
after the Reorganization and Offering. The 53% of the shares of Company's Common
Stock that are not sold in the Offering will be issued to the Mutual Holding
Company.
Changes in the market and financial conditions and demand for the Common
Stock may result in an increase of up to 15% in the Independent Valuation (to up
to $39,013,750) and a corresponding increase in the maximum of the Offering
Range (to up to 1,833,646 shares). The number of shares issued is subject to
approval of the OTS. Subscribers will not be notified if the maximum of the
Independent Valuation and the maximum of the Offering Range are increased by 15%
or less. However, subscribers will be notified if the maximum of the Independent
Valuation is increased by more than 15%, or if the minimum of the Independent
Valuation is decreased. The Independent Valuation is not a recommendation as to
the advisability of purchasing Common Stock. Potential investors should read
this entire Prospectus in order to make an informed investment decision.
Termination of the Offering
The Subscription Offering will terminate at 10:00 a.m., New Jersey time, on
June 17, 1998. The Community Offering, if any, may commence at any time
following commencement of the Subscription Offering. The Company may terminate
the Community Offering at any time prior to August 3, 1998, or later if
permitted by the OTS.
Benefits to Management from the Offering
The Bank's full-time employees will be eligible to participate in the ESOP.
The Company also intends to implement the Recognition Plan and Stock Option Plan
following completion of the Reorganization, which will benefit the Bank's and
the Company's officers and directors. If the Recognition Plan is adopted,
certain officers and directors will be awarded shares of Common Stock at no cost
to them. However, the Recognition Plan and Stock Option Plan may not be adopted
until at least six months after completion of the Reorganization and are subject
to shareholder approval. The Bank will also enter into employment agreements
with certain officers of the Bank, which will provide for benefits and cash
payments in the event of a change in control of the Company or the Bank. See
"Management of the Bank--Benefit Plans."
Use of the Proceeds Raised from the Sale of Common Stock
Net proceeds from the sale of the Common Stock are estimated to be between
$11.2 million and $15.3 million, depending on the number of shares of Common
Stock sold and the expenses of the Offering. Up to 50% of the net proceeds of
the Offering will be retained by the Company and used for general business
purposes, including a loan by the Company to the ESOP to enable the ESOP to
purchase up to 8% of the Common Stock issued in the Offering. The remaining net
proceeds retained by the Company will be invested initially in short- and
medium-term investments and securities, including mortgage-backed securities and
Treasury obligations and may be used as a possible source of funds for the
payment of dividends to stockholders, the repurchase of stock and for other
general corporate purposes. The portion of net proceeds from the Offering
contributed to the Bank will be used by the Bank
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for general corporate purposes, including origination of loans and purchase of
investments in the ordinary course of business. Initially, the net proceeds are
expected to be invested primarily in mortgage-backed securities and short- and
medium-term Treasury securities. The Bank also may use the proceeds for the
expansion of its facilities and to acquire branch offices and deposits. See "Use
of Proceeds."
Dividends
Although no decision has been made regarding the payment of dividends, the
Company will consider a policy of paying quarterly cash dividends on the Common
Stock, with the first such dividend to be declared and paid as early as the
first full quarter following completion of the Offering. There can be no
assurance that dividends will be paid or, if paid, what the amount of the
dividends will be, or whether such dividends, once paid, will continue to be
paid.
Market for the Common Stock
The Company was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. The Company has
applied to have the Common Stock quoted on the Nasdaq National Market under the
symbol "LIBB." The requirements for listing include a minimum number of publicly
traded shares, market makers and record holders, and a minimum market
capitalization. Although under no obligation to do so, Ryan Beck has indicated
its intention to make a market in the Common Stock, and based on management's
analysis of the results of recent conversion stock offerings, the Bank believes
that the Company will satisfy the Nasdaq National Market listing requirements.
If the Company is unable, for any reason, to list the Common Stock on the Nasdaq
National Market, or to continue to be eligible for such listing, then management
believes that the Common Stock will be traded on the over-the-counter market
with quotations available through the OTC Bulletin Board.
Risk Factors
The purchase of Common Stock involves a substantial degree of risk.
Prospective shareholders should carefully consider the matters set forth in this
Prospectus, including those set forth in "Risk Factors."
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
The following tables set forth selected consolidated historical financial
and other data of the Bank (including its subsidiary) for the periods and at the
dates indicated. The information is derived in part from and should be read in
conjunction with the Consolidated Financial Statements and Notes thereto of the
Bank contained elsewhere herein.
At December 31,
----------------------
1997 1996
---- ----
(In Thousands)
Financial Condition Data:
Total assets ....................................... $217,437 $201,574
Loans receivable, net .............................. 152,200 130,690
Securities available for sale:
Investment securities ........................... 992 4,064
Mortgage-backed securities ...................... 52,925 55,525
Deposits ........................................... 198,363 184,709
Retained earnings-substantially restricted ......... 16,541 14,812
Year Ended December 31,
-----------------------
1997 1996(1)
---- ------
(In Thousands)
Operating Data:
Interest income ......................... $15,083 $13,723
Interest expense ........................ 9,004 8,049
------- -------
Net interest income ..................... 6,079 5,674
Provision for loan losses ............... 200 43
------- -------
Net interest income after provision
for loan losses ...................... 5,879 5,631
------- -------
Non-interest income:
Fees and service charges ............. 299 278
Gain on sales of securities .......... 129 --
Other non-interest income ............ 104 73
------- -------
Total non-interest income ........ 532 351
------- -------
Non-interest expense:
Salaries and employee benefits ....... 1,980 1,967
Net occupancy expense ................ 445 469
Equipment ............................ 416 355
Advertising .......................... 184 97
Federal insurance premium ............ 120 1,382
Miscellaneous ........................ 836 820
------- -------
Total non-interest expense ....... 3,981 5,090(1)
------- -------
Income before income taxes .............. 2,430 892
Income taxes ............................ 877 283(1)
------- -------
Net income .............................. $ 1,553 $ 609(1)
======= =======
- ----------
(1) Operating data for the year ended December 31, 1996 includes the effect of
a one-time Savings Association Insurance Fund ("SAIF") recapitalization
assessment of $1.0 million, or $648,000 net of taxes. Excluding this
non-recurring assessment, total non-interest expense would have been $4.0
million, income taxes would have totalled $635,000 and net income would
have been $1.3 million.
11
<PAGE>
At or For The Year
Ended December 31,
--------------------
1997 1996
---- ----
Selected Ratios:
Performance Ratios:
Return on assets (ratio of net income to
average total assets) (1) ..................... 0.73% 0.32%
Return on retained earnings (ratio of net
income to average equity) (1) ................. 9.95% 4.23%
Interest rate spread information (2):
Average during period ......................... 2.54% 2.65%
End of period ................................. 2.61% 2.67%
Net interest margin (net income divided by
average interest-earning assets) .............. 2.92% 3.01%
Operating expenses to
average total assets .......................... 1.88% 2.64%
Average interest-earning assets to
average interest-bearing liabilities .......... 108.77% 108.31%
Asset Quality Ratios:
Non-performing assets to total assets ........... 0.49% 0.46%
Allowance for loan losses to
non-performing loans .......................... 77.41% 57.61%
Allowance for loan losses to
loans receivable, net ......................... 0.48% 0.41%
Capital Ratios:
Retained earnings to total assets
at end of period .............................. 7.61% 7.35%
Average retained earnings to
average assets (2) ............................ 7.37% 7.47%
Other Data:
Number of full service customer
facilities at end of period ................... 4 4
- ---------------
(1) For the year ended December 31, 1995, return on average assets was 0.73%,
return on average retained earnings was 9.78% and average retained earnings
to average assets was 7.50%.
(2) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average cost of
average interest-bearing liabilities.
12
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth certain consolidated financial and other
information of the Bank for the periods and at the dates indicated. The selected
consolidated financial data, operating data and ratios and other data as of
March 31, 1998 and December 31, 1997 and for the three months ended March 31,
1997 and March 31, 1998 are derived from unaudited consolidated financial
statements. In the opinion of the management, all adjustments (consisting only
of normal recurring accruals) considered necessary for the fair presentation of
financial data and operating data for the three months ended March 31, 1998 and
1997 are included. The results of operations and ratios and other data presented
for the three months ended March 31, 1998 are not necessarily indicative of the
results of operations for the year ending December 31, 1998.
At March 31, At December 31,
1998 1997
----------- ---------------
(In Thousands)
Selected Financial Condition Data:
Total assets .................................... $225,178 $217,437
Loans receivable, net (1) ....................... 150,889 152,200
Securities available for sale:
Investment securities ........................ 994 992
Mortgage-backed securities ................... 51,073 52,925
Deposits ........................................ 205,944 198,363
Retained earnings-substantially restricted ...... 16,851 16,541
For the Three Months Ended March 31,
------------------------------------
1998 1997
---- ----
(In Thousands)
Selected Operating Data:
Interest income ........................ $3,753 $3,621
Interest expense ....................... 2,305 2,125
------ ------
Net interest income .................... 1,448 1,496
Provision for loan losses .............. 15 50
Non-interest income .................... 118 100
Non-interest expense ................... 1,057 992
------ ------
Income before income taxes ............. 494 554
Income taxes ........................... 186 224
------ ------
Net income ............................. $ 308 $ 330
====== ======
- -----------------
(1) The allowance for loan losses at March 31, 1998 and 1997 was $731,000 and
$634,000, respectively.
13
<PAGE>
At or For the Three Months
Ended March 31, (1)
--------------------------
1998 1997
---- ----
Selected Financial Ratios and
Other Data:
Performance Ratios:
Return on average assets (ratio of
net income to average total assets) ............... .56% .65%
Return on average retained earnings
(ratio of net income to average equity) ........... 7.33 8.88
Interest rate spread (2) ............................ 2.28 2.68
Net interest margin (net income
divided by average interest-earning assets) ....... 2.68 3.00
Average interest-earning assets to average
interest-bearing liabilities ...................... 108.87 107.47
Asset Quality Ratios:
Non-performing assets to total assets ............... .30 .42
Allowance for loan losses to non-
performing loans .................................. 109.43 73.81
Non-performing loans to total assets ................ .30 .42
Non-performing loans to total loans receivable ...... .44 .63
Capital Ratios:
Retained earnings to total assets ................... 7.48 7.15
Average retained earnings to average assets ......... 7.61 7.31
Tangible capital .................................... 7.31 7.23
Core capital ........................................ 7.31 7.23
Risk-based capital .................................. 17.85 17.41
Other Data:
Number of full service customer facilities
at end of period .................................. 4 4
- -----------
(1) Ratios are annualized where appropriate.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
14
<PAGE>
Comparison of Financial Condition at March 31, 1998 and December 31, 1997
The Bank's total assets increased by $7.8 million, or 3.6%, to $225.2
million at March 31, 1998 from $217.4 million at December 31, 1997 as the Bank
invested additional funds received by the Bank from increased deposits. The
Bank's deposits increased due to the Bank's increased marketing efforts.
Interest-bearing deposits in other banks increased by $10.6 million, or 225.5%,
to $15.3 million at March 31, 1998 from $4.7 million at December 31, 1997.
Mortgage-backed securities decreased by $1.8 million, or 3.4%, to $51.1 million
at March 31, 1998 from $52.9 million at December 31, 1997 and loans receivable
decreased slightly, by $1.3 million, or 0.9% to $150.9 million at March 31, 1998
from $152.2 million at December 31, 1997. Real estate owned (REO) remained
unchanged at $121,000 at March 31, 1998 and December 31, 1997. Retained earnings
increased by $310,000 to $16.9 million at March 31, 1998 from $16.5 million at
December 31, 1997.
Deposits increased by $7.5 million, or 3.8%, to $205.9 million at March 31,
1998 from $198.4 million at December 31, 1997. Specifically, certificates of
deposit increased by $4.1 million, or 3.5%, to $119.8 million at March 31, 1998
from $115.7 million at December 31, 1997. Passbook and statement savings
accounts increased by $2.9 million, or 6.4%, to $48.1 million at March 31, 1998
from $45.2 million at December 31, 1997. Individual Retirement Accounts
increased by $914,000, or 4.2%, to $22.5 million at March 31, 1998, from $21.6
million at December 31, 1997. Checking accounts decreased by $414,000, or 2.6%,
to $15.5 million at March 31, 1998 from $15.9 million at December 31, 1997.
Comparison of Operating Results for the Three Months Ended March 31, 1998 and
1997
General
The Bank's net income decreased by $22,000, or 6.7%, to $308,000 for the
three months ended March 31, 1998 from $330,000 for the three months ended March
31, 1997. The decrease in net income during the three month period in 1998
resulted from a decrease in net interest income and non-interest income and an
increase in non-interest expense, which were partially offset by a decrease in
the provision for loan losses and income taxes.
Interest Income
Interest income increased by $132,000, or 3.6%, to $3.8 million for the
three months ended March 31, 1998 from $3.6 million for the same period in 1997.
The increase for the three month period in 1998 resulted from an increase in
average interest earning assets of $16.9 million partially offset by a 32 basis
point decrease in the yield. This reduction of yield primarily resulted from
employing an interest rate risk reduction strategy whereby the Bank sold fixed
rate mortgage-backed securities and purchased adjustable rate mortgage-backed
securities.
Interest Expense
Interest expense increased by $180,000, or 8.5%, to $2.3 million for the
three months ended March 31, 1998, compared to $2.1 million for the same period
in 1997. The increase for the three month period in 1998 was attributable to an
increase of $12.7 million in the average balance of interest-bearing liabilities
outstanding and an increase of 7 basis points in the cost of such liabilities.
Net Interest Income
Net interest income decreased $48,000, or 3.2%, to $1.4 million for the
three months ended March 31, 1998, from $1.5 million for the same period in
1997. The decrease was due to a 32 basis point reduction in net interest margin
to 2.68% during the three months ended March 31, 1998 from 3.00% for the same
period in 1997.
15
<PAGE>
Provision for Loan Losses
During the three months ended March 31, 1998 and 1997, the Bank provided
$15,000 and $50,000, respectively, for loan losses. The allowance for loan
losses is based on management's evaluation of the risk inherent in its loan
portfolio and gives due consideration to the changes in general market
conditions and in the nature and volume of the Bank's loan activity. The Bank
intends to continue to provide for loan losses based on management's periodic
review of the loan portfolio and general market conditions. At March 31, 1998
and 1997, the Bank's non-performing loans which were delinquent 90 days or more
totaled $668,000, or .30% of total assets, and $859,000, or .42% of total
assets, respectively. At March 31, 1998 and 1997, all non-performing loans were
on non-accrual status.
Non-interest Income
Non-interest income increased by $18,000, or 18.0%, to $118,000 during the
three months ended March 31, 1998 compared with $100,000 during the same period
in 1997.
Non-interest Expense
Non-interest expense increased by $65,000, or 6.5%, to $1.06 million during
the three months ended March 31, 1998, compared with $992,000 during the same
period in 1997. The increase was primarily caused by increases in salaries and
advertising.
Income Taxes
Income taxes totaled $186,000 and $224,000 during the three months ended
March 31, 1998 and 1997, respectively. The decrease during the 1998 period
resulted from a decrease in pre-tax income.
16
<PAGE>
RISK FACTORS
The following risk factors, in addition to the other information discussed
elsewhere in this Prospectus, should be considered by investors in deciding
whether to purchase the Common Stock offered hereby.
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
The net income of the Bank substantially depends on its net interest
income, which is the difference between the interest income earned on its
interest-earning assets and the interest expense paid on its interest-bearing
liabilities. Like most savings institutions, the Bank's earnings are affected by
changes in market interest rates, and other economic factors beyond its control.
If an institution's interest-earning assets have longer effective maturities
than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and, as a result, the institution's net interest
income and interest rate spread generally would be adversely affected by
material and prolonged increases in interest rates. Accordingly, an increase in
interest rates generally would result in a decrease in the Bank's average
interest rate spread and net interest income. As a result of increases in the
rates paid by the Bank on its deposits without a commensurate increase in the
yields earned on its interest-earning assets, the Bank's average interest rate
spread decreased to 2.54% for the year ended December 31, 1997 from 2.65% for
the year ended December 31, 1996. No assurance can be given that the Bank's
average interest rate spread will not decrease in future periods. Any such
decrease in the Bank's average interest rate spread would adversely affect the
Bank's net interest income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Management of Market Risk."
In addition to affecting interest income and expense, changes in interest
rates also can affect the value of the Bank's interest-earning assets, which
comprise fixed- and adjustable-rate instruments, and the ability to realize
gains from the sale of such assets. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. At December 31,
1997, the Bank had $53.9 million of securities available for sale and the Bank
had $653,000 of net unrealized gains with respect to such securities, which were
included, net of income taxes, as a separate component in the Bank's retained
earnings, as of such date.
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. The relatively lower interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-backed
securities, as many borrowers have refinanced their mortgages to reduce their
borrowing costs. Under these circumstances, the Bank is subject to reinvestment
risk to the extent that it is not able to reinvest such prepayments at rates
which are comparable to the rates on the prepaid loans or securities. Moreover,
volatility in interest rates also can result in the flow of funds away from the
Bank into other investments such as U.S. Government and corporate securities and
investments which generally pay higher rates of return than the rates paid on
deposits by savings institutions.
Uncertainty as to Future Growth Opportunities and Ability to Successfully Deploy
Offering Proceeds
The Bank intends to use the net proceeds of the Offering to increase its
loan and deposit growth. It may also seek to expand its banking franchise by
acquiring other financial institutions or branches. The Bank's ability to grow
through selective acquisitions of other financial institutions or branches will
depend on successfully identifying, acquiring and integrating such institutions
or branches. There can be no assurance the Bank will be able to generate
internal growth or to identify attractive acquisition candidates, acquire such
candidates on favorable terms, successfully integrate any acquired institutions
or branches into the Bank, or increase profits sufficiently to offset the
increase in expenses that will result from an acquisition. Neither the Company
nor the Bank has any specific plans, arrangements or understandings regarding
any additional expansions or acquisitions at this time.
17
<PAGE>
Possible Increase in Valuation Range and Number of Shares Issued
The amount of Common Stock to be issued in the Reorganization may be
increased by up to 15% to reflect regulatory considerations and changes in
market and financial conditions following the commencement of the Subscription
and Community Offerings. If the Independent Valuation increases, then the
interests of those who purchase shares in the Offering will be diluted because
more shares will be outstanding at the conclusion of the Offering. Such an
increase in the number of shares issued in the Reorganization will also decrease
a subscriber's pro forma annualized net earnings per share and pro forma
stockholders' equity per share. See "Pro Forma Data."
Reduced Return on Equity After Reorganization
At December 31, 1997, the Bank's equity as a percentage of assets was
7.61%, and for the year ended December 31, 1997 the Bank's return on average
equity (net income divided by average equity) was 9.95%. The Bank's equity as a
percentage of assets will significantly increase as a result of the net proceeds
received in the Offering. On a pro forma basis as of December 31, 1997, the
Company's equity as a percentage of consolidated assets would be approximately
12.8% at the adjusted maximum of the Offering Range. The Bank currently
anticipates that it will take time to prudently deploy the capital raised in the
Offering. As a result, until the Bank has leveraged the capital received in the
Offering by increasing its interest-earning assets (and its interest-bearing
liabilities) and thereby reduced its equity as a percentage of assets, the
Bank's return on average equity is likely to be below its historical returns and
internal goals. There can be no assurances that the Bank will be able to
successfully leverage its capital, or that the Bank will be successful in
generating future returns on equity equal its historical returns or internal
goals.
Control by Current Directors
As the majority stockholder of the Company, the Mutual Holding Company will
be able to elect all of the directors of the Company and direct its business and
affairs. The Company will be controlled by its Board of Directors, which will
consist initially of those persons who currently are directors of the Bank.
After the Reorganization, the initial Board of Directors of the Mutual Holding
Company will also consist of those persons who currently are members of the
Board of Directors of the Bank. In the future, the directors of the Mutual
Holding Company will be elected by the Mutual Holding Company's members at an
annual meeting of members in the same manner that directors of the Bank in its
mutual form are elected by the Bank's members. The Mutual Holding Company's
members will consist of the Bank's account holders and certain borrowers of the
Bank. It is expected that the Board of Directors of the Mutual Holding Company
will exercise control over the Mutual Holding Company and, consequently, may be
capable of perpetuating the Board of Directors and management of the Mutual
Holding Company, the Company and the Bank. Executive officers and directors of
the Company will own 1.8% of the Common Stock outstanding at the completion of
the Offering (assuming shares are sold at the midpoint of the Offering Range and
that executive officers and directors receive all the shares for which they are
expected to subscribe). Assuming shares are sold at the midpoint of the Offering
Range and including shares held by the Mutual Holding Company and shares
proposed to be issued pursuant to the Recognition Plan, directors may control up
to 56.7% of the Common Stock outstanding following the Offering. Such percentage
may increase assuming the exercise of stock options granted pursuant to the
Stock Option Plan. The purchasers of the Common Stock in the Offering will be
Minority Stockholders of the Company and will have limited influence in electing
directors or otherwise directing the affairs of the Company as long as the
Mutual Holding Company remains in existence. The Company's Charter will prohibit
cumulative voting. Therefore, the Mutual Holding Company, under the direction of
the Bank's current Board of Directors, will have the power to elect all the
directors of the Company, and thus control the future course of the Company. No
assurances can be given that the Mutual Holding Company will not take action
that the Minority Stockholders believe to be contrary to their interests.
Minority Public Ownership and Certain Anti-Takeover Provisions
Voting Control of the Mutual Holding Company. Under OTS regulations and the
Plan of Reorganization, a majority of the Company's voting shares must be owned
by the Mutual Holding Company, and the Mutual Holding
18
<PAGE>
Company will own 53.0% of the Common Stock outstanding at the completion of the
Offering. The Mutual Holding Company will be controlled by its executive
officers and directors, who initially will consist of persons who are executive
officers and directors of the Company. Assuming shares are sold at the midpoint
of the Offering Range and including shares held by the Mutual Holding Company
and shares proposed to be issued pursuant to the Recognition Plan, directors may
control up to 56.7% of the Common Stock outstanding following the Offering. Such
percentage may increase assuming the exercise of stock options granted pursuant
to the Stock Option Plan. The Mutual Holding Company will elect all members of
the Board of Directors of the Company and, with certain exceptions, will control
the outcome of matters presented to the stockholders of the Company for
resolution by vote. The situations in which the Mutual Holding Company may not
control the outcome of such vote include any stockholder vote to approve a
restricted stock plan or stock option plan instituted within one year of the
Offering (which would require the approval of a majority of the shares other
than shares held by the Mutual Holding Company), any stockholder vote relating
to the Mutual Holding Company's conversion from the mutual to the stock form of
organization (which would require the approval of a majority of shares other
than shares held by the Mutual Holding Company and of two-thirds of all shares
including shares held by the Mutual Holding Company), or any other stockholder
vote in which the OTS may impose such a requirement. The Mutual Holding Company,
acting through its Board of Directors, will be able to control the business and
operations of the Company and the Bank and will be able to prevent any challenge
to the ownership or control of the Company by stockholders other than the Mutual
Holding Company. Although OTS regulations and the Plan of Reorganization permit
the Mutual Holding Company to convert from the mutual to the capital stock form
of organization, there can be no assurance when, if ever, a conversion of the
Mutual Holding Company will occur.
Provisions in the Company's and the Bank's Governing Instruments. In
addition, certain provisions of the Company's Charter and Bylaws, particularly a
provision limiting voting rights, as well as certain federal regulations will
assist the Company in maintaining its status as an independent publicly owned
corporation. These provisions provide for, among other things, staggered boards
of directors, no cumulative voting for directors, limits on the calling of
special meetings of shareholders, and limits on the ability to vote Common Stock
in excess of 10% of outstanding shares (except as to shares held by the Mutual
Holding Company and the ESOP).
Possible Dilution in Ownership Interest
Dividend Waivers by the Mutual Holding Company. It has been the policy of
many mutual holding companies to waive the receipt of dividends declared by
their subsidiaries. OTS regulations require that mutual holding companies
receive OTS approval before they waive dividends. The OTS has generally
permitted mutual holding companies to waive dividends under certain conditions.
Management believes that one of the conditions to such permission would be that,
in the event the Mutual Holding Company undertakes a Conversion Transaction in
the future, any waived dividends would reduce the percentage of the resulting
entity's shares of common stock issued to Minority Stockholders in exchange for
their shares of Common Stock. The Plan of Reorganization also provides for such
an adjustment. See "Regulation--Holding Company Regulation--Conversion of the
Mutual Holding Company to Stock Form." The Mutual Holding Company has not
determined whether it will waive dividends declared by the Company. There is no
assurance that the OTS would approve the waiver of dividends should the Mutual
Holding Company request it to do so.
Terms of Any Conversion Transaction. If the Mutual Holding Company conducts
a Conversion Transaction, the stock offering that would be conducted as part of
the Conversion Transaction would include maximum purchase limitations that
restrict the amount of stock that a person could purchase. Minority Stockholders
would be likely to receive shares of the resulting entity in exchange for their
shares of Common Stock. Under current OTS policy, the shares of the resulting
entity that Minority Stockholders receive in exchange for their shares of Common
Stock will be included in the maximum purchase limitations that apply to the
stock offering. This means that certain Minority Stockholders may not be able to
exercise subscription rights to purchase shares of common stock sold in the
Conversion Transaction, and in certain circumstances, may be required by the OTS
to divest shares of Common Stock.
19
<PAGE>
Implementation of Proposed Stock Benefit Plans
Following the Offering, the Company intends to seek stockholder approval of
the Recognition Plan and the Stock Option Plan at a meeting of stockholders
which, under current OTS regulation, may be held no earlier than six months
after completion of the Offering. If the Recognition Plan is approved by
stockholders of the Company, the Recognition Plan intends to acquire an amount
of Common Stock equal to 4% of the shares of Common Stock sold in the Offering,
or 63,779 shares of Common Stock at the maximum of the Offering Range. Such
shares would be granted to officers and directors of the Bank at no cost to
these recipients, for a total value of $637,790 at the maximum of the Offering
Range and based on the $10 per share subscription price. If the Stock Option
Plan is approved by stockholders of the Company, the Company intends to reserve
for future issuance pursuant to such plan a number of shares of Common Stock
equal to 10% of the Common Stock sold in the Offering. Options to purchase these
shares of Common Stock will be granted to officers and directors of the Bank and
the Company at no cost to them, and without risk as there is no requirement that
officers and directors exercise their options.
Possible Dilutive Effective of Issuance of Additional Shares
Shares of Common Stock to be acquired by the Recognition Plan or issued
upon exercise of stock options granted pursuant to the Stock Option Plan may be
acquired in the open market with funds provided by the Company, or from
authorized but unissued shares of Common Stock. In the event that such shares
are issued from authorized but unissued shares of Common Stock, the voting
interests of stockholders will be diluted by approximately 6.80% and net
earnings per share and stockholders' equity per share would be decreased.
Higher Compensation Expenses in Future Periods
The Bank's and the Company's compensation expense is likely to increase
substantially in the future due to the stock benefit plans that the Bank and the
Company intend to implement. Among the benefit plans that the Bank and the
Company intend to establish are the Recognition Plan and the ESOP. Generally
accepted accounting principles will require the Company to record compensation
expense upon the vesting of shares of restricted stock awarded pursuant to the
Recognition Plan and upon the commitment to release shares under the ESOP from
the ESOP loan suspense account. For the ESOP, the compensation expense will be
equal to the fair value of the shares at the time the shares are committed to be
released and allocated to employees' ESOP accounts, and future increases and
decreases in the fair value of Common Stock committed to be released will have a
corresponding effect on compensation expense related to the ESOP. To the extent
that the fair value of the Bank's ESOP shares differs from the cost of such
shares, the differential will be charged or credited to equity.
Competition
Competition in the banking and financial services industry is intense. In
its market area, the Bank competes for loans and deposits with commercial banks,
savings institutions, mortgage brokerage firms, credit unions, finance
companies, mutual funds, insurance companies, and brokerage and investment
banking firms operating locally and elsewhere. Many of these competitors have
substantially greater resources and lending limits than the Company and the Bank
and may offer certain services that the Company and the Bank do not or cannot
provide. Such competition may have an adverse effect on the Company's and the
Bank's growth and profitability in the future.
Lack of Active Market for the Common Stock
The Company has never issued capital stock to the public, and due to the
relatively small size of the Offering (resulting, in part from the issuance of
only a portion of Company's to-be outstanding shares in the Offering), there can
be no assurance that an active and liquid trading market for the Common Stock
will develop or be maintained. It is anticipated that the Common Stock will be
quoted on the Nasdaq National Market. Ryan Beck has indicated its intention to
make a market in the Common Stock, although it is not required to do so. If the
Common Stock cannot be quoted and traded on the Nasdaq National Market, it is
expected that the Common Stock will be traded on the over-the-counter market
with quotations available through the OTC Bulletin Board. Investors who purchase
shares of
20
<PAGE>
Common Stock may not be able to sell them when they want to at a price that
equals or exceeds the price paid for the Common Stock.
Regulatory Oversight and Legislation
The Bank is subject to extensive regulation, supervision and examination by
the OTS, as its chartering authority, and by the FDIC as insurer of its deposits
up to applicable limits. The Bank is a member of the Federal Home Loan Bank (the
"FHLB") of New York and is subject to certain limited regulations promulgated by
the Board of Governors of the Federal Reserve System (the "FRB"). As the holding
company of the Bank, the Company also will be subject to regulation and
oversight by the OTS. Such regulation and supervision govern the activities in
which an institution can engage and are intended primarily for the protection of
the insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
banking and thrift industries, including the imposition of restrictions on the
operation of an institution, the classification of assets by an institution and
the adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight, whether by the OTS, the FDIC or Congress, could have a
material impact on the Company, the Bank and their respective operations. See
"Regulation."
Legislation is proposed periodically providing for a comprehensive reform
of the banking and thrift industries, and has included provisions that would (i)
require federal savings associations to convert to a national bank or a
state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed and, if
passed, in what form the legislation would be passed. As a result, management
cannot accurately predict the possible impact of such legislation on the Bank.
Capability of the Bank's Data Processing Hardware to Accommodate the Year 2000
Like many financial institutions the Bank relies upon computers for the
daily conduct of its business and for data processing generally. There is
concern among industry experts that on January 1, 2000 computers will be unable
to "read" the new year and there may be widespread computer malfunctions. The
Bank generally relies on independent third parties to provide data processing
services to the Bank, and has been advised by such parties that the issue is
being addressed. Based on these representations, management does not believe
that significant additional costs will be incurred in connection with the year
2000 issue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Capability of the Bank's Data Processing Hardware to
Accommodate the Year 2000."
THE MUTUAL HOLDING COMPANY
The Mutual Holding Company will be formed as a federal mutual holding
company and will initially own 53% of the outstanding shares of Common Stock
following the completion of the Reorganization. The Company has not yet been
formed, although the OTS has approved an application for the Mutual Holding
Company to become a savings and loan holding company. The Mutual Holding Company
will have all of the powers set forth in its federal charter, and federal law
and OTS regulations. The Mutual Holding Company initially will not conduct any
active business other than activities relating to its investment in a majority
of the Common Stock and maintenance of books and records relating to its
members. The Mutual Holding Company does not intend to employ any persons other
than its officers, although it may utilize the Bank's support staff from time to
time. Federal law and OTS regulations, and the Plan of Reorganization, require
that as long as the Mutual Holding Company is in existence it must own a
majority of the Common Stock. Federal law and OTS regulations, and the Plan of
Reorganization, permit the Mutual Holding Company to convert to the capital
stock form of organization. The manner in which such a transaction would be
conducted and the regulations and policy affecting such a transaction are
described in "Regulation--Holding Company Regulation."
21
<PAGE>
Although many federal mutual holding companies waive the receipt of cash
dividends declared by their subsidiaries, the Mutual Holding Company has not
determined whether or not it will do so, and intends to make such a
determination at the time the Company declares a dividend, if any. OTS
regulations require the Mutual Holding Company to give the OTS prior written
notice of any such waiver, and the conditions pursuant to which the OTS
generally approves dividend waivers are described in "Regulation--Holding
Company Regulation." The Mutual Holding Company's Board of Directors will waive
dividends paid by the Company if the Board determines that such a waiver is in
the Mutual Holding Company's members' best interest because, among other
reasons: (i) the Mutual Holding Company has no need for the dividend considering
its business operations; (ii) the cash that would be received could be invested
by the Company or the Bank at a more favorable rate of return; (iii) such waiver
may increase the capital of the Bank and enhance its business so that members
will continue to have access to the offices and services of the Bank; and (iv)
such waiver preserves the net worth of the Mutual Holding Company through its
principal asset (the Company, and indirectly, the Bank), which would be
available for distribution in the unlikely event of a voluntary liquidation of
the Company and the Bank after satisfaction of claims of depositors and
creditors. The Board of Directors may consider other factors in determining
whether such waiver is consistent with its fiduciary duties to members of the
Mutual Holding Company. Any waiver of dividends by the Mutual Holding Company is
likely to result in a downward adjustment to the ratio pursuant to which shares
of Common Stock are exchanged for shares of the resulting company in any future
Conversion Transaction.
The Mutual Holding Company will accept dividends paid by the Company in an
amount necessary to pay the Mutual Holding Company's expenses, and will accept
additional dividends if its Board of Directors determines that accepting such
dividends is in the Mutual Holding Company's members' best interest because,
among other reasons: (i) the Mutual Holding Company may increase its direct
ownership of the Company, and indirect ownership of the Bank, by using cash
dividends to purchase additional shares of Common Stock in the open market from
time to time; and (ii) such dividends may be used to promote activities that are
in the interest of members and the Bank's community. Any purchases of Common
Stock by the Mutual Holding Company will increase the percentage of the
outstanding shares of Common Stock held by the Mutual Holding Company and, in a
Conversion Transaction, will decrease the aggregate number of shares of the
resulting company issued to Minority Stockholders in exchange for their shares
of Common Stock.
The Mutual Holding Company's offices will be located at 1410 St. Georges
Avenue, Avenel, New Jersey 07001, and its telephone number will be (732)
499-7200.
THE COMPANY
The Company will be organized for the purpose of acquiring all of the
outstanding shares of common stock of the Bank. Immediately after the
Reorganization, it is expected that the only business activities of the Company
will be owning 100% of the common stock of the Bank, making the loan to the
ESOP, and investing the remainder of the 50% of the net proceeds received in the
Offering. See "Use of Proceeds." Initially, the Company will neither own nor
lease any property, but instead will use the premises, equipment and furniture
of the Bank. At the present time, the Company does not intend to employ any
persons other than officers of the Bank but will utilize the support staff of
the Bank from time to time. Additional employees will be hired as appropriate to
the extent the Company expands its business. See "Management of the Company."
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of or mergers
with other financial institutions and financial services companies, or for other
business or investment purposes, including the possible repurchase of Common
Stock as permitted by the OTS. Although there are no current arrangements,
understandings or agreements, written or oral, regarding any such opportunities
or transactions, the Company will be in a position after the Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Company are anticipated to be funded by the
proceeds from the Offering retained by the Company and earnings thereon or,
alternatively, through dividends received from the Bank.
22
<PAGE>
The Company's offices will be located at 1410 St. Georges Avenue, Avenel,
New Jersey 07001, and its telephone number will be (732) 499-7200.
THE BANK
The Bank was organized as a building and loan association in 1927 and
became a federal savings and loan association in 1942. In 1986 it converted to a
federal savings bank charter. The Bank conducts its business from its corporate
headquarters located in Avenel, New Jersey and three branch offices located in
Union and Middlesex Counties, New Jersey. The Bank has traditionally operated as
a community-oriented savings institution providing mortgage and consumer loans
to its local community. The Bank is primarily engaged in the business of
offering savings and other FDIC-insured deposits to the general public through
its offices and using those funds to originate mortgage loans secured by
one-to-four family residences located primarily in Union and Middlesex Counties.
Loans secured by one-to-four family residences totalled $143.6 million, or
93.9%, of the Bank's total loan portfolio at December 31, 1997. At December 31,
1997, the Bank had total assets of $217.4 million, total deposits of $198.4
million, and retained earnings of $16.5 million.
The Bank's executive offices are located at 1410 St. Georges Avenue,
Avenel, New Jersey 07001, and its telephone number at that location is (732)
499-7200.
23
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At December 31, 1997, the Bank exceeded all OTS regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with OTS
capital standards as of December 31, 1997, on a historical and pro forma basis
assuming that the indicated number of shares were sold as of such date, and that
the Company contributes to the Bank 50% of the estimated net proceeds of the
Offering. See "Pro Forma Data" for the assumptions used to determine the net
proceeds of the Offering.
<TABLE>
<CAPTION>
Pro Forma at December 31, 1997, Based Upon the Sale of
-----------------------------------------------------------------------------------
1,833,646 Shares
1,178,525 Shares at 1,368,500 Shares at 1,594,475 Shares at At Adjusted
Historical at Minimum of Midpoint of Maximum of Maximum of
December 31, 1997 Offering Range Offering Range Offering Range Offering Range(1)
------------------ ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital............. $ 16,541 7.61% $ 20,721 9.35% $ 21,511 9.67% $ 22,298 9.99% $ 23,210 10.36%
======== ====== ========= ====== ========= ====== ======== ====== ======== =====
Tangible capital:
Capital level (3)...... $ 16,123 7.43% $ 20,303 9.18% $ 21,093 9.50% $ 21,880 9.82% $ 22,792 10.19%
Requirement............ 3,255 1.50 3,318 1.50 3,331 1.50 3,344 1.50 3,355 1.50
-------- ------ --------- ------ --------- ------ -------- ------ -------- -----
Excess............... $ 12,868 5.93% $ 16,985 7.68% $ 17,762 8.00% $ 18,536 8.32% $ 19,437 8.69%
======== ====== ========= ====== ========= ====== ======== ====== ======== =====
Core capital:
Capital level (3)...... $ 16,123 7.43% $ 20,303 9.18% $ 21,093 9.50% $ 21,880 9.82% $ 22,792 10.19%
Requirement (4)........ 6,511 3.00 6,636 3.00 6,660 3.00 6,683 3.00 6,711 3.00
-------- ------ --------- ------ --------- ------ -------- ------ -------- -----
Excess............... $ 9,612 4.43% $ 13,667 6.18% $ 14,433 6.50% $ 15,197 6.82% $ 16,081 7.19%
======== ====== ========= ====== ========= ====== ======== ====== ======== =====
Risk-based capital:
Capital level (3)(5)... $ 16,834 17.69% $ 21,014 21.60% $ 21,804 22.33% $ 22,591 23.04% $ 23,503 23.86%
Requirement............ 7,614 8.00 7,781 8.00 7,813 8.00 7,844 8.00 7,881 8.00
-------- ------ --------- ------ --------- ------ -------- ------ -------- -----
Excess............... $ 9,220 9.69% $ 13,233 13.60% $ 13,991 14.33% $ 14,747 15.04% $ 15,622 15.86%
======== ====== ========= ====== ========= ====== ======== ====== ======== =====
</TABLE>
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Range of up to 15% to
reflect changes in market and financial conditions following commencement
of the Subscription Offering and the Community Offering, if any, as well as
to reflect demand for the Common Stock.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets. Pro forma total adjusted and risk-weighted assets
used for the capital calculations include the proceeds of the ESOP's
purchase of 8% of the Common Stock issued in the Offering.
(3) Regulatory capital levels exclude net unrealized gains on securities. Pro
forma capital levels assume that the Bank funds the Recognition Plan
purchases of a number of shares equal to 4% of the Common Stock sold in the
Offering, the ESOP purchases 8% of the shares sold in the Offering. See
"Management of the Bank" for a discussion of the Recognition Plan and ESOP.
(4) The current OTS core capital requirement for savings banks is 3% of total
adjusted assets. The OTS has proposed core capital requirements that would
require a core capital ratio of 3% of total adjusted assets for savings
banks that receive the highest supervisory rating for safety and soundness,
and a 4% to 5% core capital ratio requirement for all other savings banks.
See "Regulation--Federal Regulation of Savings Institutions--Capital
Requirements."
(5) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 50% risk-weighting.
USE OF PROCEEDS
The net proceeds from the sale of Common Stock, based on the minimum,
midpoint, maximum and 15% above the maximum of the Offering Range, are estimated
at $11.2 million, $13.3 million, $15.3 million and $17.7 million, respectively.
The Company will be unable to utilize any of the net proceeds of the Offering
until the consummation of the Reorganization.
The Company will retain up to 50% of the net proceeds of the Offering. Net
proceeds retained by the Company will be used to fund the loan to the Bank's
24
<PAGE>
ESOP to acquire up to 8% of the Common Stock issued in the Offering. Any
remaining net proceeds retained by the Company will be invested in short-term
and medium-term investment securities, including mortgage-backed securities,
Treasury obligations, and deposits of the Bank. The Company will contribute to
the Bank at least 50% of the net proceeds of the Offering, which will be added
to the Bank's general funds that management currently intends to use initially
for general corporate purposes, including investment in one-to-four family
residential real estate loans and other loans and investment in short-term and
intermediate-term securities and mortgage-backed securities.
The net proceeds retained by the Company and proceeds contributed to the
Bank may also be used to support the future expansion of operations through
branch acquisitions, the establishment of new branch offices, and the
acquisition of financial institutions or their assets or diversification into
other banking related businesses. However, neither the Company nor the Bank has
any specific plans, arrangements or understandings regarding any additional
expansions or acquisitions at this time.
Upon completion of the Reorganization, the Board of Directors of the
Company will have the authority to repurchase stock, subject to statutory and
regulatory requirements. Based upon facts and circumstances following the
Reorganization and subject to applicable regulatory requirements, the Board of
Directors may determine to repurchase Common Stock in the future. Such facts and
circumstances may include but will not be limited to (i) market and economic
factors such as the price at which the Common Stock is trading in the market,
the volume of trading, the attractiveness of other investment alternatives in
terms of the rate of return and risk involved in the investment, the ability to
increase the book value and/or earnings per share of the remaining outstanding
shares, and the opportunity to improve the Company's return on equity; (ii) the
avoidance of dilution to stockholders by not having to issue additional shares
to cover the exercise of stock options or to fund employee stock benefit plans;
and (iii) any other circumstances in which repurchases would be in the best
interests of the Company and its shareholders. In the event the Company
determines to repurchase stock, such repurchases may be made at market prices
which may be in excess of the Subscription Price in the Offering.
DIVIDEND POLICY
Although no decision has been made yet regarding the payment of dividends,
the Company will consider a policy of paying quarterly cash dividends on the
Common Stock, with the first such dividend to be declared and paid as early as
the first full quarter following completion of the Offering. Declarations of
dividends by the Company's Board of Directors will depend upon a number of
factors, including the amount of the net proceeds from the Offering retained by
the Company, investment opportunities available to the Company or the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. Consequently, there can be no assurance that dividends will
in fact be paid on the Common Stock or that, if paid, such dividends will not be
reduced or eliminated in future periods.
The Company will not be subject to OTS regulatory restrictions on the
payment of dividends although the availability of funds for such dividends will
depend in part upon the receipt of dividends from the Bank. The Bank must
provide the OTS with 30 days prior notice of its intention to make a capital
distribution to the Company. In certain circumstances, OTS regulations limit the
amount of any capital distribution by federal savings banks. In addition, the
portion of the Bank's earnings which has been appropriated for bad debt reserves
and deducted for federal income tax purposes cannot be used by the Bank to pay
cash dividends to the Company without the payment of federal income taxes by the
Bank at the then current income tax rate on the amount deemed distributed, which
would include the amount of any federal income taxes attributable to the
distribution. The Company does not contemplate any distribution by the Bank that
would result in a recapture of the Bank's bad debt reserve or otherwise create
federal tax liabilities. See "Taxation--Federal Income Taxes," Note 9 to
Consolidated Financial Statements, and "Regulation--Federal Regulation of
Savings Institutions--Limitations on Capital Distributions."
Additionally, in connection with the Reorganization, the Company and the
Bank have committed to the OTS that during the one-year period following the
consummation of the Reorganization and the Offering, the Company will not take
any action to declare an extraordinary dividend to stockholders which would be
treated by recipient stockholders as a tax-free return of capital for federal
income tax purposes without prior approval of the OTS.
25
<PAGE>
MARKET FOR THE COMMON STOCK
The Company was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. The Company has
applied to have the Common Stock quoted on the Nasdaq National Market under the
symbol "LIBB." The requirements for listing include a minimum number of publicly
traded shares, market markers and record holders, and a minimum market
capitalization. Although under no obligation to do so, Ryan Beck has indicated
its intention to make a market in the Common Stock. Based on management's
analysis of the results of recent conversion stock offerings, the Bank believes
that the Company will satisfy these requirements. If the Company is unable, for
any reason, to list the Common Stock on the Nasdaq National Market, or to
continue to be eligible for such listing, then management believes that the
Common Stock will be traded on the over-the-counter market with quotations
available through the OTC Bulletin Board.
Additionally, the development of a public market, having the desirable
characteristics of depth, liquidity and orderliness, depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Bank or any market maker. There can be no assurance that
persons purchasing the Common Stock will be able to sell their shares at or
above the Subscription Price. Therefore, purchasers of the Common Stock should
have a long-term investment intent and should recognize that a possibly limited
trading market may make it difficult to sell the Common Stock, and may have an
adverse effect on the price of the Common Stock.
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
December 31, 1997, and the pro forma consolidated capitalization of the Company
as of that date after giving effect to the Reorganization and Offering, based
upon the assumptions set forth in the "Pro Forma Data" section.
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based Upon the Sale for $10.00 per Share of
--------------------------------------------------------
1,833,646
1,178,525 1,368,500 1,594,475 Shares of
Shares at Shares at Shares at Adjusted
Minimum Midpoint Maximum Maximum
Historical of Offering of Offering of Offering of Offering
Capitalization Range Range Range Range (1)
-------------- ------------ ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2)................................. $ 198,363 $198,363 $ 198,363 $ 198,363 $198,363
========= ======== ========= ========= ========
Stockholders' equity (3):
Preferred Stock, $1.00 par value, 10,000,000
shares authorized; none to be issued $ -- $ -- $ -- $ -- $ --
Common Stock, $1.00 par value, 20,000,000
shares authorized; shares to be issued
as reflected............................. -- 2,508 2,950 3,393 3,901
Additional paid-in capital................. -- 8,677 10,315 11,952 13,835
Unrealized gain on securities available
for sale................................. 418 418 418 418 418
Less:
Common Stock acquired by ESOP (4)........ -- 943 1,109 1,276 1,467
Common Stock acquired by
Recognition Plan (5)................... -- 471 555 638 733
Retained earnings, substantially
restricted(6)............................ 16,123 16,123 16,123 16,123 16,123
------ -------- --------- --------- --------
Total stockholders' equity............. $ 16,541 $ 26,312 $ 28,142 $ 29,972 $ 32,077
========= ======== ========= ========= ========
Total stockholders' equity as a percentage
of pro forma total assets................ 7.6% 11.0% 11.6% 12.1% 12.8%
========= ======== ========= ========= ========
(footnotes on following page)
</TABLE>
26
<PAGE>
(1) As adjusted to give effect to an increase in the number of shares issued
which could occur due to an increase in the maximum of the Valuation Range
and the maximum of the Offering Range of up to 15% to reflect changes in
market and financial conditions following the commencement of the Offering.
(2) Excludes withdrawals from deposit accounts for the purchase of Common
Stock. Such withdrawals will reduce pro forma deposits by the amount
thereof.
(3) Does not reflect additional shares of Common Stock that could be purchased
pursuant to the Stock Option Plan, if implemented, under which directors,
executive officers and other employees of the Company would be granted
options to purchase an aggregate amount of Common Stock equal to 10% of the
shares issued in the Offering. Implementation of the Stock Option Plan
requires shareholder approval, which may be sought no earlier than six
months following the Reorganization.
(4) Assumes purchases by the ESOP of a number of shares equal to 8% of the
shares sold in the Offering. The funds used to acquire the ESOP shares will
be borrowed from the Company. See "Use of Proceeds." The Bank intends to
make contributions to the ESOP sufficient to service and ultimately retire
its debt. The Common Stock acquired by the ESOP is reflected as a reduction
of shareholders' equity. As the ESOP debt is repaid, shares will be
released and allocated to participants' accounts. See "Management of the
Bank--Benefit Plans--Employee Stock Ownership Plan and Trust."
(5) Assuming the receipt of shareholder approval, the Company intends to
implement the Recognition Plan. Assuming such implementation, the
Recognition Plan will purchase an amount of shares equal to 4% of the
Common Stock sold in the Offering. Such shares may be purchased from
authorized but unissued shares or in the open market. If the Recognition
Plan shares are issued from authorized but unissued shares, the dilution to
the voting interests of existing stockholders would be 1.94%. The Common
Stock to be purchased by the Recognition Plan represents unearned
compensation and is, accordingly, reflected as a reduction to pro forma
stockholders' equity.
(6) Retained earnings are substantially restricted, see "Consolidated Financial
Statements."
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Offering is completed. The following estimated pro forma
information is based upon the assumption that the Reorganization expenses,
including the fees payable to Ryan Beck, will be approximately $600,000. Actual
expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the year ended
December 31, 1997 has been calculated as if the Company had been in existence
and estimated net proceeds received by the Company and the Bank had been
invested at an assumed interest rate of 5.55% for the year ended December 31,
1997. The reinvestment rate was calculated based on the one year U.S. Treasury
bill rate (which, in light of changes in interest rates in recent periods is
deemed by the Company and the Bank to more accurately reflect the pro forma
reinvestment rates than the arithmetic average method). The effect of
withdrawals from deposit accounts for the purchase of Common Stock has not been
reflected. The pro forma after-tax yield on the estimated net proceeds is
assumed to be 3.50% for the year ended December 31, 1997, based on an effective
tax rate of 37.0%. Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of Common Stock. No effect has been given in the pro forma
stockholders' equity calculations for the assumed earnings on the net proceeds.
It is assumed that the Company will retain 50% of the estimated adjusted net
Offering proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with generally accepted accounting principles
("GAAP"). The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
27
<PAGE>
The following table summarizes historical data of the Bank and pro forma
data of the Company at or for the year ended December 31, 1997, based on
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the Common Stock following the
Reorganization. No effect has been given in the tables to the possible issuance
of additional shares reserved for future issuance pursuant to the Stock Option
Plan. See "The Reorganization and Offering--Effects of Reorganization on
Depositors, Borrowers and Members--Effect on Liquidation Rights," and
"Management of the Bank--Directors' Compensation," and "--Executive
Compensation."
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
Based upon the Sale for $10.00 per Share of
--------------------------------------------------
1,178,525 1,386,500 1,594,475 1,833,646
Shares Shares Shares Shares (1)
------ ------ ------ ----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Gross proceeds.............................................. $ 11,785 $ 13,865 $ 15,945 $ 18,336
Less Offering expenses...................................... 600 600 600 600
---------- ---------- ---------- ----------
Estimated net proceeds.................................... 11,185 13,265 15,345 17,736
Common Stock purchased by ESOP.............................. (943) (1,109) (1,276) (1,467)
Common Stock purchased by Recognition Plan.................. (471) (555) (638) (733)
---------- ---------- ---------- ----------
Estimated investable proceeds............................. $ 9,771 $ 11,601 $ 13,431 $ 15,536
========== ========== ========== ==========
Net earnings:
Historical................................................ $ 1,553 $ 1,553 $ 1,553 $ 1,553
Pro forma income on net proceeds (2)...................... 342 406 470 543
Pro forma ESOP adjustment (3)............................. (59) (70) (80) (92)
Pro forma Recognition Plan adjustment (4)................. (59) (70) (80) (92)
---------- ---------- ---------- ----------
Pro forma net earnings................................. $ 1,777 $ 1,819 $ 1,863 $ 1,912
========== ========== ========== ==========
Per share net earnings: (5)
Historical................................................ $ 0.62 $ 0.53 $ 0.46 $ 0.40
Pro forma income on net proceeds (2)...................... 0.14 0.14 0.14 0.14
Pro forma ESOP adjustment (3)............................. (0.02) (0.02) (0.02) (0.02)
Pro forma Recognition Plan adjustment (4)................. (0.02) (0.02) (0.02) (0.02)
---------- ---------- ---------- ----------
Pro forma net earnings per share (4) (5)............... $ 0.72 $ 0.64 $ 0.57 $ 0.51
========== ========== ========== ==========
Stockholders' equity:
Historical (6)............................................ $ 16,541 $ 16,541 $ 16,541 $ 16,541
Estimated adjusted net proceeds (7)....................... 11,185 13,265 15,345 17,736
Common Stock acquired by ESOP (3)......................... (943) (1,109) (1,276) (1,467)
Common Stock acquired by Recognition Plan (4)............. (471) (555) (638) (733)
---------- ---------- ---------- ----------
Pro forma stockholders' equity............................ $ 26,312 $ 28,142 $ 29,972 $ 32,077
========== ========== ========== ==========
Stockholders' equity per share: (5) (6)
Historical................................................ $ 6.60 $ 5.61 $ 4.88 $ 4.24
Estimated adjusted net proceeds (7)....................... 4.46 4.50 4.52 4.55
Common Stock acquired by ESOP (3)......................... (0.38) (0.38) (0.38) (0.38)
Common Stock acquired by Recognition Plan (4)............. (0.19) (0.19) (0.19) (0.19)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share (5).............. $ 10.49 $ 9.54 $ 8.83 $ 8.22
========== ========== ========== ==========
Offering price as a percentage of pro forma stockholders' equity 95.33% 104.82% 113.25% 121.65%
========== ========== ========== ==========
Offering price to pro forma net earnings per share (5)...... 13.89x 15.63x 17.54x 19.61x
========== ========== ========== ==========
(footnotes on following page)
</TABLE>
28
<PAGE>
- ------------------
(1) Assumes that at the conclusion of the Offering the maximum of the Valuation
Range increases by 15% to $39,013,750 and that the Bank increases the
number of shares sold in the Offering to 1,833,646.
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock. Since funds on deposit at the Bank may
be withdrawn to purchase shares of Common Stock (which will reduce deposits
by the amount of such purchases), the net amount of funds available to the
Bank for investment following receipt of the net proceeds of the Offering
will be reduced by the amount of such withdrawals.
(3) Assumes that 8% of the shares of Common Stock sold in the Offering will be
purchased by the ESOP. The funds used to acquire such shares will be
borrowed by the ESOP from the Company. The Bank intends to make quarterly
contributions to the ESOP in an amount at least equal to the principal and
interest requirements of the debt, which is expected to have a maturity of
10 years. The pro forma net earnings assume that the Bank's total annual
contribution is equivalent to the debt service requirement for the year
ended December 31, 1997, and was made at the end of each period.
(4) Subsequent to the completion of the Offering, and subject to the approval
by stockholders, the Recognition Plan intends to purchase an aggregate
number of shares of Common Stock equal to 4% of the shares to be issued in
the Offering. The shares may be acquired directly from the Company from
authorized but unissued shares, or through open market purchases. The funds
to be used by the Recognition Plan to purchase the shares will be provided
by the Company or the Bank. Assumes that the Recognition Plan acquires the
shares from the Company at the Subscription Price with funds contributed by
the Company, and that 20% of the amount contributed to the Recognition Plan
is amortized as an expense for the year ended December 31, 1998. If shares
for the Recognition Plan are issued from authorized but unissued shares,
pro forma net earnings per share would be $0.73, $0.63, $0.56 and $0.50 at
the minimum, midpoint, maximum and adjusted maximum of the Valuation Range,
respectively; pro forma book value per share would be $10.30, $9.36, $8.67
and $8.07 at the minimum, midpoint, maximum and adjusted maximum of the
Valuation Range, respectively; and the voting dilution of such issuance
would be approximately 1.9% on all stockholders.
(5) Assumes 2,507,500 shares, 2,950,000 shares, 3,392,500 shares, and 3,901,375
shares are outstanding at the minimum, midpoint, maximum, and adjusted
maximum of the Valuation Range. Such number of shares includes shares sold
in the Offering and shares issued to the Mutual Holding Company in the
Reorganization. In accordance with The American Institute of Certified
Public Accountants Statement of Position 93-6, "Employers' Accounting for
Employee Stock Option Plans," 9,428, 11,092, 12,756 and 14,669 ESOP shares
at the minimum, midpoint, maximum and adjusted maximum of the Valuation
Range, respectively were also considered outstanding for purposes of
calculating net earnings per share. No effect has been given to the
issuance of additional shares of Common Stock pursuant to the Company's
Stock Option Plans. However, the number of shares to be issued pursuant to
stock options would be 117,853, 138,650, 159,448 and 183,365 at the
minimum, midpoint, maximum, and adjusted maximum of the Valuation Range,
respectively. Assuming all shares reserved under the Stock Option Plan are
issued at an exercise price of $10.00 per share, pro forma net earnings per
share would be $0.70, $0.61, $0.54 and $0.48 at the minimum, midpoint,
maximum and adjusted maximum of the Valuation Range, respectively,
stockholders' equity per share would be $10.47, $9.56, $8.89 and $8.30 at
the at the minimum, midpoint, maximum and adjusted maximum of the Valuation
Range, respectively, and the dilution to the voting interest of existing
stockholders would be approximately 4.9%.
(6) Stockholders' equity represents the excess of the carrying value of the
assets of the Bank over its liabilities. The amounts shown do not reflect
the federal income tax consequences of the potential restoration to income
of the bad debt reserves for income tax purposes, which would be required
in the event of liquidation.
(7) Includes assumed proceeds from sale to the Recognition Plans for $10.00 per
share of 4% of the number of shares sold in the Offering. Purchases by the
Recognition Plan will be made at the fair market value of such shares at
the time of purchase, which may be more or less than $10.00.
29
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank and subsidiary
for the fiscal years ended December 31, 1997 and 1996 have been audited by
Radics & Co., LLC, independent certified public accountants, whose report
thereon appears elsewhere in this Prospectus. These statements should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996
---- ----
Interest income:
<S> <C> <C>
Loans (see notes 1 and 3).................................... $ 10,942,843 $ 9,067,269
Mortgage-backed securities available for sale (see note 1)... 3,536,358 4,036,856
Investment securities available for sale (see note 1)........ 197,426 248,508
Other interest-earning assets (see note 1)................... 406,373 370,650
------------- -------------
Total interest income...................................... 15,083,000 13,723,283
------------- -------------
Interest expense:
Deposits (see notes 1 and 6)................................. 8,908,267 8,048,040
Advances..................................................... 95,774 645
------------- -------------
Total interest expense..................................... 9,004,041 8,048,685
------------- -------------
Net interest income............................................. 6,078,959 5,674,598
Provision for loan losses (see notes 1 and 3)................... 200,000 43,056
------------- -------------
Net interest income after provision for loan losses............. 5,878,959 5,631,542
------------- -------------
Non-interest income:
Fees and service charges on deposits......................... 178,606 171,440
Fees and service charges on loans (see note 1)............... 120,302 106,866
Gain on sales of securities available for sale (see notes 1 and 2) 128,716 --
Gain on sale of office building.............................. -- 23,372
Gain on sale of loans........................................ 4,395 --
Miscellaneous................................................ 99,929 49,470
------------- -------------
Total non-interest income.................................. 531,948 351,148
------------- -------------
Non-interest expenses:
Salaries and employee benefits (see note 8).................. 1,980,390 1,966,496
Net occupancy expense of premises (see note 1)............... 445,516 468,782
Equipment (see note 1)....................................... 415,666 355,226
Advertising.................................................. 184,000 97,432
Federal insurance premium (see note 12)...................... 119,643 1,382,048
Loss from foreclosed real estate (see note 1)................ 3,144 3,945
Miscellaneous................................................ 832,393 816,358
------------- -------------
Total non-interest expense................................. 3,980,752 5,090,287
------------- -------------
Income before income taxes...................................... 2,430,155 892,403
Income taxes (see notes 1, 9 and 12)............................ 876,950 283,481
------------- -------------
Net income...................................................... $ 1,553,205 $ 608,922
============= =============
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has not yet been formed and, accordingly, has no results of
operations. The Bank's results of operations depend primarily on its net
interest income, which is the difference between the income earned on its loan
and securities portfolios and the interest expense paid on interest-bearing
liabilities. Results of operations are also affected by the Bank's provision for
loan losses, fees and service charges on deposits and loans, and gains on sales
of securities. The Bank's non-interest expense consists primarily of salaries
and employee benefits, occupancy expense, equipment expense, federal deposit
insurance premiums, advertising and other expenses. Results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Business Strategy
The Bank has several strategies designed to enhance profitability
consistent with safety and soundness. These strategies include but are not
limited to: (i) emphasizing one-to-four family residential real estate lending;
(ii) complementing the Bank's traditional lending by increasing consumer,
multi-family and commercial real estate loans; (iii) maintaining asset quality;
(iv) expanding its deposit products to include checking and other transaction
accounts; and (v) growing at a controlled rate as market conditions permit and
consistent with profitability objectives. The Bank is subject to intense
competition, and there can be no assurances that the Company will successfully
implement these strategies.
o Emphasizing Traditional One-to-Four Family Residential Real Estate
Lending. Historically, the Bank has emphasized one-to-four family residential
lending within the Bank's primary market area. As of December 31, 1997,
approximately 93.9% of the Bank's total loan portfolio consisted of one-to-four
family residential real estate loans. During the year ended December 31, 1997,
the Bank originated $38.6 million of one-to-four family residential real estate
loans, and the Bank's portfolio of such loans totaled $143.6 million at December
31, 1997. Although the yields on residential mortgage loans are often less than
the yields on consumer loans and commercial real estate loans, the Bank intends
to continue to emphasize one-to-four family lending because of its expertise
with such lending, and the relatively low delinquency rates on one-to-four
family mortgage loans compared to other loans.
o Increasing Consumer and Other Lending. To complement the Bank's continued
emphasis on one-to-four family residential real estate lending, the Bank intends
to increase consumer, multi-family and commercial real estate lending as market
conditions permit, and consistent with safety and soundness. As of December 31,
1997, commercial and multi-family residential real estate loans totaled $3.2
million, or 2.1% of the Bank's gross loan portfolio, and consumer loans totaled
$6.2 million, or 4.1% of the Bank's gross loan portfolio. To accomplish the
desired growth in these areas, the Bank has evaluated consumer and multi-family
loan products offered by competitors, and intends to offer variations that
management believes will be attractive to consumers in the Bank's market area.
The Bank will also increase its advertising of these loan products to compete
more effectively in its marketplace. Management believes that it can safely
originate, service and monitor these loans; however, such loans generally have
greater credit risk than one-to-four family residential real estate loans.
o Maintaining Asset Quality While Implementing the Bank's Lending
Strategies. As of December 31, 1997, the Bank had $934,000 of loans delinquent
90 days or more, which represented .61% of net loans. The Bank's allowance for
loan losses as of December 31, 1997 was $723,000, or .48% of net loans and 77.4%
of nonperforming loans. During the year ended December 31, 1997, the Bank
charged-off loans totaling $11,000. The Bank had no loan charge-offs in 1996.
The Bank's goal is to gradually increase its portfolio of multi-family loans
while applying prudent underwriting standards. It may be necessary to increase
the provision for loan losses, which will have an adverse effect on the Bank's
net income.
31
<PAGE>
o Attracting Checking and Other Transaction Accounts. As of December 31,
1997 the Bank had $15.9 million of transaction accounts, which represented 8.0%
of total deposits. Of total checking accounts, $3.4 million were non-interest
bearing deposits. At December 31, 1997, the Bank had $45.2 million of savings
accounts, which represented 22.8% of total deposits. The Bank's goal is to
continue to increase these types of deposits through advertising. The Bank
believes that building relationships with core deposit customers is an effective
means of marketing and selling loan products and other services.
o Sustaining Growth and Profitability. Total assets of the Bank have grown
by 35.6% during the past five years from $160.3 million at December 31, 1992 to
$217.4 million at December 31, 1997. The Bank intends to continue to grow and
expand its operations as market conditions permit, and consistent with
management's profitability objectives. The Bank may effect such growth through
new branches and branch acquisitions.
Management of Market Risk
General. As with other savings institutions, the Bank's most significant
form of market risk is interest rate risk. The Bank's assets, consisting
primarily of mortgage loans, have longer maturities than its liabilities,
consisting primarily of deposits. As a result, a principal part of the Bank's
business strategy is to manage interest rate risk and reduce the exposure of the
Bank's net interest income to changes in market interest rates. Accordingly, the
Board of Directors has established an Asset/Liability Management Committee which
is responsible for evaluating the interest rate risk inherent in the Bank's
assets and liabilities, determining the level of risk that is appropriate given
the Bank's business strategy, operating environment, capital, liquidity and
performance objectives, and managing this risk consistent with the guidelines
approved by the Board of Directors. The Asset/Liability Management Committee
consists of senior management operating under a policy adopted by the Board of
Directors and meets at least quarterly to review the Bank's asset/liability
policies and interest rate risk position. See "Risk Factors--Potential Effects
of Changes in Interest Rates and the Current Interest Rate Environment."
In recent years, the Bank has used the following strategies to manage
interest rate risk: (1) emphasizing one-to-four family adjustable rate mortgage
("ARM") and fixed-rate mortgage lending with maturities of 15 years or less, (2)
purchasing adjustable rate mortgage-backed securities guaranteed by FNMA or
FHLMC, (3) increasing adjustable rate home equity lending and fixed-rate home
equity lending with maturities of five years or less, and (4) investing in
shorter-term securities which generally have lower yields compared to longer
term investments, but which better position the Bank to reinvest its assets if
market interest rates increase. The Bank does not engage in trading activities
or use derivative instruments to control interest rate risk.
The Bank's current investment strategy is to maintain a securities
portfolio that provides a source of liquidity and that contributes to the Bank's
overall profitability and asset mix within given quality and maturity
considerations. The securities portfolio consists primarily of U.S. Treasury,
Federal Government and government sponsored corporation securities. All of the
Bank's investment securities, other than FHLB stock, are classified as available
for sale to provide management with the flexibility to make adjustments to the
portfolio in the event of changes in interest rates, to fulfill unanticipated
liquidity needs, or to take advantage of alternative investment opportunities.
Net Portfolio Value. In past years, the Bank measured 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 decay rates formerly provided by the OTS.
However, the OTS now requires the computation of amounts by which 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") would
change in the event of a range of assumed changes in market interest rates.
These computations estimate the effect on an institution's NPV from
instantaneous and permanent 1% to 4% (100 to 400 basis point) increases and
decreases in market interest rates.
32
<PAGE>
The following table presents the Bank's NPV at December 31, 1997, as
calculated by the OTS, which is based upon quarterly information that the Bank
provided voluntarily to the OTS.
Percentage Change in Net Portfolio Value
-------------------------------------------------------------------------------
Changes Board
in Market Projected Policy Estimated Amount of
Interest Rates Change (1) Guidelines NPV Change
- ---------------- ----------- -------------- ----------- ---------
(basis points) (Dollars in Thousands)
400 (71.0)% (75.0)% $ 6,034 $(14,786)
300 (50.0)% (50.0)% 10,417 (10,403)
200 (30.0)% (37.5)% 14,543 (6,277)
100 (13.0)% (18.8)% 18,174 (2,646)
0 -- -- 20,820 --
(100) 8.0% (15.0)% 22,424 1,604
(200) 11.0% (25.0)% 23,035 2,215
(300) 11.0% (50.0)% 23,170 2,349
(400) 16.0% (100.0)% 24,153 3,332
- -------------
(1) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV requires making certain
assumptions which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of the Bank's interest sensitive assets
and liabilities existing at the beginning of a period remain constant over the
period being measured and assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration or
repricing of specific assets and liabilities. Accordingly, although the NPV
table provides an indication of the Bank's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Bank's net interest income, and will differ from actual results.
Additionally, the guidelines established by the Board of Directors are not
strict limitations. While a goal of the Asset/Liability Management Committee and
the Board of Directors is to limit projected NPV changes within the Board's
guidelines, the Bank will not necessarily limit projected changes in NPV if the
required action would present disproportionate risk to the Bank's continued
profitability.
Comparison of Financial Condition at December 31, 1997 and 1996
Assets. Total assets for the year ended December 31, 1997 increased by
$15.9 million, or 7.9%, to $217.4 million from $201.5 million. The increase in
total assets resulted primarily from a $21.5 million, or a 16.3%, increase in
gross loans receivable to $153.0 million from $131.5 million. This increase was
partially offset by a $2.6 million, or 4.7%, decrease in mortgage-backed
securities from $55.5 million to $52.9 million. The increase in loans receivable
resulted primarily from continued demand for one-to-four family mortgage loans
as the Bank originated $38.6 million of such mortgage loans during 1997.
Mortgage backed securities decreased primarily because the Bank was able to
invest part of the proceeds of mortgage-backed securities prepayments and
repayments in new one-to-four family mortgage loans. Government and government
agency securities decreased by $3.0 million, or 75.0%, from $4.0 million to $1.0
million. This decrease was the result of a maturity of one investment security
and another investment security being called by the issuer.
Liabilities. Total liabilities for the year ended December 31, 1997
increased by $14.1 million, or 7.6%, from $186.7 million to $200.8 million. This
increase was primarily due to a $11.1 million, or 8.8%, increase in certificates
33
<PAGE>
of deposit to $137.3 million from $126.2 million which resulted, in part, from
increased advertising in the Bank's market area.
Total Retained Earnings. Total retained earnings as of the year ended
December 31, 1997 increased by $1.7 million, or 11.5%, to $16.5 million from
$14.8 million. The increase in total retained earnings was due to net income of
$1.6 million and a $175,000 increase in the unrealized gain on securities (net
of taxes) available for sale.
Analysis of Results of Operations
Net Interest Income. Net interest income represents the difference between
income on interest-earning assets and expense on interest-bearing liabilities.
Net interest income depends on the interest yield on interest-earning assets and
the interest paid on interest-bearing liabilities, as well as the relative
amounts of interest-earning assets and interest-bearing liabilities.
34
<PAGE>
The following table sets forth certain information relating to the Bank at
December 31, 1997, and for the years ended December 31, 1997, 1996 and 1995. For
the periods indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities and the resultant cost, is
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly averages.
<TABLE>
<CAPTION>
Years Ended December 31,
At ----------------------------------------------------------------------------
December 31, 1997 1997 1996 1995
----------------- ------------------------ ------------------------ ------------------------
Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- ------ -------- -------- ------ -------- -------- ------ -------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)(2)........... $152,923 7.54% $144,513 $10,944 7.57% $117,720 $ 9,067 7.70% $103,179 $ 8,050 7.80%
Mortgage-backed securities........ 52,925 6.51 53,333 3,536 6.63 61,131 4,037 6.60 58,451 3,952 6.76
Investment securities............. 992 6.49 3,126 197 6.30 3,264 249 7.63 5,561 351 6.31
Other interest-earning assets..... 6,543 5.91 7,086 406 5.73 6,602 371 5.62 4,717 342 7.25
-------- -------- ------- -------- ------- -------- -------
Total interest-earning assets....... 213,383 7.23 208,058 15,083 7.25 188,717 13,724 7.27 171,908 12,695 7.38
------- ------- -------
Non-interest earning assets......... 4,054 3,572 3,855 4,305
-------- -------- -------- --------
Total assets........................ $217,437 $211,630 $192,572 $176,213
======== ======== ======== ========
Interest-bearing liabilities:
Interest bearing deposits
Demand.......................... $ 12,505 1.77 $ 12,358 244 1.97 $ 12,453 290 2.33 11,039 294 2.66
Savings and club................ 45,168 3.00 44,803 1,346 3.00 44,426 1,312 2.95 45,842 1,366 2.98
Certificates of deposit......... 137,314 5.52 132,467 7,318 5.52 117,347 6,446 5.49 100,558 5,225 5.20
Borrowed funds.................... -- -- 1,663 96 5.77 12 1 5.49 962 45 4.68
-------- -------- ------- -------- ------- -------- -------
Total interest-bearing liabilities.. 194,987 4.62 191,291 9,004 4.71 174,238 8,049 4.62 158,401 6,930 4.37
------- ------- -------
Non-interest bearing liabilities.... 5,909 4,734 3,943 4,597
Retained earnings................... 16,541 15,605 14,391 13,215
-------- -------- -------- --------
Total liabilities and retained
earnings.......................... $217,437 $211,630 $192,572 $176,213
======== ======== ======== ========
Net interest income................. $ 6,079 $ 5,675 $ 5,765
======= ======= =======
Net interest rate spread............ 2.61% 2.54% 2.65% 3.01%
==== ==== ==== ====
Net yield on average
interest-earning assets........... 2.92% 3.01% 3.35%
==== ==== ====
Ratio of average interest-earning
assets to interest-bearing
liabilities....................... 1.09x 1.08x 1.09x
==== ==== ====
</TABLE>
- ----------
(1) Calculated net of deferred loan fees and discounts and loans in process.
(2) Includes non-accrual loans.
35
<PAGE>
The table below sets forth information regarding changes in the Bank's
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 old rate) and (ii) changes in rate (changes in
rate multiplied by old volume). Changes attributable to both rate and volume,
which cannot be segregated, have been allocated proportionately to the change
due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 vs December 31, 1997 December 31, 1996 vs December 31, 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------- --------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable................ $2,032 $(155) $1,877 $1,121 $(104) $1,017
Mortgage backed securities...... (519) 18 (501) 179 (94) 85
Investment securities........... (10) (42) (52) (165) 63 (102)
Other interest-earning assets... 28 7 35 117 (88) 29
------ ----- ------ ------ ----- ------
Total interest income......... 1,531 (172) 1,359 1,253 (224) 1,029
------ ----- ------ ------ ----- ------
Interest expense:
Interest-bearing demand......... (2) (44) (46) 35 (39) (4)
Savings and club accounts....... 11 23 34 (41) (13) (54)
Certificates of deposit......... 837 35 872 915 306 1,221
Borrowed funds.................. 95 0 95 (51) 7 (44)
------ ----- ------ ------ ----- ------
Total interest expense........ 941 14 955 859 260 1,119
------ ----- ------ ------ ----- ------
Change in interest income......... $ 590 $(186) $ 404 $ 394 $(484) $ (90)
====== ===== ====== ====== ===== ======
</TABLE>
Comparison of Operating Results For the Years Ended December 31, 1997 and 1996
General. The Bank's net income depends primarily on its level of net
interest income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of one-to-four family mortgage
loans, mortgage-backed securities, home equity loans, commercial real estate
loans, multi-family real estate loans, and investment securities, and the
interest paid on interest-bearing liabilities, consisting primarily of deposits.
Net interest income is affected primarily by (i) the Bank's interest rate
spread, which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities, and by (ii) the average balance of interest-earning assets as
compared to interest-bearing liabilities. The Bank's net income is also affected
by its level of non-interest income consisting primarily of fees and service
charges on deposits and loans, and gains on sale of securities, loans and other
assets, as well as its level of non-interest expense, including salaries and
employee benefits, occupancy, equipment, advertising, deposit insurance,
professional services and other non-interest expenses.
Interest Income. Interest income increased by $1.4 million, or 10.2%, to
$15.1 million for the year ended December 31, 1997 from $13.7 million for the
prior year. The increase was due to a $1.9 million increase in income on loans
and a $35,000 increase in income on other interest earning assets, which were
only partially offset by a $500,000 decrease in income from mortgage-backed
securities, and a $52,000 decrease in income from investment securities. The
increase in income from loans was attributable primarily to a $26.8 million, or
22.8%, increase in the average balance of loans to $144.5 million from $117.7
million, which was partially offset by a 13 basis point decrease in the average
yield on loans to 7.57% in 1997 from 7.70% in 1996. The increase in the Bank's
average loan portfolio resulted from the Bank's originations exceeding
repayments and loans sold by $21.5 million. The Bank's strategy is to continue
to prudently grow its loan portfolio, although there can be no assurances that
the Bank will be able to do so. The decrease in average yield on loans
receivable resulted from originating lower yielding residential mortgage loans
in a relatively low interest rate environment.
Interest income on the Bank's investment securities decreased by $52,000,
or 20.5%, to $197,000 from approximately $249,000. The decrease in interest
income on investment securities resulted from a scheduled maturity of one
investment and another investment being called, the interest rate of which
exceeded the average rate for the Bank's investment securities, which resulted
in a decrease in the average yield on investment securities to 6.30%
36
<PAGE>
during 1997 from 7.63% during 1996. Interest income on mortgage-backed
securities decreased by $500,000, or 12.5%, to $3.5 million in 1997 from $4.0
million in 1996. The decrease in interest income on mortgage-backed securities
resulted from a $7.8 million, or 12.8%, decrease in average mortgage-backed
securities to $53.3 million from $61.1 million, which was partially offset by a
slight increase in the yield on average mortgage-backed securities to 6.63% from
6.60%. The yield on mortgage-backed securities decreased to 6.51% at December
31, 1997. The decline in yield as of December 31, 1997 resulted primarily from
management's strategy to replace $27.0 million of fixed rate mortgage backed
securities with $27.0 million of adjustable-rate mortgage securities. This
strategy was implemented in the third and fourth quarters of 1997 in an effort
to reduce the Bank's overall interest rate risk. The decrease in the average
balance of mortgage-backed securities also resulted from prepayments of the
underlying mortgage loans in a declining interest rate environment and the
reinvestment of the proceeds of such prepayments in one-to-four family mortgage
loans.
Interest Expense. Interest expense increased by $955,000, or 11.9%, to $9.0
million for the year ended December 31, 1997 from $8.0 million for the prior
year. This increase was the result of a $17.1 million, or 9.8%, increase in the
Bank's average interest bearing liabilities combined with a slight increase in
the Bank's average cost of funds to 4.71% from 4.62%. The increase in average
interest bearing liabilities resulted primarily from increases in the average
balances of the Bank's certificate of deposit products, as well as an increase
in other borrowed funds. The increase in the average cost of the Bank's deposits
resulted from increasing the rates paid on deposits in order to better compete
with rates offered by other financial institutions.
Net Interest Income. Net interest income increased by $404,000, or 7.1%, to
$6.1 million from $5.7 million. The increase in net interest income resulted
from a greater increase in average interest earning assets compared to average
interest bearing liabilities, which was partially offset by a narrowing of the
Bank's average interest rate spread to 2.54% in 1997 from 2.65% in 1996.
Management believes that the narrowing of the Bank's interest rate spread is due
in part to the relatively large percentage of the Bank's total loan portfolio
that had been originated in the low interest rate environment of the past two
years, and the fact that 69.2% of the Bank's total deposits consisted of
certificates of deposit at December 31, 1997. The Bank's net interest spread was
2.61% at December 31, 1997.
Provision for Loan Losses. The Bank establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed appropriate to absorb future charge-offs of
loans deemed uncollectible. In determining the appropriate level of the
allowance for loan losses, management considers past and anticipated loss
experience, valuations of real estate collateral, current and anticipated
economic conditions, volume and type of lending and the levels of nonperforming
and other classified loans. The amount of the allowance is based on estimates
and the ultimate losses may vary from such estimates. Management of the Bank
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses monthly in order to maintain the adequacy of the allowance.
The Bank provided $200,000 and $43,000 in loan loss provisions during the
years ended December 31, 1997 and 1996, respectively. The increase was based in
part on the increase in the Bank's loan portfolio and in part on the Bank's
strategy of increasing its portfolio of home equity lending which, based on the
Bank's experience and industry experience, exposes the Bank's operations to
greater risk of loss than the one-to-four family residential real estate loans
that the Bank has traditionally emphasized. Management's review also included an
analysis of the inherent risk of loss associated with maintaining a larger loan
portfolio both in terms of asset size and number of loans. At December 31, 1997
and 1996 the Bank's allowance for loan losses was $723,000 and $534,000,
respectively, and the Bank's loans delinquent for ninety days or more were
$934,000 and $930,000, respectively. The Bank's allowance for loan losses as a
percentage of total nonperforming loans at December 31, 1997 and 1996 was 77.4%
and 57.6%, respectively. While management believes that, based on information
currently available, the Bank's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, future loan loss provisions
may be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require the Bank to
recognize additional provisions based on their judgment of information available
to them at the time of their examination. See "Business of the Bank--Lending
Activities--Nonperforming Assets and Delinquencies" and "--Provision for Loan
Losses".
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<PAGE>
Noninterest Income. Noninterest income consists primarily of fees and
service charges on deposit accounts and loans, gain on sale of securities and
other assets, and other income. Noninterest income increased by $181,000, or
51.6%, to $532,000 for the year ended December 31, 1997 from $351,000 for the
prior year, as service charges increased by $20,000, or 7.2%, gain on sale of
securities increased to $129,000 from no gain in the prior year, and other
income increased by $32,000, or 44.4%.
Noninterest Expense. Noninterest expense decreased by $1.1 million, or
21.8%, to $4.0 million for the year ended December 31, 1997 from $5.1 million
for the prior year. The decrease was due to a $1.3 million decrease in deposit
insurance as a result of legislation, enacted in September 1996, to recapitalize
the SAIF. The one-time assessment was 65.7 basis points per $100 in SAIF-insured
deposits held as of March 31, 1995, payable on November 30, 1996. For the Bank,
the assessment amounted to $1.0 million (or approximately $648,000, on an
after-tax basis), based on the Bank's SAIF-insured deposits as of March 31,
1995. Excluding this one-time assessment, non-interest expense totaled $4.0
million for the year ended December 31, 1996. In addition, beginning January 1,
1997, pursuant to the legislation, interest payments on FICO bonds issued in the
late 1980's by the Financing Corporation to recapitalize the former Federal
Savings and Loan Insurance Corporation are paid jointly by institutions insured
by the Bank Insurance Fund (the "BIF") and SAIF-insured institutions. The FICO
assessment will be 1.29 basis points per $100 of BIF deposits and 6.44 basis
points per $100 in SAIF deposits. Beginning January 1, 2000, the FICO interest
payments will be paid pro-rata by banks and thrifts based on deposits
(approximately 2.4 basis points per $100 of deposits).
Salaries and employee benefits increased by $14,000, or 0.7%, to $1.98
million for the year ended December 31, 1997 from $1.97 million for the prior
year. Net occupancy expense decreased slightly in 1997 because of the sale of a
previously closed branch office. Equipment expense increased by $60,000, or
17.0%, because of an increase in data processing expense. Advertising expense
increased $87,000, or 88.8%, because of increased advertising to promote the
Bank's new consumer loans and other loan products and services.
Following the completion of the Reorganization, noninterest expense is
likely to increase as a result of added expenses associated with being a public
company and complying with the financial and business reports required to be
filed with regulatory agencies. In addition, compensation expense will increase
as a result of the implementation of the ESOP and Recognition Plan. See "Risk
Factors--Implementation of Proposed Stock Benefit Plans."
Provision for Income Taxes. The Bank's provision for income taxes was
$877,000 and $283,000 for the years ended December 31, 1997 and 1996,
respectively. The higher provision for the year ended December 31, 1997 related
primarily to an increase in income before income taxes.
Net Income. Net income increased by $944,000, or 155.1%, to $1.6 million
for the year ended December 31, 1997 from $609,000 for the prior year. The
increase was primarily due to a $404,000 increase in net interest income, a
$181,000 increase in non-interest income, and a $1.1 million decrease in
noninterest expense (primarily due to the special assessment in 1996 to
recapitalize the SAIF), which were only partially offset by a $157,000 increase
in the provision for loan losses and a $594,000 increase in the provision for
income taxes. Excluding the special SAIF assessment, net income totaled $1.3
million for the year ended December 31, 1996.
Liquidity and Capital Resources
The objective of the Bank's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Bank's ability to meet deposit withdrawals on demand or at contractual maturity,
to repay borrowings as they mature, and to fund new loans and investments as
opportunities arise.
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<PAGE>
The Bank's primary sources of internally generated funds are principal and
interest payments on loans receivable, cash flows generated from operations, and
cash flows generated by investments. External sources of funds include increases
in deposits and advances from the FHLB of New York. At December 31, 1997, the
Bank had outstanding $2.1 million in commitments to originate loans. If the Bank
requires funds beyond its internal funding capabilities, agreements with the
FHLB of New York are available to borrow funds up to $10.5 million. At December
31, 1997, approximately $90.3 million in certificates of deposit were scheduled
to mature within a year. The Bank's experience has been that a large portion of
its maturing certificates of deposit accounts remain on deposit with the Bank.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet applicable liquidity requirements. At
December 31, 1997, the Bank's liquidity, as measured for regulatory purposes,
was in excess of the minimum OTS requirement.
Following the Reorganization, the Company will initially conduct no
business other than holding the capital stock of the Bank, the loan it will make
to the ESOP, and the investment of the remaining 50% of the net proceeds of the
Offering. See "Use of Proceeds." In the future, the Company's primary source of
funds, other than income from its investments and principal and interest
payments received on the ESOP loan, is expected to be capital dividends from the
Bank. As a stock savings association, the Bank may not declare or pay a cash
dividend on or repurchase any of its capital stock if the effect of such
transaction would be to reduce its net worth to an amount which is less than the
minimum amount required by applicable federal regulations. At December 31, 1997,
the Bank was in compliance with all applicable capital requirements.
Capability of the Bank's Data Processing Hardware to Accommodate the Year 2000
Like many financial institutions the Bank relies upon computers for the
daily conduct of its business and for data processing generally. There is
concern among industry experts that on January 1, 2000 computers will be unable
to "read" the new year and there may be widespread computer malfunctions. The
Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Bank's
computer programs that would have date-sensitive software may recognize a date
ending "00" as the year 1900 rather than the year 2000. This could result in a
systems failure or miscalculations causing disruptions of operations, including
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Bank recognized that a comprehensive and coordinated plan of action was
needed to ensure complete readiness to perform Year 2000 processing. Year 2000
compliance responsibility has been assigned to initiate and implement the Year
2000 project, policies, document readiness of the Bank to accommodate Year 2000
processing, and to track and test progress towards full compliance. The Bank
generally relies on independent third parties to provide data processing service
to the Bank, and has been advised by its data processing service center that the
issue is being addressed. The Bank is also in the process of ensuring that
external vendors and additional servicers are adequately addressing the system
and software issues related to the Year 2000.
Beginning in the third quarter of 1998, the Bank will coordinate end-to-end
tests with primary servicers, which allow the Bank to simulate daily processing
on sensitive century dates. In the evaluation, the Bank will ensure that
critical operations will continue if servicers or vendors are unable to achieve
the Year 2000 requirements. The Bank expects to complete the Year 2000 project
no later than December 31, 1998. The Bank is in the process of determining the
costs and time associated with the Year 2000 project and does not expect that
the total cost of the Year 2000 project will have a material adverse impact on
the financial condition or operations of the Bank. To date, the Bank has not
incurred or expensed any amount related to the assessment of, and preliminary
efforts in connection with, the Year 2000 project and the development of a
remediation plan.
39
<PAGE>
Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The comprehensive income and related cumulative equity
impact of comprehensive income items will be required to be disclosed
prominently as part of the notes to the financial statements. Only the impact of
unrealized gains or losses on securities available for sale is expected to be
disclosed as an additional component of the Bank's income under the requirements
of SFAS No. 130. This statement is effective for fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement is effective for fiscal years beginning after December
15, 1997.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that the FASB no longer considers as useful as when they were
issued. This statement suggests combined formats for presentation of pension and
other postretirement benefit disclosures. This statement is effective for fiscal
years beginning after December 15, 1997.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein have
been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
BUSINESS OF THE BANK
General
The Bank operates, and intends to continue to operate, as a
community-oriented financial institution dedicated to serving the credit and
savings needs of its customers. The Bank's business consists primarily of
accepting FDIC- insured deposits from the general public and using those funds
to originate one-to-four family residential real estate loans, and, to a lesser
extent, consumer loans, multi-family real estate loans and commercial real
estate loans. See "--Lending Activities."
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<PAGE>
Market Area
The Bank's headquarters are located in Avenel, New Jersey in the township
of Woodbridge. Branch offices of the Bank are located in East Brunswick, Rahway
and Linden, all of which branches, and the main office, are located in the
Bank's primary market area consisting of Middlesex and Union Counties. Middlesex
and Union Counties are contiguous and are located in the eastern central part of
New Jersey. As of 1990, Middlesex and Union Counties had a population of
approximately 672,000 and 494,000, respectively. Their economies are based on
retail services and light manufacturing, especially pharmaceuticals. Both
Johnson and Johnson and Merck and Co. have an administrative and research
presence in this market. Among the largest employers in Middlesex and Union
Counties are John F. Kennedy Medical Center, Robert Wood Johnson Medical Center,
Merck and Co. and Johnson & Johnson. The Bank faces intense competition from
many financial institutions for deposits and loan originations. See "Risk
Factors--Competition."
Lending Activities
General. At December 31, 1997, the Bank's net loans receivable totaled
$152.2 million, or 70.0% of total assets at that date. The Bank has
traditionally concentrated its lending activities on first mortgage loans
secured by one-to-four family properties that conform to the underwriting
guidelines of FNMA and FHLMC (often referred to as "conforming loans"). FNMA and
FHLMC are federally chartered corporations that purchase loans in the secondary
mortgage market and issue mortgage-backed securities that are secured by the
underlying mortgages. Mortgage loans secured by one-to-four family properties
totalled $143.6 million, or 93.9% of gross loans receivable at December 31,
1997. In addition, the Bank originates construction loans, multi-family
residential real estate loans, commercial real estate loans, home equity loans
and other consumer loans.
Loan Portfolio Analysis. The following tables set forth the composition of
the Bank's loan portfolio at the dates indicated. The Bank had no concentration
of loans exceeding 10% of total gross loans other than as disclosed below.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family.............. $143,623 93.88% $120,892 91.93% $ 97,007 92.08%
Multi-family.................... 1,258 0.82 1,875 1.42 2,018 1.92
Commercial...................... 1,906 1.25 2,035 1.55 1,862 1.76
Construction.................... -- -- 237 0.18 -- --
-------- ------ -------- ------ -------- ------
Total real estate loans....... 146,787 95.95 125,039 95.08 100,887 95.76
-------- ------ -------- ------ -------- ------
Consumer loans:
Home equity..................... 5,706 3.73 5,364 4.08 3,345 3.17
Other........................... 491 0.32 1,101 0.84 1,123 1.07
-------- ------ -------- ------ -------- ------
Total consumer loans.......... 6,197 4.05 6,465 4.92 4,468 4.24
-------- ------ -------- ------ -------- ------
Total loans................... 152,984 100.00% 131,504 100.00% 105,355 100.00%
-------- ====== -------- ====== -------- ======
Less:
Loans in process................ -- 3 --
Deferred loan origination fees.. 61 277 392
Allowance for loan losses....... 723 534 490
-------- -------- --------
Total loans, net.................. $152,200 $130,690 $104,473
======== ======== ========
</TABLE>
41
<PAGE>
At December 31,
---------------------------------------
1994 1993
------------------ ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
Real estate loans:
One-to-four family.............. $ 91,895 91.56% $ 81,404 91.33%
Multi-family.................... 2,102 2.09 2,004 2.25
Commercial...................... 2,049 2.04 1,184 1.33
Construction.................... -- -- -- --
-------- ------ -------- ------
Total real estate loans....... 96,046 95.69 84,592 94.91
-------- ------ -------- ------
Consumer loans:
Home equity..................... 3,005 2.99 3,168 3.55
Other........................... 1,321 1.32 1,370 1.54
-------- ------ -------- ------
Total consumer loans.......... 4,326 4.31 4,538 5.09
-------- ------ -------- ------
Total loans................... 100,372 100.00% 89,130 100.00%
-------- ====== -------- ======
Less:
Loans in process................ -- --
Deferred loan origination fees.. 428 507
Allowance for loan losses....... 442 392
-------- --------
Total loans, net.................. $ 99,502 $ 88,231
======== ========
Loan Portfolio Composition. The following table shows the composition of
the Bank's loan portfolios by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans:
Real estate:
One-to-four family.............. $ 73,490 48.04% $ 80,748 61.40% $ 69,530 66.00%
Multi-family.................... 1,193 0.78 1,107 0.84 1,182 1.12
Commercial...................... 799 0.52 918 0.70 925 .88
Construction.................... -- -- 237 0.18 -- --
-------- ------ -------- ------ -------- ------
Total real estate loans....... 75,482 49.34 83,010 63.12 71,637 68.00
-------- ------ -------- ------ -------- ------
Consumer.......................... 3,838 2.51 2,925 2.23 2,067 1.96
-------- ------ -------- ------ -------- ------
Total fixed rate loans........ 79,320 51.85 85,935 65.35 73,704 69.96
-------- ------ -------- ------ -------- ------
Adjustable rate loans:
Real estate:
One-to-four family (1).......... 70,133 45.85 40,144 30.53 27,477 26.08
Multi-family.................... 65 0.04 768 0.58 836 .79
Commercial...................... 1,107 0.72 1,117 0.85 937 .89
Construction.................... -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total real estate loans....... 71,305 46.61 42,029 31.96 29,250 27.76
Consumer.......................... 2,359 1.54 3,540 2.69 2,401 2.28
-------- ------ -------- ------ -------- ------
Total adjustable rate loans... 73,664 48.15 45,569 34.65 31,651 30.04
-------- ------ -------- ------ -------- ------
Total loans................... $152,984 100.00% $131,504 100.00% $105,355 100.00%
======== ====== ======== ====== ======== ======
Less:
Loans in process................ -- 3 --
Deferred fees and discounts..... 61 277 392
Allowance for loan losses....... 723 534 490
-------- -------- --------
Total loans receivable, net... $152,200 $130,690 $104,473
======== ======== ========
</TABLE>
- ----------
(1) Includes mortgage loans which adjust annually after an initial fixed rate
period of five, seven or ten years.
One-to-Four Family Real Estate Lending. Historically, the Bank has
concentrated its lending activities on the origination of conforming first
mortgage loans secured by one-to-four family residences located in its primary
42
<PAGE>
market area. At December 31, 1997, $143.6 million, or 93.9%, of the Bank's gross
loans receivable, consisted of one-to-four family residential real estate loans.
The Bank originated $38.6 million and $38.3 million of one-to-four family
residential mortgage loans during the years ended December 31, 1997 and 1996,
respectively.
The Bank originates fixed rate mortgage loans and adjustable rate mortgage
("ARM") loans. The Bank's fixed-rate one-to-four family mortgage loans have
maturities ranging from 10 to 30 years and are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest at the
end of the loan term. Fixed rate loans are generally originated under terms,
conditions and documentation which permit them to be sold to FNMA and FHLMC in
the secondary mortgage market, although the Bank rarely sells fixed-rate loans.
The Bank's fixed-rate loans customarily include "due on sale" clauses, which
give the Bank the right to declare a loan immediately due and payable in the
event the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not paid.
The Bank offers ARM loans at competitive interest rates and terms. At
December 31, 1997, $73.7 million, or 48.2%, of the Bank's gross loan portfolio
consisted of ARM loans or other loans subject to periodic interest rate
adjustments. Substantially all of the Bank's ARM loans meet the underwriting
standards of FNMA or FHLMC, even though the Bank originates ARM loans primarily
for its own portfolio. Most of the Bank's ARM loans have interest rates that
adjust every year based on the one year Treasury constant maturity index. The
Bank also originates ARM loans that have fixed interest rates for an initial
period of three to ten years, and thereafter adjust annually based on the one
year Treasury constant maturity index. A small percentage of the Bank's ARM
loans adjust based on other indices. Most of the Bank's ARM loans amortize over
a 30-year period. The Bank determines whether a borrower qualifies for an ARM
loan based on the initial interest rate on the loan, except that one year ARM
loan borrowers are qualified at the initial rate plus 2%. The Bank's current ARM
loans do not provide for negative amortization. The Bank's ARM loans generally
provide for annual and lifetime interest rate adjustment limits of 2% and 6%,
respectively. The Bank offers initial interest rates that may be more than 2%
below the interest rate to which the loan may adjust after the first adjustment
date, (based on market interest rates at the time the loan is originated).
Accordingly, because of the Bank's 2% interest rate adjustment limitation, the
interest rates on these loans would not adjust to the fully-indexed rate at the
end of the adjustment period if interest rates were to increase or remain
unchanged at the end of the adjustment period.
Borrower demand for ARM loans versus fixed-rate mortgage loans is affected
by market interest rates, borrowers' expectations of future changes in the level
of market interest rates, and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that the Bank originates at any time is largely
determined by borrowers' demand for each type of loan.
Retaining ARM loans helps reduce the Bank's exposure to changes in interest
rates. There are, however, potential credit risks associated with ARM loans in a
rising interest rate environment. Specifically, during periods of rising
interest rates the risk of default on ARM loans may increase as a result of
repricing and the increased monthly payments required of the borrower. See "Risk
Factors--Potential Effects of Changes in Interest Rates and the Current Interest
Rate Environment." In addition, although ARM loans allow the Bank to increase
the sensitivity of its asset base to changes in market interest rates, the
extent of this interest sensitivity is limited by the annual and lifetime
interest rate adjustment limits. Because of these considerations, the Bank has
no assurance that yields on ARM loans will be sufficient to offset increases in
the Bank's cost of funds. The Bank believes these risks, which have not had a
material adverse effect on the Bank to date, generally are less than the risks
associated with holding long-term, fixed-rate loans in portfolio during a rising
interest rate environment.
The Bank requires title insurance insuring the status of the underlying
mortgaged properties and an acceptable attorney's opinion on all loans where
real estate is the primary source of security. The Bank also requires that fire
and casualty insurance be maintained in an amount at least equal to the
outstanding loan balance and, if appropriate, flood insurance also must be
maintained.
Pursuant to underwriting guidelines adopted by the Bank's Board of
Directors, the Bank can lend up to 95% of the appraised value of the property
securing a one-to-four family residential loan. The Bank does not require
private mortgage insurance for loans of up to and including 80% of the appraised
value of the property. The Bank requires private mortgage insurance for between
17% and 30% of the amount of the loan for loans of 80% to 95% of the appraised
value of the property.
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<PAGE>
Multi-Family Residential Real Estate Lending. The Bank originates mortgage
loans secured by multi-family residential properties (consisting of more than
four units). At December 31, 1997, $1.3 million, or 0.8%, of the Bank's total
gross loan portfolio consisted of loans secured by multi-family residential real
estate. The majority of the Bank's multi-family residential real estate loans
are secured by apartment buildings located in the Bank's primary market area.
The Bank offers both fixed-rate and adjustable-rate multi-family residential
real estate loans. Fixed rate loans are generally offered with balloon terms of
three, five and seven years, with a 25 year amortization period, and with a
"balloon" or final principal payment due at maturity. The Bank also offers a 15
year fixed rate multi-family residential loan with a 15 year term and
amortization period and a one-year adjustable-rate loan with a 25 year term and
amortization period. The interest rate on the adjustable rate loans is tied to
the one year constant maturity Treasury index, with annual and lifetime interest
rate adjustment limits of 2% and 6%, respectively. At December 31, 1997, the
average balance of the Bank's multi-family residential real estate loans was
$251,000, and the largest such loan had a balance of $484,068 and was performing
in accordance with its contractual terms.
The Bank requires appraisals of all properties securing multi-family
residential real estate loans. Appraisals are performed by an independent State
licensed and qualified appraiser approved by the Bank, and all appraisals are
reviewed by management. The Bank, when underwriting such loans, considers the
quality of the real estate, the credit of the borrower, the cash flow of the
project and the quality of management involved with the property. Loan-to-value
ratios on the Bank's multi-family residential real estate loans are generally
limited to 75%. As part of the criteria for underwriting multi-family
residential real estate loans, the Bank generally imposes a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of not less than 1.25. The Bank's policy is also to obtain personal
guarantees from the principals of its corporate borrowers on multi-family
residential real estate loans.
Multi-family residential real estate loans generally have higher interest
rates than those available on one-to-four family residential loans. However,
loans secured by multi-family residential real estate usually have higher
balances and are more difficult to evaluate and monitor and, therefore, may
involve a greater degree of credit risk than one-to-four family residential
mortgage loans. If the estimated value is inaccurate, the value of the property
may be insufficient to assure full repayment in the event of default and
foreclosure. Because payments on such loans often depend on the successful
operation and management of the properties, repayment of such loans may be
affected by adverse conditions in the real estate market or the economy. The
Bank seeks to minimize these risks by limiting the maximum loan-to-value ratio,
and strictly scrutinizing the financial condition of the borrower, the quality
of the collateral and the management of the property securing the loan. The Bank
also generally obtains loan guarantees from financially capable parties based on
a review of personal financial statements.
Commercial Real Estate Lending. The Bank originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. At December
31, 1997, $1.9 million, or 1.3% of the Bank's total gross loan portfolio
consisted of loans secured by commercial real estate properties. The majority of
the Bank's commercial real estate loans are secured by office buildings and
retail stores that are located in the Bank's primary market area. The Bank
offers both fixed rate and adjustable rate commercial real estate loans.
Fixed-rate loans are generally approved with terms of three, five and seven
years, with a 25 year amortization period, resulting in a balloon payment at the
end of the stated term. The Bank also offers an adjustable rate commercial real
estate loan with annual interest rate adjustments tied to the one year Treasury
constant maturity index, and with annual and lifetime interest rate adjustment
limits of 2% and 6%, respectively. Adjustable-rate commercial real estate loans
are offered for terms of 25 years and are fully amortizing. At December 31,
1997, the average balance of the Bank's commercial real estate loans was
$163,085, and the largest such loan had a balance of $682,060 and was performing
in accordance with its contractual terms.
The Bank requires appraisals of all properties securing commercial real
estate loans. Appraisals are performed by an independent State licensed and
qualified appraiser approved by the Bank, all of which are reviewed by
management. The Bank, when underwriting such loans, considers the quality and
location of the real estate, the credit of the borrower, the cash flow of the
project and the quality of management involved with the property.
44
<PAGE>
Loan-to-value ratios on the Bank's commercial real estate loans are
generally limited to 75% of the appraised value of the secured property. As part
of the criteria for underwriting commercial real estate loans, the Bank
generally imposes a debt coverage ratio (the ratio of net cash from operations
before payment of debt service to debt service) of not less than 1.25. It is
also the Bank's policy to obtain personal guarantees from the principals of its
corporate borrowers on its commercial real estate loans.
Commercial real estate loans generally have higher interest rates than
those available on one-to-four family residential loans. However, loans secured
by such properties usually have higher balances and are more difficult to
evaluate and monitor and, therefore, may involve a greater degree of risk than
one-to-four family residential mortgage loans. If the estimated value is
inaccurate, in the event of default and foreclosure the value of the property
securing the loan may be insufficient to assure full repayment. Because payments
on such loans often depend on the successful development, operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. The Bank seeks to minimize
these risks by limiting the maximum loan-to-value ratio and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan. The Bank also
obtains loan guarantees from financially capable parties based on a review of
personal financial statements.
Construction Lending. To a lesser extent, the Bank originates residential
construction loans to local home builders, generally with whom it has an
established relationship, and to individuals who have a contract with a builder
for the construction of their residence. The Bank's construction loans are
generally secured by property located in the Bank's primary market area. At
December 31, 1997, the Bank had no construction loans outstanding.
The Bank's construction loans to home builders generally have fixed
interest rates and are for a term of 12 months. Construction loans to builders
typically are originated with a maximum loan to value ratio of 80%. Construction
loans to individuals are generally originated pursuant to the same policy
guidelines regarding loan to value ratios that are used in connection with loans
secured by one-to-four family residential real estate.
Construction loans to builders are made where the home is pre-sold or on a
speculative (unsold) basis. However, the Bank generally limits the number of
outstanding loans on unsold homes under construction to individual builders,
with the amount dependent on the financial strength of the builder, the present
exposure of the builder, and prior sales of homes in the development. Prior to
making a commitment to fund a construction loan, the Bank requires an appraisal
of the property, and all appraisals are reviewed by management. Loan proceeds
are disbursed after an inspection of the property based on a percentage of
completion. Monthly payment of accrued interest is required.
Construction loans generally have higher interest rates with shorter terms
to maturity relative to single-family permanent mortgage lending. Construction
loans, however, are generally considered to involve a higher degree of risk than
single-family permanent mortgage loans because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost of the project. If the estimate of construction costs is
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion is inaccurate, the value of the property may be
insufficient to assure full repayment. Projects may also be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no purchaser
has been identified carry more risk because the repayment of the loan depends on
the builder's ability to sell the property prior to the time that the
construction loan is due. The Bank has attempted to minimize the foregoing risks
by, among other things, limiting its construction lending primarily to
residential properties and generally requiring personal guarantees from the
principals of its corporate borrowers.
Consumer Lending. The Bank's consumer loans consist of both fixed-rate and
adjustable-rate line of credit home equity loans, and loans secured by deposit
accounts. The Bank's home equity loans and lines of credit are secured by a
first or second mortgage on residential property, and have fixed and variable
interest rates that are tied to The Wall Street Journal prime lending rate (the
"Prime Rate"). Variable interest rate equity lines of credit adjust monthly and
generally have terms of up to 20 years. Home equity loans are offered with fixed
interest rates and have terms from five to 20 years. Loans secured by deposit
accounts do not have a fixed term, and are due and payable when the underlying
deposit account or certificate is withdrawn or matures. At December 31, 1997,
consumer loans totalled $6.2 million, or 4.1% of the total loan portfolio. The
Bank promotes consumer loans by contacting existing customers and by other
promotions and advertising directed at existing and prospective customers. All
of the Bank's consumer loans are secured by real estate or deposits. At December
31, 1997, $3.8 million, or 61.3%, of consumer loans had fixed interest rates,
and $2.4 million, or 38.7%, had adjustable interest rates.
45
<PAGE>
Consumer lending is an important part of the Bank's business because such
loans generally have shorter terms and higher yields than one-to-four family
mortgage loans, thus reducing exposure to changes in interest rates. In
addition, consumer loans expand the products and services offered by the Bank to
better meet all of the financial services needs of its customers. Consumer loans
generally involve greater credit risk than residential mortgage loans because of
the difference in the underlying collateral. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance because of the greater likelihood of damage, loss or
depreciation in the underlying collateral. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections depend
on the borrower's personal financial stability. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on such loans. The
Bank believes that these risks are not as prevalent in the case of the Bank's
consumer loan portfolio because a large percentage of the portfolio consists of
home equity loans that are underwritten so that their credit risk is
substantially similar to that of one-to-four family residential mortgage loans.
Nevertheless, these loans have greater credit risk than one-to-four family
residential mortgage loans because they often are secured by mortgages
subordinated to the existing first mortgage on the property, which may or may
not be held by the Bank.
The Bank's underwriting procedures for consumer loans include an assessment
of the applicant's credit history and the ability to meet existing and proposed
debt obligations. Although the applicant's creditworthiness is the primary
consideration, the underwriting process also includes a comparison of the value
of the security, to the proposed loan amount. The Bank underwrites and
originates its consumer loans internally, which the Bank believes limits its
exposure to credit risks associated with loans underwritten or purchased from
brokers and other external sources.
Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1997 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans and loans
with no stated maturity are reported as becoming due within one year. Loan
balances do not include undisbursed loan proceeds, unearned discounts, unearned
income and allowance for loans losses.
One-to-Four
Family Multi-Family Commercial Consumer Total
----------- ------------ ---------- -------- --------
(In Thousands)
Amounts Due:
Within 1 year......... $ 91 $ -- $ 75 $ 184 $ 350
Over 1 to 2 years..... 158 -- -- 98 256
Over 2 to 3 years..... 109 -- -- 156 265
Over 3 to 5 years..... 3,910 -- -- 494 4,404
Over 5 to 10 years.... 19,162 484 23 1,536 21,205
Over 10 to 25 years... 47,133 774 1,049 3,729 52,685
Over 25 years......... 73,060 -- 759 -- 73,819
-------- ------ ------ ------ --------
Total amount due...... $143,623 $1,258 $1,906 $6,197 $152,984
======== ====== ====== ====== ========
46
<PAGE>
The following table sets forth the dollar amount of all loans for which
final payment is not due until after December 31, 1998. The table also shows the
amount of loans which have fixed rates of interest and those which have
adjustable rates of interest.
Fixed Rates Adjustable Rates Total
----------- ---------------- --------
(In Thousands)
Real estate loans:
One-to-four family................. $73,364 $70,168 $143,532
Multi-family....................... 1,193 65 1,258
Commercial......................... 724 1,107 1,831
------- ------- --------
Total real estate loans.............. 75,281 71,340 146,621
Consumer............................. 3,831 2,182 6,013
------- ------- --------
Total loans...................... $79,112 $73,522 $152,634
======= ======= ========
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such loans. The actual life of a loan is often less
than its contractual term because of prepayment. In addition, due-on-sale
clauses on mortgage loans 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 the Bank's mortgage loans portfolio tends to increase, however, when
current mortgage loan market interest rates are substantially higher than
interest rates on existing mortgage loans. Conversely, the average life of the
Bank's loan portfolio would decrease when interest rates on existing mortgage
loans are substantially higher than current mortgage loan market interest rates.
Loan Solicitation and Processing. The Bank's lending activities are subject
to the written underwriting standards and loan origination procedures
established by the Board of Directors. Loan originations come from a number of
sources. The principal sources of loan originations are newspaper advertising,
real estate agents, home builders, walk-in customers, referrals and existing
customers. The Bank uses professional fee appraisers for residential real estate
loans and construction loans and all commercial real estate loans. The Bank
requires hazard, title and, to the extent applicable, flood insurance on all
property securing its real estate loans. Mortgage loan applications are
initiated by loan officers. All loans of $500,000 or more must be approved by
the Board of Directors. Loans of less than $350,000 may be approved by any three
members of the Bank's Loan Committee, which consists of the Bank's President,
the Bank's Executive Vice President and two lending officers. Loans in excess of
$350,000, but less than $500,000 may be approved by the Bank's Executive
Committee, which consists of the Bank's President and Directors John W. Fox,
Donald F. Marsh and Nelson L. Taylor, Jr.
47
<PAGE>
Loan Originations, Sales and Purchases. The following table sets forth
total loans originated and repaid during the periods indicated.
Years Ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
Originations:
Adjustable rate:
Real Estate
One-to-four family (1)................ $22,317 $22,542 $10,916
Multi-family.......................... -- -- --
Commercial............................ -- -- --
Construction.......................... -- -- --
Consumer................................ 1,654 2,122 893
------- ------- -------
Total adjustable rate................. 23,971 24,664 11,809
------- ------- -------
Fixed rate:
Real estate
One-to-four family.................... 16,234 15,713 4,439
Multi-family.......................... -- -- --
Commercial............................ -- -- --
Construction.......................... 140 631 148
Consumer................................ 838 564 298
------- ------- -------
Total fixed rate...................... 17,212 16,908 4,885
------- ------- -------
Total loans originated................ 41,183 41,572 16,694
------- ------- -------
Purchases:
Real estate
One-to-four family...................... -- -- --
Multi-family............................ -- 97 --
Commercial.............................. -- -- --
Consumer.................................. -- -- --
------- ------- -------
Total loans purchased................. -- 97 --
------- ------- -------
Sales and Repayments:
Real estate...............................
One-to-four family...................... -- -- --
Multi-family............................ -- -- --
Commercial.............................. -- -- --
Consumer.................................. 647 -- --
------- ------- -------
Total loans sold...................... 647 -- --
------- ------- -------
Principal repayments........................ 19,056 15,524 11,735
------- ------- -------
Total reductions.......................... 19,703 15,524 11,735
------- ------- -------
Increase in other items, net................ 30 72 12
------- ------- -------
Net increase (decrease)................... $21,510 $26,217 $ 4,971
======= ======= =======
- ----------
(1) Originations include mortgage loans which adjust annually after an initial
fixed-rate period of five, seven or ten years in the following amounts:
Years Ended December 31,
------------------------
1997 1996
------ ------
(In Thousands)
Initial fixed rate:
Five years............................... $6,087 $2,871
Seven years.............................. 6,909 3,377
Ten years................................ 1,027 2,866
Loan Commitments. The Bank issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and generally remain outstanding for
45 to 60 days from the date the commitment is issued, depending on the type of
transaction. At December 31, 1997, the Bank had total loan commitments of $2.1
million and commitments to customers for unused lines of credit of $3.1 million
outstanding. See Note 10 of Notes to Consolidated Financial Statements.
48
<PAGE>
Loan Fees. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, late payments and for
miscellaneous services related to its loans. Income from these activities varies
from period-to-period depending upon the volume and type of loans made and
competitive conditions.
The Bank charges loan origination fees which are calculated as a percentage
of the amount borrowed. In accordance with applicable accounting procedures,
loan origination fees in excess of loan origination costs are deferred and
recognized over the contractual remaining lives of the related loans on a level
yield basis. Discounts and premiums on loans purchased are accreted and
amortized in the same manner. The Bank recognized income of $69,000 and $44,000
of deferred loan fees during the years ended December 31, 1997 and 1996,
respectively.
Nonperforming Assets and Delinquencies. When a borrower fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. Computer generated late notices
are mailed 15 days after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency continues, additional contact is made either through
a notice or other means, and the Bank will attempt to work out a payment
schedule and actively encourage delinquent borrowers to seek home ownership
counseling. While the Bank generally prefers to work with borrowers to resolve
such problems, the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely to be received in
accordance with the terms of the loan agreement, or when principal or interest
is past due 90 days or more. Interest accrued but not collected at the date the
loan is placed on nonaccrual status is reversed against income when it is
considered uncollectible. Loans may be reinstated to accrual status when
payments are under 90 days past due and, in the opinion of management,
collection of the remaining past due balances can be reasonably expected.
The Bank's Board of Directors is informed monthly of the status of all
mortgage loans delinquent more than 60 days, all loans in foreclosure and all
foreclosed and repossessed property owned by the Bank.
49
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. As of such dates, the Bank had no
restructured loans within the meaning of SFAS No. 15.
At December 31,
----------------------------------
1997 1996 1995 1994 1993
------ ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One-to-four family....................... $ 844 $841 $368 $737 $766
Multi-family............................. 65 63 -- -- --
Commercial............................... -- -- -- -- --
Consumer................................. -- -- -- -- --
------ ---- ---- ---- ----
Total.................................... 909 904 368 737 766
------ ---- ---- ---- ----
Accruing loans delinquent 90 days or more:
One-to-four family....................... -- -- 440 58 70
Multi-family............................. -- -- -- -- --
Commercial............................... -- -- -- -- --
Consumer (1)............................. 25 26 15 51 30
------ ---- ---- ---- ----
Total.................................... 25 26 455 109 100
------ ---- ---- ---- ----
Real estate owned........................ 121 -- 134 144 82
------ ---- ---- ---- ----
Total non-performing assets.............. $1,055 $930 $957 $990 $948
====== ==== ==== ==== ====
Total as a percentage of total assets.... 0.49% 0.46% 0.51% 0.58% 0.57%
====== ==== ==== ==== ====
- ----------
(1) Consists of student loans backed by a government guarantee.
Interest income that would have been recorded for the fiscal years ended
December 31, 1997 and 1996 had nonaccruing loans been current in accordance with
their original terms amounted to $84,000 and $77,000, respectively. The Bank
recorded $36,000 and $35,000, respectively, of interest income on such loans for
such periods.
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at December 31, 1997.
<TABLE>
<CAPTION>
Loans delinquent for:
60-89 days 90 Days and Over Total Delinquent Loans
------------------------ ------------------------ ------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family...... 4 $208 0.14% 9 $844 0.59% 13 $1,052 0.73%
Multi-family............ -- -- -- 1 65 5.17 1 65 5.17
Commercial.............. -- -- -- -- -- -- -- -- --
Consumer.................. 2 6 0.10 7 25 0.40 9 31 0.50
---- ---- ---- ---- ---- ------
Total loans............ 6 $214 0.14 17 $934 0.61 23 $1,148 0.75
==== ==== ==== ==== ==== ======
</TABLE>
Real Estate Acquired in Settlement of Loans. Real estate acquired by the
Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified
as real estate acquired in settlement of loans until sold. Foreclosed real
estate is held for sale and such assets are carried at fair value minus
estimated cost to sell the property. After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their fair value. At December 31, 1997, the Bank had $121,000 of real estate
acquired in settlement of loans.
50
<PAGE>
Restructured Loans. Under GAAP, the Bank is required to account for certain
loan modifications or restructuring as "troubled debt restructuring." In
general, the modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrowers that the
Bank would not otherwise consider. Debt restructurings or loan modifications for
a borrower do not necessarily always constitute troubled debt restructurings,
however, and troubled debt restructurings do not necessarily result in
nonaccrual loans. The Bank had no restructured loans as of December 31, 1997.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory risk based capital, while specific valuation allowances
for loan losses generally do not qualify as regulatory capital. Assets that do
not currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and monitored by the Bank. As of December 31,
1997, the Bank had $285,000 of assets designated as "special mention."
At December 31, 1997, the Bank had $1.1 million of assets classified
substandard, and no assets classified doubtful or loss.
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Bank increases its allowance for loan losses by
charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the loan portfolio. 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, current
economic conditions and the size and growth of the loan portfolio. Specific
valuation allowances are established to absorb losses on loans for which full
collectibility cannot be reasonably assured. The amount of the allowance is
based on the estimated value of the collateral securing the loan and other
analyses pertinent to each situation. Generally, a provision for losses is
charged against income monthly to maintain the allowances.
At December 31, 1997, the Bank had an allowance for loan losses of
$723,000. Management believes that the amount maintained in the allowance at
December 31, 1997 will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to make
such determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance for
loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loan deteriorate as a result of
the factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Bank's financial condition and results of
operations.
51
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses.
At or For the Years Ended December 31,
--------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period........... $534 $490 $442 $392 $317
Charge-offs
Real estate:
One-to-four family..................... 11 -- 12 3 --
Multi-family and other................. -- -- -- -- 2
---- ---- ---- ---- ----
Total................................ 11 -- 12 3 2
Total Recoveries......................... -- 1 -- -- 1
---- ---- ---- ---- ----
Net charge-offs.......................... 11 (1) 12 3 1
Additions charged to operations.......... 200 43 60 53 76
---- ---- ---- ---- ----
Balance at end of period................. $723 $534 $490 $442 $392
==== ==== ==== ==== ====
Ratio of net charge-offs during the
period to average loans outstanding
during the period........................ 0.01% -- 0.01% -- --
==== ==== ==== ==== ====
Ratio of net charge-offs during the
period to average non-performing assets.. 1.04% -- 1.23% 0.31% 0.10%
==== ==== ==== ==== ====
The activity in the allowance for loan losses is as follows:
Years Ended December 31,
------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Balance--beginning....................... $534 $490 $442 $392 $317
Provisions charged to operations......... 200 43 60 53 76
Loans charged off, net of recoveries..... (11) 1 (12) (3) (1)
---- ---- ---- ---- ----
Balance--ending.......................... $723 $534 $490 $442 $392
==== ==== ==== ==== ====
52
<PAGE>
The following tables set forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------- ----------------------------------- -----------------------------------
% of % of % of
Loan Loans in Loan Loans in Loan Loans in
Amount of Amounts Each Category Amount of Amounts Each Category Amount of Amounts Each Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowances Category Loans Allowances Category Loans Allowances Category Loans
---------- -------- ------------- ---------- -------- ------------- ---------- -------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family..... $402 $143,623 93.88% $356 $121,129 92.10% $296 $ 97,007 92.08%
Multi-family........... 22 1,258 0.82 42 1,875 1.43 43 2,018 1.92
Commercial real estate. 37 1,906 1.25 61 2,035 1.55 61 1,862 1.76
Home equity............ 59 5,706 3.73 75 5,364 4.08 44 3,345 3.17
Other consumer......... 3 491 0.32 -- 1,101 0.84 -- 1,123 1.07
Unallocated............ 200 -- 0.00 -- -- 0.00 46 -- 0.00
---- -------- ------ ---- -------- ------ ---- -------- ------
$723 $152,984 100.00% $534 $131,504 100.00% $490 $105,355 100.00%
==== ======== ====== ==== ======== ====== ==== ======== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1994 1993
----------------------------------- -----------------------------------
% of % of
Loan Loans in Loan Loans in
Amount of Amounts Each Category Amount of Amounts Each Category
Loan Loss by to Total Loan Loss by to Total
Allowances Category Loans Allowances Category Loans
---------- -------- ------------- ---------- -------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four-family..... $240 $ 91,895 91.56% $204 $ 81,404 91.33%
Multi-family........... 37 2,102 2.09 35 2,004 2.25
Commercial real estate. 33 2,049 2.04 21 1,184 1.33
Home equity............ 30 3,005 2.99 33 3,168 3.55
Other consumer......... -- 1,321 1.32 -- 1,370 1.54
Unallocated............ 102 -- 0.00 99 -- 0.00
---- -------- ------ ---- -------- ------
$442 $100,372 100.00% $392 $ 89,130 100.00%
==== ======== ====== ==== ======== ======
</TABLE>
Investment Activities
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, government sponsored
corporation securities, securities of various federal agencies and of state and
municipal governments, deposits at the FHLB of New York, certificates of deposit
of federally insured institutions, certain bankers' acceptances and federal
funds. Subject to various restrictions, the Bank may also invest a portion of
its assets in commercial paper and corporate debt securities. The Bank is not
permitted to invest in corporate equity securities. Savings institutions like
the Bank are also required to maintain an investment in FHLB stock. The Bank is
required under federal regulations to maintain a minimum amount of liquid
assets. See "Regulation" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Bank purchases investment securities with excess liquidity arising when
investable funds exceed loan demand. The Bank's current investment policy limits
investments to U.S. Government and government sponsored corporation securities,
certificates of deposit, marketable corporate debt obligations, and
mortgage-backed securities. The Bank's investment policy does not permit
engaging directly in hedging activities or purchasing high risk mortgage
derivative products or non-investment grade corporate bonds. Investments are
made based on certain considerations, which include the interest rate, yield,
settlement date and maturity of the investment, the Bank's liquidity position,
and anticipated cash needs and sources (which in turn include outstanding
commitments, upcoming maturities, estimated deposits and anticipated loan
amortization and repayments). The effect that the proposed investment would have
on the Bank's credit and interest rate risk and risk-based capital is also
considered.
53
<PAGE>
The following table sets forth the carrying value of the Bank's securities
portfolio, at the dates indicated. All securities, other than FHLB stock, are
available for sale.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Available for sale:
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Federal agency obligations................. $ 1,000 1.85% $ 4,007 6.72% $ 5,018 7.30%
Unrealized gain (loss), net................ (8) (.01) (63) (.10) (13) (.02)
Equity securities.......................... -- -- -- -- -- --
Unrealized gains (loss), net............... -- -- 120 .20 91 .13
------- ------ ------- ------ ------- ------
Total investment securities............. 992 1.84 4,064 6.82 5,096 7.41
------- ------ ------- ------ ------- ------
Mortgage-backed Securities:
GNMA....................................... 1,184 2.20 1,813 3.04 2,220 3.23
FNMA....................................... 19,922 36.95 12,300 20.64 11,632 16.92
FHLMC...................................... 30,614 56.78 40,604 68.14 48,746 70.89
Net unamortized premium, (discounts)....... 545 1.01 487 0.82 512 0.74
Unrealized gains, net...................... 660 1.22 321 0.54 559 0.81
------- ------ ------- ------ ------- ------
Total mortgage backed securities........ 52,925 98.16 55,525 93.18 63,669 92.59
------- ------ ------- ------ ------- ------
Total securities available for sale........ $53,917 100.00% $59,589 100.00% $68,765 100.00%
======= ====== ======= ====== ======= ======
FHLB Stock................................. $ 1,804 -- $ 1,615 -- $ 1,537 --
======= ====== ======= ====== ======= ======
Other interest earning assets:
Interest bearing deposits in banks...... $ 4,739 -- $ 4,471 -- $ 6,197 --
======= ====== ======= ====== ======= ======
</TABLE>
The following table shows mortgage-backed securities purchases and
repayment activities of the Bank for the periods indicated.
Years Ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
Purchases:
Adjustable-rate............................ $29,207 $ 4,280 $ 8,175
Fixed-rate................................. 12,072 2,000 5,246
------- ------- -------
Total purchases.......................... 41,279 6,280 13,421
------- ------- -------
Sales:
Adjustable-rate............................ -- -- --
Fixed-rate................................. 30,714 -- --
------- ------- -------
Total sales............................. 30,714 -- --
------- ------- -------
Principal repayments....................... 13,375 14,051 10,002
------- ------- -------
Increase (decrease) in other items, net.... 210 (373) 1,775
------- ------- -------
Net increase (decrease)................. $(2,600) $(8,144) $ 5,194
======= ======= =======
54
<PAGE>
The following table sets forth the amount of investment and mortgage-backed
securities which mature during each of the periods indicated and the weighted
average yields for each of the range at maturities at December 31, 1997.
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years After Ten Years Total
----------------- ------------------ ----------------- ----------------- -----------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Government securities........ $ -- --% $ -- --% $ -- --% $ -- --% $ -- --%
Federal agency debentures......... -- -- -- -- 1,000 6.49 -- -- 1,000 6.49
Mortgage-backed securities........ 71 5.56 5,113 6.49 -- -- 47,081 6.38 52,265 6.39
----- ------ ------ ------- -------
Total investment securities......... $ 71 5.56% $5,113 6.49% $1,000 6.49% $47,081 6.38% $53,265 6.39
===== ====== ====== ======= =======
Weighted average rate............... 5.50% 6.55% 6.49% 6.49% 6.50%
</TABLE>
55
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. Borrowings
from the FHLB of New York may be used on a short-term basis to compensate for
reductions in the flow of funds from other sources or as a long-term funding
strategy. Presently, the Bank has no other borrowing arrangements.
Deposit Accounts. The Bank's deposit products include negotiable order of
withdrawal ("NOW") accounts, demand deposit accounts, money market accounts,
regular passbook savings, statement savings accounts and term certificate
accounts. Deposit account terms vary with the principal difference being the
minimum balance deposit, early withdrawal penalties and the interest rate. The
Bank reviews its deposit mix and pricing weekly. The Bank does not utilize
brokered deposits, nor has it sought jumbo certificates of deposit.
The Bank believes it is competitive in the type of accounts and interest
rates it offers on its deposit products. The Bank determines the rates paid
based on a number of conditions, including rates paid by competitors, rates on
U.S. Treasury securities, rates offered on various FHLB of New York lending
programs, and the deposit growth rate the Bank is seeking to achieve.
The Bank may use premiums to attract new checking accounts, particularly in
conjunction with new branch openings. These premiums are reflected as an
increase in the Bank's advertising and promotion expense, as well as its cost of
funds. The Bank also attracts business checking accounts and promotes individual
retirement accounts ("IRAs").
In the unlikely event the Bank is liquidated after the Reorganization,
depositors would be entitled to full payment of their deposit accounts before
any payment is made to any stockholder of the Bank.
The following table sets forth an analysis of deposit accounts by type,
maturity, and rate at December 31, 1997, 1996 and 1995, as well as the savings
flows.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average % of Average % of Average % of
Amount Rate Total Amount Rate Total Amount Rate Total
-------- -------- ------- -------- -------- ------- -------- -------- -------
(Dollars in Thousands)
Transactions and savings deposits:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing.............. $ 3,376 --% 1.70% $ 2,417 --% 1.31% $ 2,682 --% 1.58%
Money market accounts............. 2,809 2.69 1.42 3,160 2.75 1.71 3,564 2.77 2.10
NOW accounts...................... 9,696 1.50 4.89 8,816 2.25 4.77 8,799 2.25 5.18
Passbook and statement savings.... 45,168 3.00 22.77 44,120 2.99 23.89 44,274 3.00 26.07
-------- ------ -------- ------ -------- ------
Total transactions and
savings deposits.............. 61,049 2.58% 30.78 58,513 2.74% 31.68 59,319 2.74 34.93
-------- ------ -------- ------ -------- ------
Certificate accounts with
remaining maturities of:
6 months or less.................. 62,587 5.30 31.55 52,974 5.05 28.68 43,090 5.08 25.37
Over 6 to 12 months............... 27,714 5.37 13.97 31,902 5.50 17.27 31,516 5.48 18.55
Over 12 months.................... 47,013 5.89 23.70 41,320 5.75 22.37 35,917 5.84 21.15
-------- ------ -------- ------ -------- ------
Total certificates.............. 137,314 5.52 69.22 126,196 5.39 68.32 110,523 5.44 65.07
-------- ------ -------- ------ -------- ------
Total deposits.................. $198,363 4.62% 100.00% $184,709 4.55% 100.00% $169,842 4.50% 100.00%
======== ==== ====== ======== ==== ======= ======== ==== ======
</TABLE>
56
<PAGE>
Time Deposits by Maturities. The following table sets forth the amount of
time deposits in the Bank categorized by rates and maturities at December 31,
1997.
After
December 31, December 31, December 31, December 31,
1998 1999 2000 2000 Total
------------ ------------ ------------ ------------ --------
(In Thousands)
4.00-5.99%...... $88,289 $22,656 $15,559 $1,316 $127,820
6.00-7.99%...... 2,012 782 6,700 -- 9,494
------- ------- ------- ------ --------
Total........... $90,301 $23,438 $22,259 $1,316 $137,314
======= ======= ======= ====== ========
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1997.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------------
3 Months Over 3 Months Over 12 Months Over
Or Less to 12 Months to 36 Months 36 Months Total
-------- ------------- -------------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of Deposit less than $100,000... $31,220 $54,072 $42,613 $1,097 $129,002
Certificates of Deposit of $100,000 or more.. 2,482 2,532 3,080 218 8,312
------- ------- ------- ------ --------
Total Certificates of Deposit................ $33,702 $56,604 $45,693 $1,315 $137,314
======= ======= ======= ====== ========
</TABLE>
Deposit Activity. The following table sets forth the deposit activity of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance................................. $184,709 $169,842 $153,769 $154,055 $149,742
-------- -------- -------- -------- --------
Net increase (decrease) before interest credited.. 5,283 7,343 6,446 (5,192) (1,042)
Interest credited................................. 8,371 7,524 9,627 4,906 5,355
-------- -------- -------- -------- --------
Net increase (decrease) in deposits............... 13,654 14,867 16,073 (286) 4,313
-------- -------- -------- -------- --------
Ending balance.................................... $198,363 $184,709 $169,842 $153,769 $154,055
======== ======== ======== ======== ========
</TABLE>
Borrowings. Savings deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank has the ability to use advances from the FHLB of New York to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The FHLB
of New York functions as a central reserve bank providing credit for savings
associations and certain other member financial institutions. As a member of the
FHLB of New York, the Bank is required to own capital stock in the FHLB of New
York and is authorized to apply for advances on the security of such stock and
certain of its mortgage loans and other assets (principally securities that are
obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit.
57
<PAGE>
The following table sets forth the maximum month-end balance and average
balance of FHLB of New York advances for the periods indicated.
At December 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In Thousands)
Maximum balance:
FHLB advances..................... $7,500 $ 800 $4,200 $4,100 $ --
Average balance:
FHLB advances..................... $1,663 $ 12 $ 962 $ 304 $ --
At December 31, 1997 and 1996, no advances were outstanding from the FHLB
of New York.
Competition
The Bank faces intense competition in its primary market area for the
attraction of savings deposits (its primary source of lendable funds) and the
origination of loans. Its most direct competition for savings deposits has
historically come from commercial banks, credit unions, other thrifts operating
in its market area, mutual funds and other financial institutions such as
brokerage firms and insurance companies. Particularly in times of high interest
rates, the Bank has faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities. The Bank's competition for loans comes from commercial banks, thrift
institutions, credit unions and mortgage bankers. Such competition for deposits
and the origination of loans may limit the Bank's growth in the future. See
"Risk Factors--Competition."
Subsidiary Activities
Under OTS regulations, the Bank generally may invest up to 3% of its assets
in service corporations, provided that at least one-half of investment in excess
of 1% is used primarily for community, inner-city and community development
projects. The Bank's investment in its wholly-owned service corporation, Axia
Financial Corporation which was $19,522 at December 31, 1997, did not exceed
these limits. The Bank's other service corporation, Axia Financial Services, is
unfunded and inactive at this time.
Properties
The following table sets forth certain information regarding the Bank's
offices at December 31, 1997.
Location Year Opened Approximate Square Feet Deposits
- ------------------------ ----------- ----------------------- -------------
1410 St. Georges Avenue 1986 9,200 $57.6 million
Avenel, NJ 07001
1515 Irving Street 1995 7,300 $42.0 million
Rahway, NJ 07065
225 North Wood Ave. 1977 1,400 $39.2 million
Linden, NJ 07036
755 State Highway 18 1974 2,000 $59.5 million
East Brunswick, NJ 08816
At December 31, 1997, the net book value of the Bank's office properties
and fixtures, furniture, and equipments was $2.1 million.
Employees
As of December 31, 1997, the Bank had 43 full-time employees and 1
part-time employee, none of whom is represented by a collective bargaining unit.
The Bank believes its relationship with its employees is good.
58
<PAGE>
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.
REGULATION
As a federally chartered SAIF-insured savings bank, the Bank is subject to
examination, supervision and extensive regulation by the OTS and the FDIC. The
Bank is a member of the FHLB of New York. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The Bank also is subject to regulation by the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") governing reserves to
be maintained against deposits and certain other matters. The OTS examines the
Bank and prepares reports for the consideration of the Bank's Board of
Directors. The FDIC also examines the Bank in its role as the administrator of
the SAIF. The Bank's relationship with its depositors and borrowers also is
regulated to a great extent by both federal and state laws, especially in such
matters as the ownership of savings accounts and the form and content of the
Bank's mortgage documents. Any change in such regulation, whether by the FDIC,
OTS, or Congress, could have a material adverse impact on the Company and the
Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act (the "FDI Act") and the regulations issued by the
agencies to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which savings association may engage. The
description of statutory provisions and regulations applicable to savings
associations set forth herein does not purport to be a complete description of
such statutes and regulations and their effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to a single or related group of
borrowers. Generally, this limit is 15% of the Bank's unimpaired capital and
surplus, and an additional 10% of unimpaired capital and surplus if such loan is
secured by readily- marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the loans
to one borrower rule to permit savings associations meeting certain requirements
to extend loans to one borrower in additional amounts under circumstances
limited essentially to loans to develop or complete residential housing units.
Qualified Thrift Lender Test. In general, savings associations are required
to maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties. Recent legislation permits a
savings association to qualify as a qualified thrift lender not only by
maintaining 65% of portfolio assets in qualified thrift investments (the "QTL
test") but also, in the alternative, by qualifying under the Internal Revenue
Code of 1986, as amended (the "Code") as a "domestic building and loan
association." The Bank is a domestic building and loan association as defined in
the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and education loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10% of total assets, plus an additional 10%
for small business loans. Loans for personal, family and household purposes
(other than credit card, small business and educational loans) are now included
without limit with other assets that, in the aggregate, may account for up to
20% of total assets. At December 31, 1997, under the expanded QTL test,
approximately 99.99% of the Bank's portfolio assets were qualified thrift
investments, which exceeded then applicable requirements.
59
<PAGE>
Limitations on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution, such as the
Bank, that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters; provided that the institution would not
be undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its fully-phased in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average liquidity ratio
at December 31, 1997 was 37.9%, which exceeded the then applicable requirements.
Community Reinvestment Act and Fair Lending Laws. Savings association share
a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to complete with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received a
satisfactory CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any nonsavings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
60
<PAGE>
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted a final regulation and Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines") to implement the
safety and soundness standards required under the FDI Act. The Guidelines set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit systems; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs"), and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed the effective date of the capital
component in order to provide it with an opportunity to review the interest rate
risk approaches taken by the other federal banking agencies.
61
<PAGE>
At December 31, 1997, the Bank met each of its capital requirements, in
each case on a fully phased-in basis. See "Regulatory Capital Compliance" for a
table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Bank's historical amounts and
percentages at December 31, 1997, and pro forma amounts and percentages based
upon the issuance of the shares within the Offering Range and assuming that a
portion of the net proceeds are retained by the Company.
Thrift Charter. Congress has been considering legislation in various forms
that would require federal thrifts, such as the Bank, to convert their charters
to national or state bank charters. Legislation enacted in 1996 required the
Treasury Department to prepare for Congress a comprehensive study on development
of a common charter for federal savings associations and commercial banks; and
provided for the merger of the BIF and the SAIF into a single deposit insurance
fund on January 1, 1999 provided the thrift charter was eliminated. The Bank
cannot determine whether, or in what form, such legislation may eventually be
enacted and there can be no assurance that any legislation that is enacted would
not adversely affect the Bank and the Company.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has total
risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized," and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS may also take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
62
<PAGE>
Federal Home Loan Bank System
The Bank, as a federal association, is required to be a member of the FHLB
System, which consists of 12 regional FHLBs. The FHLB provides a central credit
facility primarily for member institutions. The Bank, as a member of the FHLB of
New York, is required to acquire and hold shares of capital stock in that FHLB
in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater. As of December 31, 1997, the Bank was in compliance with this
requirement. The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). At December 31, 1997, the Bank
was in compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS.
Holding Company Regulation
Generally. The Mutual Holding Company and the Company are nondiversified
mutual savings and loan holding companies within the meaning of the HOLA. As
such, the Mutual Holding Company and the Company are registered with the OTS and
are subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Mutual
Holding Company and the Company and any nonsavings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. As federal corporations, the Company and the Mutual Holding Company
are generally not subject to state business organizations law.
Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS
regulations and policy, a mutual holding company and a federally chartered
mid-tier holding company such as the Company may engage in the following
activities: (i) investing in the stock of a savings association; (ii) acquiring
a mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association
subsidiary of such holding company; (iii) merging with or acquiring another
holding company, one of whose subsidiaries is a savings association; (iv)
investing in a corporation, the capital stock of which is available for purchase
by a savings association under federal law or under the law of any state where
the subsidiary savings association or associations share their home offices; (v)
furnishing or performing management services for a savings association
subsidiary of such company; (vi) holding, managing or liquidating assets owned
or acquired from a savings subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity (A) that
the Federal Reserve Board, by regulation, has determined to be permissible for
bank holding companies under Section 4(c) of the Bank Holding Company Act of
1956, unless the Director, by regulation, prohibits or limits any such activity
for savings and loan holding companies; or (B) in which multiple savings and
loan holding companies were authorized (by regulation) to directly engage on
March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director. If a mutual
holding company acquires or merges with another holding company, the holding
company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed in (i)
through (x) above, and has a period of two years to cease any nonconforming
activities and divest of any nonconforming investments.
The HOLA prohibits a savings and loan holding company, including the
Company and the Mutual Holding Company, directly or indirectly, or through one
or more subsidiaries, from acquiring another savings institution or holding
company thereof, without prior written approval of the OTS. It also prohibits
the acquisition or retention of, with certain exceptions, more than 5% of a
nonsubsidiary savings institution, a nonsubsidiary holding company, or a
nonsubsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
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<PAGE>
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Waivers of Dividends by the Mutual Holding Company. OTS regulations require
the Mutual Holding Company to notify the OTS of any proposed waiver of its right
to receive dividends. The OTS reviews dividend waiver notices on a case-by-case
basis, and, in general, does not object to any such waiver if: (i) the mutual
holding company's board of directors determines that such waiver is consistent
with such directors' fiduciary duties to the mutual holding company's members;
(ii) for as long as the savings association subsidiary is controlled by the
mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction to the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with SFAS 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the mutual holding company.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations and
the Plan of Reorganization permit the Mutual Holding Company to undertake a
Conversion Transaction. There can be no assurance when, if ever, a Conversion
Transaction will occur, and the Board of Directors has no current intention or
plan to undertake a Conversion Transaction. In a Conversion Transaction a new
holding company would be formed as the successor to the Company (the "New
Holding Company"), the Mutual Holding Company's corporate existence would end,
and certain depositors of the Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of Common Stock held by Minority Stockholders would be automatically
converted into a number of shares of common stock of the New Holding Company
determined pursuant an exchange ratio that ensures that after the Conversion
Transaction, subject to the Dividend Waiver Adjustment described below and any
adjustment to reflect the receipt of cash in lieu of fractional shares, the
percentage of the to-be outstanding shares of the New Holding Company issued to
Minority Stockholders in exchange for their Common Stock would be equal to the
percentage of the outstanding shares of Common Stock held by Minority
Stockholders immediately prior to the Conversion Transaction. The total number
of shares held by Minority Stockholders after the Conversion Transaction would
also be affected by any purchases by such persons in the offering that would be
conducted as part of the Conversion Transaction.
The Dividend Waiver Adjustment would decrease the percentage of the to-be
outstanding shares of common stock of the New Holding Company issued to Minority
Stockholders in exchange for their shares of Common Stock to reflect (i) the
aggregate amount of dividends waived by the Mutual Holding Company and (ii)
assets other than Common Stock held by the Mutual Holding Company. Pursuant to
the Dividend Waiver Adjustment, the percentage of the to-be outstanding shares
of the New Holding Company issued to Minority Stockholders in exchange for their
shares of Common Stock would be equal to the percentage of the outstanding
shares of Common Stock held by Minority Stockholders multiplied by the Dividend
Waiver Fraction. The Dividend Waiver Fraction is equal to the product of (a) a
fraction, of which the numerator is equal to the Company's stockholders' equity
at the time of the Conversion Transaction less the aggregate amount of dividends
waived by the Mutual Holding Company and the denominator is equal to the
Company's stockholders' equity at the time of the Conversion Transaction, and
(b) a fraction, of which the numerator is equal to the appraised pro forma
market value of the New Holding Company minus the value of the Mutual Holding
Company's assets other than Common Stock and the denominator is equal to the pro
forma market value of the New Holding Company.
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<PAGE>
Federal Securities Law
The Common Stock to be issued in the Offering will be registered with the
SEC under the Securities Exchange Act of 1934 (the "Exchange Act"). The Company
will be subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act. Common
Stock held by persons who are affiliates (generally officers, directors and
principal stockholders) of the Company may not be resold without registration or
unless sold in accordance with certain resale restrictions. If the Company meets
specified current public information requirements, each affiliate of the Company
is able to sell in the public market, without registration, a limited number of
shares in any three-month period.
TAXATION
Federal Income Taxes
General. The Bank is, and the Company will be, subject to federal income
taxation in the same general manner as other corporations, with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Bank.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its federal income tax returns. The Small
Business Protection Act of 1996 (the "1996 Act") eliminated the use of the
reserve method of accounting for bad debt reserves by savings institutions,
effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of December 31, 1997, was approximately
$880,000.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a savings
bank charter.
At December 31, 1997, the Bank's total federal pre-1988 reserve was
approximately $3.0 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
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<PAGE>
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 1997, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated return, and corporations which own less
than 20% of the stock of a corporation distributing a dividend may deduct only
70% of dividends received or accrued on their behalf.
The Bank is not currently under audit with respect to its federal income
tax returns and has not been audited with respect to its federal income tax
returns during the past five years.
State and Local Taxation
State of New Jersey. The Bank files New Jersey income tax returns. For New
Jersey income tax purposes, savings institutions are presently taxed at a rate
equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of net interest income on state and municipal obligations). The Bank is
not currently under audit with respect to its New Jersey income tax returns.
The Company will be required to file a New Jersey income tax return because
it will be doing business in New Jersey. For New Jersey tax purposes, regular
corporations are presently taxed at a rate equal to 9% of taxable income. For
this purpose, "taxable income" generally means federal taxable income subject to
certain adjustments (including addition of interest income on state and
municipal obligation). However, if the Company meets certain requirements, it
may be eligible to elect to be taxed as a New Jersey Investment Company at a tax
rate presently equal to 2.25% (25% of 9%) of taxable income.
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<PAGE>
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company will consist of nine members and will
be divided into three classes and will be elected by the stockholders of the
Company, for staggered three year terms and until their successors are elected
and qualified. One class of directors, consisting of directors John C. Marsh,
Paul J. McGovern and Nelson L. Taylor, Jr. will have terms of office expiring in
2001; a second class, consisting of directors John R. Bowen, Michael J. Widmer
and Donald F. Marsh will have terms of office expiring in 1999; and a third
class, consisting of directors Anthony V. Caruso, John W. Fox and Neil R. Bryson
have terms of office expiring in 2000. Their names and biographical information
are set forth under "Management of the Bank--Directors of the Bank."
The following individuals will hold positions as executive officers of the
Company as is set forth below opposite their names.
Name Position With the Company
---- -------------------------
John R. Bowen............. President and Chief Executive Officer
Michael J. Widmer......... Executive Vice President and Chief Financial Officer
Lucille Capece............ Vice President
Brian C. Messett.......... Vice President
Joseph F. Coccaro......... Treasurer
Leslie C. Whelan.......... Corporate Secretary
The executive officers of the Company will be elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors.
The Board of Directors initially is expected to have, among others, a
standing Executive Committee and Finance and Audit Committee. The Company's full
Board of Directors will act as the Nominating Committee, or may appoint a
Nominating Committee. The Company does not intend initially to have a
compensation committee, as it is not anticipated that the officers of the
Company will initially be compensated as such.
The Executive Committee initially will consist of Directors Fox (who will
serve as Chairman), Bowen, Donald F. Marsh and Taylor, Jr. The Executive
Committee is expected to meet as necessary when the Board is not in session to
exercise general control and supervision in all matters pertaining to the
interests of the Company, subject at all times to the direction of the Board of
Directors.
The Finance and Audit Committee initially will consist of Directors Taylor,
Jr. (who will serve as Chairman), Caruso, Donald F. Marsh, and McGovern. The
Finance and Audit Committee is expected to meet as necessary to review and
recommend the independent auditors to be engaged by the Company, to review the
audit report with the independent auditors of the Company and to review and
approve the internal audit program of the Company.
None of the executive officers, directors or other personnel have received
remuneration from the Company. Information concerning the principal occupations,
employment and compensation of the directors and officers of the Company during
the past five years is set forth under "Management of the Bank."
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<PAGE>
MANAGEMENT OF THE BANK
Directors of the Bank
Upon completion of the Reorganization, the directors of the Stock Bank will
consist of those persons who currently serve on the Board of Directors of the
Bank. The directors of the Stock Bank will have three year terms which will be
staggered to provide for the election of approximately one-third of the board
members each year. Directors of the Bank will be elected by the Company as sole
stockholder of the Stock Bank. The directors and executive officers of the Bank
are as follows:
<TABLE>
<CAPTION>
Age at Current
Name December 31, 1997 Position Director Since (1) Term Expires
- --------------------- ----------------- -------------------------- ------------------ ------------
<S> <C> <C> <C> <C>
John R. Bowen 57 Chairman, President and 1973 1999
Chief Executive Officer
Michael J. Widmer 38 Executive Vice President, 1998 1999
Chief Financial Officer
and Director
Neil R. Bryson, DDS 57 Director 1990 2000
Anthony V. Caruso 71 Director and Legal Counsel 1984(2) 2000
John W. Fox 60 Director 1968 2000
Donald F. Marsh 94 Director 1930 1999
John C. Marsh 70 Director 1968 2001
Paul J. McGovern 51 Director 1988 2001
Nelson L. Taylor, Jr. 67 Director 1966 2001
</TABLE>
- ----------
(1) Reflects initial appointment to the Board of Directors of the Bank. (2)
Also previously served as a director from January 1958 through May 1977.
Executive Officers Who Are Not Directors
The following table sets forth information regarding the executive officers
of the Bank who are not also directors.
Age At
Name December 31, 1997 Position With the Bank
----------------- ----------------- ----------------------
Lucille Capece 53 Vice President
Brian C. Messett 37 Vice President
Joseph F. Coccaro 40 Treasurer
Leslie C. Whelan 34 Secretary
The principal occupation during the past five years of each director and
executive officer of the Bank is set forth below. All directors have held their
present positions for five years unless otherwise stated.
John R. Bowen is the President, Chief Executive Officer and Chairman of the
Board of Directors. Mr. Bowen has been employed by the Bank in various
capacities since 1964. Mr. Bowen was elected President and Chief Executive
Officer in 1973 and Chairman in 1995. He serves as Vice Chairman of the Board of
Trustees of the Rahway Center Partnership, a non-profit community development
organization.
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<PAGE>
Michael J. Widmer has served as Chief Financial Officer of the Bank since
February 1998 and Executive Vice President of the Bank since March 1996. Mr.
Widmer is a member of the Board of Trustees of the Union County Arts Center. Mr.
Widmer served as President and as a member of the Board of Directors of Chatham
Savings Bank in Chatham, New Jersey from 1990 to 1996.
Neil R. Bryson is a Doctor of Dental Surgery, a Board Certified
Periodontist, a Prosthiodontist and a member of the American Dental Association
in private practice in Colonia, New Jersey.
Anthony V. Caruso has served as the Bank's legal counsel since 1963. Mr.
Caruso is a practicing attorney with thirty-nine years of experience. Mr. Caruso
is a former Municipal Judge of Rahway, New Jersey and is a member of the Board
of Governors of The Rahway Hospital.
John W. Fox is a General Partner of The Linden Investment Co., a real
estate investment company. Mr. Fox is Chairman of the Board of Trustees of
Children's Specialized Hospital, Mountainside, New Jersey.
Donald F. Marsh served as Chairman of the Board of Directors of the Bank
from 1967 until 1995. Mr. Marsh is retired from the position of President, Chief
Executive Officer and a member of the Board of Directors of Boorum & Pease, Co.
and subsidiaries, manufacturers of office supplies and equipment.
John C. Marsh is President and Chief Executive Officer of Consumers
International. Prior to that position, Mr. Marsh held various administrative
positions in area hospitals. Mr. Marsh is a former Mayor of the City of Rahway,
New Jersey.
Paul J. McGovern is retired from the position of Senior Director of
Internal Auditing for Merck & Co., Inc. Mr. McGovern is a Certified Public
Accountant. Mr. McGovern is a member of the Board of Trustees of Don Bosco
Preparatory School, Ramsey, New Jersey.
Nelson L. Taylor, Jr. is the President and owner of West End Garage, Inc.,
a Chrysler Plymouth automobile agency in Rahway, New Jersey. Mr. Taylor is a
member of the Board of Governors of The Rahway Hospital.
Lucille Capece has served as Vice President of Operations of the Bank since
1979.
Brian C. Messett joined the Bank as Vice President of Lending in August of
1997. Prior to joining the Bank, Mr. Messett was Assistant Vice President of
Lending for Spencer Savings Bank, Garfield, New Jersey.
Joseph F. Coccaro has served as Treasurer of the Bank since 1988.
Leslie C. Whelan joined the Bank in 1991 and has served as Corporate
Secretary since October of 1993.
Meetings of the Board of Directors of the Bank
The Board of Directors of the Bank meets monthly and may have additional
special meetings as may be called by the Chairman or as otherwise provided by
the Bank's current Bylaws. During the fiscal year ended December, 1997, the
Board held 14 meetings. No director attended fewer than 75% in the aggregate of
the total number of meetings of the Board or Board Committees on which such
Director served during fiscal 1997.
Directors' Compensation
During the year ended December 31, 1997, directors of the Bank received a
retainer fee of $12,000, plus a fee of $300 per board meeting or committee
meeting attended. The Bank provides all employees with medical, dental and life
insurance, and also offers these benefits to its directors. During the year
ended December 31, 1997, the Bank provided insurance benefits to directors
Donald F. Marsh, Taylor, Jr., Bryson, and Caruso of $3,400, $7,400, $10,800, and
$10,020 respectively. Employee directors Bowen and Widmer received benefits of
$11,300 and $6,500, respectively, pursuant to these plans. The Bank also
provides that a director's beneficiary will receive a $10,000 cash payment
should the director die while in office.
69
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth for the year
ended December 31, 1997, certain information as to the total remuneration paid
by the Bank to the President and Chief Executive Officer and the Executive Vice
President and Chief Financial Officer, each of whose salary and bonuses exceeded
$100,000 in 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1) Compensation Awards
------------------------------------------ -------------------
Other Restricted
Annual Stock Options/ All Other
Name and Principal Fiscal Salary($) Compensation Award SARs Compensation
Position Year(1) (2) Bonus($) ($)(3) ($) (#) ($)
- -------------------------- ------- --------- -------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John R. Bowen, 1997 186,200 16,320 -- -- -- --
President and Chief
Executive Officer
Michael J. Widmer, 1997 97,000 8,262 -- -- -- --
Executive Vice President
and Chief Financial
Officer
</TABLE>
- ----------
(1) In accordance with the rules on executive officer and director compensation
disclosure adopted by the SEC, Summary Compensation information is excluded
for the fiscal years ended December 31, 1996 and 1995, as the Bank was not
a public company during such periods.
(2) Salary amount for Mr. Bowen includes directors fees of $16,200 for the year
ended December 31, 1997.
(3) The Bank also provides certain members of senior management with the use of
an automobile, and all employees of the Bank with medical, dental and life
insurance. These benefits did not exceed the lesser of $50,000 or 10% of
the total annual salary and bonus reported for each officer.
Benefit Plans
Employment Agreements. The Bank intends to enter into employment agreements
with Messrs. Bowen and Widmer and Ms. Capece, each of which will provide for a
term of 36 months. On each anniversary date, which under the agreements is
defined as the date of the organizational meeting following the Company's annual
meeting, the agreement may be extended for an additional twelve months, so that
the remaining term shall be approximately three years. If the agreement is not
renewed, the agreement will expire 36 months following the anniversary date. The
agreement provides for, among other things, base salary (which may be increased,
but not decreased), participation in stock benefit plans and other employee and
fringe benefits applicable to executive personnel. The agreement provides for
termination by the Bank for cause at any time. In the event the Bank terminates
the executive's employment for reasons other than for disability, retirement or
for cause, or in the event of the executive's resignation from the Bank upon (i)
failure to re-elect the executive to his or her current offices, (ii) a material
change in the executive's functions, duties or responsibilities, (iii)
liquidation or dissolution of the Bank or Company, (iv) a breach of the
agreement by the Bank or, (v) a change in control of the Bank or Company, the
executive, or in the event of death, the executive's beneficiary would be
entitled to severance pay in an amount equal to three times the annual rate of
Base Salary (which includes any salary deferred at the election of Mr. Bowen,
Mr. Widmer or Ms. Capece) at the time of termination, plus the highest annual
cash bonus paid to him or her during the prior three years. The Bank would also
continue the executive's life, health, dental and disability coverage for 36
months from the date of termination. In the event the payments to the executive
would include an "excess parachute payment" as defined by Code Section 280G
(relating to payments made in connection with a change in control), the payments
would be reduced in order to avoid having an excess parachute payment.
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<PAGE>
The executive's employment may be terminated upon his/her retirement at age
65, or such later age as consented to by the Bank or in accordance with any
retirement policy established by the Bank. Upon the executive's retirement,
he/she will be entitled to all benefits available to him/her under any
retirement or other benefit plan maintained by the Bank. In the event of the
executive's disability for a period of six months, the Bank may terminate the
agreement provided that the Bank will be obligated to pay the executive his/her
Base Salary for the remaining term of the agreement or one year, whichever is
longer, reduced by any benefits paid to the executive pursuant to any disability
insurance policy or similar arrangement maintained by the Bank. In the event of
the executive's death, the Bank will pay his/her Base Salary to his/her named
beneficiaries for one year following his/her death, and will also continue
medical, dental, and other benefits to his/her family (as applicable) for one
year.
The employment agreement provides that, following termination of
employment, the executive will not compete with the Bank for a period of one
year within 25 miles of any existing branch of the Bank or within 25 miles of
any office for which the Bank and/or the Company has filed for regulatory
approval to establish an office.
Defined Benefit Pension Plan. The Bank maintains The Retirement Plan for
Employees of Axia Federal Savings Bank in RSI Retirement Trust, which is a
qualified, tax-exempt defined benefit plan ("Retirement Plan"). All employees
age 20 1/2 or older who have worked at the Bank for a period of one year and
have been credited with 1,000 or more hours of service with the Bank during the
year are eligible to participant in the Retirement Plan provided, however, that
leased employees, employees paid on a contract basis and employees in a unit
covered by a collective bargaining agreement are not eligible to participate.
The Bank annually contributes an amount to the Retirement Plan necessary to
satisfy the actuarially determined minimum funding requirements in accordance
with the Employee Retirement Income Security Act ("ERISA").
The regular form of all retirement benefits (normal, early or disability)
is guaranteed for the life of the retiree, but not less than 120 monthly
installments. For a married participant, the normal form of benefit is a joint
and 50% survivor annuity where, upon the participant's death, the participant's
spouse is entitled to receive a benefit equal to 50% of that paid during the
participant's lifetime. Alternatively, a participant may elect (with proper
spousal consent, if necessary) an optional form of benefit. These optional forms
include various annuity forms as well as a lump sum payment. All forms in which
a participant's benefit may be paid will be actuarially equivalent to a ten year
period certain and life benefit. For an unmarried participant, benefits payable
upon death are made in a lump sum.
The normal retirement benefit payable at the later of age 65 or the fifth
anniversary of participation in the plan, is an amount equal to the greater of
(i) 30.5% of a participant's average annual earnings, plus 19.5% of the amount
in excess of $10,000, multiplied by a fraction, not to exceed one, the numerator
of which is the number of years of the Participant's credited service at normal
retirement date and the denominator of which is 30 and (ii) 2% of a
participant's average annual earnings multiplied by the participant's years of
credited service (up to a maximum of 10 years). Retirement benefits are also
payable upon retirement due to early and late retirement or death. A reduced
benefit is payable upon early retirement at age 55 and, for employees who first
become participants on or after January 1, 1998, ten years of credited service,
or after the sum of the participant's attained age and vested service equals 75.
Upon termination of employment other than as specified above, a participant who
is employed on or after January 1, 1998 and has five years of vested service
after age 18 is eligible to receive his or her accrued benefit commencing,
generally, on such participant's normal retirement date. (Employees employed
prior to January 1, 1998 are eligible to receive a vested retirement benefit
that vests after age 18 over a five year period at a rate of 20% per year,
beginning in the second year of service, until a participant is 100% vested
after five years). For the plan year ended December 31, 1997, the Bank made a
contribution to the Retirement Plan of $144,567.
71
<PAGE>
The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
1997, expressed in the form of a single life annuity for the average salary and
benefit service classifications specified below.
High Five-Year Years of Service and Benefit Payable at Retirement
Average --------------------------------------------------------------
Compensation 15 20 25 30 35 40
- -------------- --------------------------------------------------------------
$ 50,000 $11,525 $15,367 $19,208 $23,050 $23,050 $23,050
75,000 17,775 23,700 29,625 35,550 35,550 35,550
100,000 24,025 32,033 40,042 48,050 48,050 48,050
125,000 30,275 40,367 50,458 60,550 60,550 60,550
160,000 39,025 52,033 65,042 78,050 78,050 78,050
The maximum annual compensation which may be taken into account under the
Internal Revenue Code, as amended (the "Code") for calculating contributions
under qualified defined benefit plans such as the Retirement Plan is currently
$160,000. As of December 31, 1997, Messrs. Bowen and Widmer had 33 years and two
years, respectively, of credited service (i.e., benefit service), under the
plan.
Employee Stock Ownership Plan and Trust
The Bank intends to implement the ESOP in connection with the
Reorganization. Employees with at least one year of employment in which they
complete 1000 hours of service for the Bank and who have attained age 21 are
eligible to participate. As part of the Reorganization, the ESOP intends to
borrow funds from the Company and use those funds to purchase up to 8% of the
Common Stock to be sold in the Offering. Collateral for the loan will be the
common stock purchased by the ESOP. The loan will be repaid principally from the
Bank's discretionary contributions to the ESOP over a period of not less than
ten years. It is anticipated that the interest rate for the loan will be a
floating rate equal to the Prime Rate. Shares purchased by the ESOP will be held
in a suspense account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of compensation in the year of allocation.
Participants in the ESOP will receive credit for service prior to the effective
date of the ESOP. Benefits generally vest after five years of credited service,
upon normal retirement (as defined in the ESOP), early retirement, disability or
death of the participant. A participant who terminates employment for reasons
other than death, retirement, or disability prior to five years of credited
service will forfeit his benefits under the ESOP. Benefits will be payable in
the form of common stock and/or cash upon death, retirement, early retirement,
disability or separation from service. The Bank's contributions to the ESOP are
discretionary, subject to the loan terms and tax law limits, and, therefore,
benefits payable under the ESOP cannot be estimated. Pursuant to The American
Institute of Certified Public Accountants Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans," the Bank is required
to record compensation expense in an amount equal to the fair market value of
the shares released from the suspense account each year.
In connection with the establishment of the ESOP, the Bank will establish a
committee of non-employee directors to administer the ESOP. The Bank will either
appoint its non-employee directors or an independent financial institution to
serve as trustee of the ESOP. The ESOP Committee may instruct the trustee
regarding investment of funds contributed to the ESOP. The ESOP trustee, subject
to its fiduciary duty, must vote all allocated shares held in the ESOP in
accordance with the instructions of participating employees. Under the ESOP,
nondirected shares, and shares held in the suspense account, will be voted in a
manner calculated to most accurately reflect the instructions it has received
from participants regarding the allocated stock so long as such vote is in
accordance with the provisions of ERISA.
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<PAGE>
Stock Option Plan. At a meeting of the Company's shareholders to be held no
earlier than six months after the completion of the Offering, the Board of
Directors intends to submit for shareholder approval a stock option plan for
directors and officers of the Bank and of the Company (the "Stock Option Plan").
If approved by the shareholders, Common Stock in an aggregate amount equal to
10% of the shares sold in the Offering would be reserved for issuance by the
Company upon the exercise of the stock options granted under the Stock Option
Plan. Ten percent of the shares issued in the Offering would amount to 117,853
shares, 138,650 shares, 159,448 shares or 183,365 shares at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range, respectively. No
options would be granted under the Stock Option Plan until the date on which
shareholder approval is received.
It is anticipated that options would be granted for terms of approximately
10 years. Options granted under the Stock Option Plan would be adjusted for
capital changes such as stock splits and stock dividends. Awards would be 100%
vested upon termination of employment due to death or disability, and if the
Stock Option Plan is adopted more than 12 months after the Offering, awards may
be 100% vested upon normal retirement or a change in control of the Bank or the
Company. Under OTS rules, if the Stock Option Plan is implemented within the
first 12 months after the Offering, no individual officer may receive more than
25% of the awards under the plan, no outside director may receive more than 5%
of the awards under the plan, all outside directors as a group may receive no
more than 30% of the awards under the plan in the aggregate, the exercise price
of the options must be equal to the fair market value of the shares on the date
of grant, options may become exercisable at a rate of no more than 20% at the
end of each 12 months of service with the Bank after the date of grant (subject
to early vesting only in the event of death or disability), and the plan must be
approved by a majority of Minority Stockholders.
The Stock Option Plan would be administered by a Committee of non-employee
members of the Company's Board of Directors. Options granted under the Stock
Option Plan to employees could be "incentive" stock options designed to result
in a beneficial tax treatment to the employee but no tax deduction to the
Company. Non-qualified stock options could also be granted under the Stock
Option Plan and would be granted to the non-employee directors who receive
grants of stock options. In the event an option recipient terminated his
employment or service as an employee or director, the options would terminate
during certain specified periods.
Recognition and Retention Plan. At a meeting of the Company's shareholders
to be held no earlier than six months after the completion of the Offering, the
Board of Directors also intends to submit a Recognition and Retention Plan (the
"Recognition Plan") for shareholder approval. The Recognition Plan will provide
the Bank's directors and officers an ownership interest in the Company in a
manner designed to encourage them to continue their service with the Bank. The
Bank will contribute funds to the Recognition Plan from time to time to enable
it to acquire an aggregate amount of common stock equal to up to 4% of the
shares of Common Stock sold in the Offering, either directly from the Company or
in open market purchases. Four percent of the shares issued in the Offering
would amount to 47,141 shares, 55,460 shares, 63,779 or 73,346 shares at the
minimum, midpoint, maximum and adjusted maximum of the Offering Range,
respectively. In the event that additional authorized but unissued shares would
be acquired by the Recognition Plan after the Offering, the interests of
existing shareholders would be diluted. The executive officers and directors
will be awarded common stock under the Recognition Plan at no cost to them. No
awards under the Recognition Plan would be made until the date the Recognition
Plan is approved by the Company's shareholders.
Awards under the Recognition Plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned by
him. Awards would be adjusted for capital changes such as stock dividends and
stock splits and would be 100% vested upon termination of employment due to
death or disability. If the Recognition Plan is adopted more than 12 months
after the Offering, awards may be 100% vested upon normal retirement or a change
in control of the Bank or the Company. If employment or service were to
terminate for other reasons, the award recipient would forfeit any nonvested
award. If employment or service is terminated for cause (as defined in the
Recognition Plan), shares not already delivered under the Recognition Plan would
be forfeited.
Under OTS rules, if the Recognition Plan is implemented within the first 12
months after the Offering, no individual officer may receive more than 25% of
the awards under the plan, no outside director may receive more than 5% of the
awards under the plan, all outside directors as a group may receive no more than
30% of the awards under the plan in the aggregate, awards may vest at a rate of
no more than 20% at the end of each 12 months of service with the Bank after the
date of grant (subject to early vesting only in the event of death or
disability), and the plan must be approved by a majority of Minority
Stockholders.
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When shares become vested under the Recognition Plan, the participant will
recognize income equal to the fair market value of the common stock earned,
determined as of the date of vesting, unless the recipient makes an election
under ss. 83(b) of the Code to be taxed earlier. The amount of income recognized
by the participant would be a deductible expense for tax purposes for the
Company. If the Recognition Plan is implemented within one year following the
Offering, dividends and other earnings will accrue and be payable to the award
recipient when the shares vest. If the Recognition Plan is adopted within one
year following the Offering, shares not yet vested under the Recognition Plan
will be voted by the trustee of the Recognition Plan, taking into account the
best interests of the recipients of the Recognition Plan awards. If the
Recognition Plan is adopted more than one year following the Offering, dividends
declared on unvested shares will be distributed to the participant when paid,
and the participant will be entitled to vote the unvested shares.
Transactions With Certain Related Persons
The Bank offers to directors, officers, and employees real estate mortgage
loans secured by their principal residence. All loans to the Bank's directors,
officers and employees are made on substantially the same terms, including
interest rates and collateral as those prevailing at the time for comparable
transactions, and do not involve more than minimal risk of collectibility.
Director Anthony V. Caruso has served as the Bank's legal counsel since
1963. During the year ended December 31, 1997 the Bank paid $61,100 in legal
fees to Mr. Caruso.
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PARTICIPATION BY MANAGEMENT
The following table sets forth information regarding intended Common Stock
subscriptions by each of the Directors and executive officers of the Bank and
Directors of the Company who do not serve as directors of the Bank and their
families, and by all such Directors and executive officers as a group. In the
event the individual maximum purchase limitation is increased, persons
subscribing for the maximum amount may increase their purchase order. This table
excludes shares to be purchased by the ESOP, as well as any Recognition Plan
awards or stock option grants that may be made no earlier than six months after
the completion of the Reorganization. See "Management of the Bank--Employee
Stock Ownership Plan and Trust--Recognition and Retention Plan" and "--Stock
Option Plan."
<TABLE>
<CAPTION>
Percent of
Shares Issued
Aggregate Price in the
Name Position With the Bank Total Shares of Shares Offering(1)
- --------------------- -------------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
John R. Bowen Chairman, President and 10,000 $100,000 *
Chief Executive Officer
Michael J. Widmer Executive Vice President, 7,500 75,000 *
Chief Financial Officer
and Director
Neil R. Bryson, DDS Director 10,000 100,000 *
Anthony V. Caruso Director and Legal Counsel 1,000 10,000 *
John W. Fox Director 2,500 25,000 *
Donald F. Marsh Director 1,000 10,000 *
John C. Marsh Director 2,000 20,000 *
Paul J. McGovern Director 10,000 100,000 *
Nelson L. Taylor, Jr. Director 10,000 100,000 *
All directors and executive officers 54,000 540,000 3.9%
as a group (13 persons)
</TABLE>
- ----------------
* Less than 1%.
(1) At the midpoint of the Offering Range.
THE REORGANIZATION AND OFFERING
THE BOARD OF DIRECTORS OF THE BANK, AND THE OTS, HAVE APPROVED THE PLAN OF
REORGANIZATION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE
ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS
APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY SUCH AGENCY.
General
On October 15, 1997, the Board of Directors of the Bank adopted the Plan of
Reorganization, pursuant to which the Bank will be converted from a federally
chartered mutual savings bank to a federally chartered stock savings bank. The
Plan of Reorganization was approved by the OTS, subject to, among other things,
approval of the Plan of Reorganization by the Bank's members. The Special
Meeting of Members has been called for this purpose.
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<PAGE>
Pursuant to the Plan of Reorganization, the Reorganization will be effected
as follows or in any other manner that is consistent with applicable federal law
and regulations and the intent of the Plan of Reorganization.
(i) the Bank will organize an interim stock savings bank as a wholly-
owned subsidiary ("Interim One");
(ii) Interim One will organize an interim stock savings bank as a
wholly-owned subsidiary ("Interim Two");
(iii) Interim One will organize the Company as a wholly-owned subsidiary;
(iv) the Bank will exchange its charter for a federal stock savings bank
charter and Interim One will exchange its charter for a federal
mutual holding company charter to become the Mutual Holding Company;
(v) simultaneously with step (iv), Interim Two will merge with and into
the Bank with the Bank as the resulting institution;
(vi) all of the initially issued stock of the Bank will be transferred to
the Mutual Holding Company in exchange for membership interests in
the Mutual Holding Company;
(vii) the Mutual Holding Company will contribute the capital stock of the
Bank to the Company, and the Bank will become a wholly-owned
subsidiary of the Company; and
(viii) contemporaneously with the Reorganization, the Company will sell the
shares of Common Stock in the Offering.
The Company expects to receive the approval of the OTS to become a savings
and loan holding company and to own all of the common stock of the Bank. The
Company intends to contribute at least 50% of the net proceeds of the Offering
to the Bank. The Reorganization will be effected only upon completion of the
sale of all of the shares of Common Stock to be issued pursuant to the Plan.
The Plan provides generally for consummation of the Reorganization in
accordance with the steps set forth above. As part of the Reorganization the
Company will offer shares of Common Stock for sale in the Subscription Offering
to Eligible Account Holders, the Bank's ESOP, Supplemental Eligible Account
Holders and Other Members. Subject to the prior rights of these holders of
subscription rights, the Company may offer Common Stock for sale in a Community
Offering that may commence anytime subsequent to the commencement of the
Subscription Offering to certain members of the general public, with a
preference given to natural persons residing in the Community. The Bank has the
right to accept or reject, in its sole discretion, in whole or in part, any
orders to purchase shares of the Common Stock received in the Community
Offering. The Community Offering must be completed within 45 days after the
completion of the Subscription Offering unless otherwise extended by the OTS.
See "--Community Offering."
The number of shares of Common Stock to be issued in the Offering will be
determined based upon an independent appraisal of the estimated pro forma market
value of the Common Stock of the Company. All shares of Common Stock to be
issued and sold in the Offering will be sold at the same price. The Independent
Valuation will be updated and the final number of the shares to be issued in the
Offering will be determined at the completion of the Offering. See "--Stock
Pricing and Number of Shares to be Issued" for more information as to the
determination of the estimated pro forma market value of the Common Stock.
This summary of the Reorganization is qualified in its entirety by
reference to the provisions of the Plan of Reorganization. A copy of the Plan of
Reorganization is available for inspection at each branch of the Bank and at the
Northeast Region and Washington, D.C. offices of the OTS. The Plan of
Reorganization is also filed as an Exhibit to the Application to Convert from
Mutual to Stock Form of which this Prospectus is a part, copies of which may be
obtained from the OTS. See "Additional Information."
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<PAGE>
Purposes of the Reorganization
In adopting the Plan of Reorganization, the Board of Directors unanimously
determined that the Reorganization is in the best interest of the Bank. The
primary purpose of the Reorganization is to establish a structure that will
enable the Bank to compete and expand more effectively in the financial services
marketplace, and that will enable the Bank's depositors, borrowers, employees,
management and directors to obtain an equity ownership interest in the Bank. The
holding company structure permits the Company to issue capital stock, which is a
source of capital not available to mutual savings banks. Since the Company is
not offering all of its common stock for sale to depositors, borrowers and the
public in the Offering (but is issuing a majority of its stock to the Mutual
Holding Company in accordance with OTS regulations), the Reorganization will
result in less capital raised in comparison to a standard mutual-to-stock
conversion. The Reorganization, however, will also offer the Bank the
opportunity to raise additional capital since the stock held by the Mutual
Holding Company will be available for sale in the future in the event of the
Mutual Holding Company decides to convert to the capital stock form of
organization. See "Regulation--Holding Company Regulation--Conversion of the
Mutual Holding Company to Stock Form."
The Reorganization will also provide greater flexibility to structure and
finance the expansion of the Company's operations, including the potential
acquisition of other financial institutions, and to diversify into other
financial services. The holding company form of organization is expected to
provide additional flexibility to diversify the Bank's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with other financial institutions, as well as other companies. Although
the Bank and the Company have no current arrangements, understandings or
agreements regarding any such opportunities, the Company will be in a position
after the Reorganization, subject to regulatory limitations and the Company's
financial position, to take advantage of any such opportunities that may arise.
Lastly, the Reorganization will enable the Bank to better manage its capital by
giving broader investment opportunities through the holding company structure,
and enable the Company to distribute capital to its stockholders in the form of
dividends. Because only a minority of the common stock will be offered for sale
in the Offering, the current mutual form of ownership and ability to remain an
independent savings bank and to provide community-oriented financial services
will be preserved through the mutual holding company structure.
The Board of Directors believes that these advantages outweigh the
potential disadvantages of the mutual holding company structure, which may
include: (i) the inability of stockholders other than the Mutual Holding Company
to obtain majority ownership of the Company and the Bank, which may result in
the perpetuation of the management and Board of Directors of the Bank and the
Company; and (ii) that the mutual holding company structure is a relatively new
form of corporate ownership, and new regulatory policies relating to the mutual
interest in the Mutual Holding Company that may be adopted from time-to-time may
have an adverse impact on minority stockholders. A majority of the voting stock
of the Company will be owned by the Mutual Holding Company, which is a mutual
institution that will be controlled by members. While this structure will permit
management to focus on the Company's and the Bank's long-term business strategy
for growth and capital redeployment, it will also serve to perpetuate the
existing management and directors of the Bank. The Mutual Holding Company will
be able to elect all members of the Board of Directors of the Company, and will
be able to control the outcome of all matters presented to the stockholders of
the Company for resolution by vote except for certain matters that must be
approved by more than a majority of stockholders of the Company. No assurance
can be given that the Company will not take action adverse to the interests of
the Minority Stockholders.
The Reorganization does not preclude the Reorganization of the Mutual
Holding Company from the mutual to stock form of organization. A conversion of
the Mutual Holding Company from the mutual to stock form of organization is not
anticipated for the foreseeable future. See "Regulation--Holding Company
Regulation--Conversion of the Mutual Holding Company to Stock Form."
Approvals Required
The affirmative vote of a majority of the total eligible votes of the
members of the Bank at the Special Meeting of Members is required to approve the
Plan of Reorganization. Consummation of the Reorganization is also subject to
the approval of the OTS.
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<PAGE>
Effects of Reorganization on Depositors, Borrowers and Members
General. Following the completion of the Reorganization, all members of the
Bank as of the effective date of the Reorganization will become members of the
Mutual Holding Company so long as they continue to hold deposit accounts with
the Bank. In addition, all persons who become depositors subsequent to the
Reorganization will become members of the Mutual Holding Company.
Continuity. While the Reorganization is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by the
OTS and the FDIC. After the Reorganization, the Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff. The directors serving the Bank at the time of the
Reorganization will serve as directors of the Bank after the Reorganization.
Effect on Deposit Accounts. Under the Plan of Reorganization, each
depositor in the Bank at the time of the Reorganization will automatically
continue as a depositor after the Reorganization, and each such deposit account
will remain the same with respect to deposit balance, interest rate and other
terms. Each such account will be insured by the FDIC to the same extent as
before the Reorganization. Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by the
Reorganization, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Reorganization.
Effect on Voting Rights of Members. At present, all depositors of the Bank
and certain borrowers of the Bank are members of, and have voting rights in, the
Bank as to all matters requiring membership action. Upon completion of the
Reorganization, all voting rights in the Bank will be vested in the Company as
the sole shareholder of the Bank. Exclusive voting rights with respect to the
Company will be vested in the holders of Common Stock. Exclusive voting rights
with respect to the Mutual Holding Company will be vested in the Mutual Holding
Company's members (i.e., the Bank's depositors and certain borrowers).
Tax Effects. The Bank will receive an opinion with regard to federal and
state income taxation to the effect that the adoption and implementation of the
Plan of Reorganization will not be taxable for federal or state income tax
purposes to the Bank, the Mutual Holding Company, members of the Bank, eligible
account holders or the Company. See "--Tax Effects of the Reorganization."
Effect on Liquidation Rights. Were the Bank to liquidate prior to the
Reorganization, all claims of creditors of the Bank, including those of
depositors to the extent of their deposit balances, would be paid first. In the
unlikely event that the Bank were to liquidate after Reorganization and
Offering, all claims of creditors (including those of depositors, to the extent
of their deposit balances) would also be paid first, with any assets remaining
thereafter distributed to the Company as the holder of the Bank's capital stock.
Stock Pricing and Number of Shares to be Issued
The Plan of Reorganization and federal regulations require that the
aggregate purchase price of the Common Stock in the Offering must be based on
the appraised pro forma market value of the Common Stock, as determined by an
independent valuation (the "Independent Valuation"). The Bank has retained
FinPro, Inc. ("FinPro") to make such valuation. For its services in making such
appraisal, FinPro will receive a fee of $13,500 (which amount does not include a
fee of $11,000 to be paid to FinPro for assistance in preparation of a business
plan). The Bank and the Company have agreed to indemnify FinPro and its
employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where FinPro's liability results from its
negligence or bad faith.
78
<PAGE>
The Independent Valuation was prepared by FinPro in reliance upon the
information contained in the Prospectus, including the Consolidated Financial
Statements. FinPro also considered the following factors, among others: the
present and projected operating results and financial condition of the Company
and the Bank and the economic and demographic conditions in the Bank's existing
marketing area; certain historical, financial and other information relating to
the Bank; a comparative evaluation of the operating and financial statistics of
the Bank with those of other publicly traded savings institutions located in the
mid-Atlantic region and on a national basis; the aggregate size of the Offering;
the impact of the consolidated stockholders' equity and earnings potential; the
proposed dividend policy of the Company; and the trading market for securities
of comparable institutions and general conditions in the market for such
securities.
The Independent Valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. FinPro did not independently verify the Consolidated Financial
Statements and other information provided by the Bank, nor did FinPro value
independently the assets or liabilities of the Bank. The Independent Valuation
considers the Bank as a going concern and should not be considered as an
indication of the liquidation value of the Bank. Moreover, because such
valuation is necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, no assurance can
be given that persons purchasing such shares in the Offering will thereafter be
able to sell such shares at prices at or above the Purchase Price.
The Independent Valuation states that as of March 16, 1998, the estimated
pro forma market value of the Common Stock ranged from a minimum of $25,075,000
to a maximum of $33,925,000 with a midpoint of $29,500,000 (the "Estimated
Valuation Range"). The Board of Directors reviewed the Independent Valuation
and, in particular, considered (i) the Bank's financial condition and results of
operations for the year ended December 31, 1997, (ii) financial comparisons of
the Bank in relation to financial institutions of similar size and asset
quality, and (iii) stock market conditions generally and in particular for
financial institutions, all of which are set forth in the Independent Valuation.
The Board also reviewed the methodology and the assumptions used by FinPro in
preparing the Independent Valuation. The Bank's Board of Directors determined to
offer the shares in the Offering for the Subscription Price of $10.00 per share.
Based on the Estimated Valuation Range and the Subscription Price, the number of
shares of Common Stock that the Company will issue will range from 2,507,500
shares to 3,392,500 shares, with a midpoint of 2,950,000 shares. The Bank's
Board of Directors determined to offer 47% of such shares in the Offering, or
between 1,178,525 shares and 1,594,475 shares with a midpoint of 1,386,500
shares (the "Offering Range"). The 53% of the to-be outstanding shares of Common
Stock that are not sold in the Offering will be issued to the Mutual Holding
Company.
Following commencement of the Subscription Offering, the Independent
Appraisal may be updated and the Estimated Valuation Range may be amended, if
necessitated by subsequent developments in the financial condition of the Bank,
market conditions generally, or the results of the Offering. The maximum of the
Estimated Valuation Range may be increased by up to 15% to up to $39,013,750,
which will result in a corresponding increase in the maximum of the Offering
Range to up to 1,833,646 shares without the resolicitation of subscribers. The
minimum of the Estimated Valuation Range and the minimum of the Offering Range
may not be decreased without a resolicitation of subscribers. If the update to
the Independent Valuation at the conclusion of the Offering results in an
increase in the maximum of the Estimated Valuation Range to more than
$39,013,750, or a decrease in the minimum of the Estimated Valuation Range to
less than $25,075,000, then the Company, after consulting with the OTS, may
terminate the Plan of Reorganization and return all funds promptly with interest
at the Bank's passbook rate of interest on payments made by check, certified or
teller's check, bank draft or money order, extend or hold a new Subscription
Offering, Community Offering, or both, establish a new Estimated Valuation Range
and Offering Range, commence a resolicitation of subscribers, or take such other
actions as permitted by the OTS in order to complete the Reorganization and the
Offering. If a resolicitation is commenced, unless subscribers respond
affirmatively by the close of the resolicitation period as to which all
subscribers would be notified, all funds will be promptly returned, with
interest, to subscribers as described above. A resolicitation, if any, following
the conclusion of the Subscription and Community Offerings would not exceed 45
days unless further extended by the OTS for periods of up to 90 days through no
later than June 24, 2000.
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<PAGE>
An increase in the Independent Valuation and the number of shares to be
issued in the Reorganization would decrease both a subscriber's ownership
interest and the Company's pro forma earnings and stockholders' equity on a per
share basis while increasing pro forma earnings and stockholders' equity on an
aggregate basis. A decrease in the Independent Valuation and the number of
shares to be issued in the Reorganization would increase both a subscriber's
ownership interest and the Company's pro forma earnings and stockholders' equity
on a per share basis while decreasing pro forma net income and stockholders'
equity on an aggregate basis. For a presentation of the effects of such changes,
see "Pro Forma Data."
Copies of the appraisal report of FinPro and the detailed memorandum of the
appraiser setting forth the method and assumptions for such appraisal are
available for inspection at the main office of the Bank and the other locations
specified under "Additional Information."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank and the OTS that, to the best of its
knowledge, nothing of a material nature has occurred that, taking into account
all relevant factors, would cause FinPro to conclude that the Independent
Valuation is incompatible with its estimate of the pro forma market value of the
Common Stock of the Company at the conclusion of the Offering. If such
confirmation is not received, the Bank may extend the Offering, reopen or begin
a new offering, establish a new Estimated Valuation Range and begin a
resolicitation of all purchasers with the approval of the OTS or take such other
actions as permitted by the OTS in order to complete the Offering.
Subscription Offering and Subscription Rights
In accordance with the Plan of Reorganization, rights to subscribe for the
purchase of Common Stock in the Subscription Offering have been granted under
the Plan of Reorganization in the following order of descending priority. All
subscriptions received will be subject to the availability of Common Stock after
satisfaction of all subscriptions of all persons having prior rights in the
Subscription Offering and to the maximum, minimum, and overall purchase
limitations set forth in the Plan of Reorganization and as described below under
"--Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each depositor with aggregate deposit
account balances of $50 or more (a "Qualifying Deposit") as of September 30,
1996 (the "Eligibility Record Date," and such account holders, "Eligible Account
Holders") will receive nontransferable subscription rights to subscribe in the
Subscription Offering for Common Stock equal to up to the greater of $100,000,
or fifteen times the product (rounded down to the next whole number) obtained by
multiplying the aggregate number of shares of Common Stock issued in the
Offering by a fraction of which the numerator is the amount of the Eligible
Account Holder's Qualifying Deposit and the denominator is the total amount of
Qualifying Deposits of all Eligible Account Holders, in each case on the
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of shares purchased by the ESOP from any increase in the shares
offered pursuant to an increase in the maximum of the Offering Range. See
"--Limitations on Common Stock Purchases." If there are not sufficient shares
available to satisfy all subscriptions, shares first will be allocated so as to
permit each subscribing Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100 shares or the
number of shares for which he subscribed. Thereafter, unallocated shares (except
for additional shares issued to the ESOP upon an increase in the maximum of the
Offering Range) will be allocated to each subscribing Eligible Account Holder
whose subscription remains unfilled in the proportion that the amount of his
aggregate Qualifying Deposit bears to the total amount of Qualifying Deposits of
all subscribing Eligible Account Holders whose subscriptions remain unfilled. If
an amount so allocated exceeds the amount subscribed for by any one or more
Eligible Account Holders, the excess shall be reallocated among those Eligible
Account Holders whose subscriptions are not fully satisfied until all available
shares have been allocated.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his Order Form all deposit accounts in which he has an ownership
interest on the Eligibility Record Date. Failure to list an account could result
in fewer shares being allocated than if all accounts had been disclosed. Neither
the Company nor the Bank nor any of their agents shall be responsible for orders
on which all Qualifying Deposit accounts have not been fully and accurately
disclosed. The subscription rights of Eligible Account Holders who are also
directors or officers of the Bank or their associates will be subordinated to
the subscription rights of other Eligible Account Holders to the extent
attributable to increased deposits in the twelve months preceding the
Eligibility Record Date.
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Priority 2: Employee Plans. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
ESOP will receive nontransferable subscription rights to purchase Common Stock
in the Offering on behalf of ESOP participants subject to the purchase
limitations described herein. The ESOP intends to subscribe for up to 8% of the
Common Stock issued in the Offering. The right of the Employee Plans to
subscribe for shares is subordinate to the right of the Eligible Account Holders
to subscribe for shares, except that the ESOP shall have first priority to
purchase shares issued in excess of the maximum of the Offering Range in the
event of an increase in the maximum of the Estimated Valuation Range and the
maximum of the Offering Range.
Priority 3: Supplemental Eligible Account Holders. To the extent that there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the ESOP, each depositor with a Qualifying Deposit as of
March 31, 1998 (the "Supplemental Eligibility Record Date") who is not an
Eligible Account Holder ("Supplemental Eligible Account Holder") will receive
nontransferable subscription rights to subscribe in the Subscription Offering
for Common Stock equal to the greater of $100,000, or fifteen times the product
(rounded down to the next whole number) obtained by multiplying the aggregate
number of shares of Common Stock issued in the Offering, by a fraction of which
the numerator is the amount of the Supplemental Eligible Account Holder's
Qualifying Deposit and the denominator is the total amount of Qualifying
Deposits of all Supplemental Eligible Account Holders, in each case on the
Supplemental Eligibility Record Date, subject to the overall purchase
limitation. See "--Limitations on Common Stock Purchases." If there are not
sufficient shares available to satisfy all subscriptions, shares first will be
allocated so as to permit each subscribing Supplemental Eligible Account Holder
to purchase a number of shares sufficient to make his total allocation equal to
the lesser of 100 shares or the number of shares for which he subscribed.
Thereafter, unallocated shares will be allocated to each subscribing
Supplemental Eligible Account Holder and whose subscription remains unfilled in
the proportion that the amount of his Qualifying Deposit bears to the total
amount of Qualifying Deposits of all subscribing Supplemental Eligible Account
Holders whose subscriptions remain unfilled.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his Order Form all deposit accounts in which he has an
ownership interest on the Supplemental Eligibility Record Date. Failure to list
an account could result in fewer shares being allocated than if all accounts had
been disclosed. Neither the Company nor the Bank nor any of their agents shall
be responsible for orders on which all Qualifying Deposit accounts have not been
fully and accurately disclosed.
Priority 4: Other Members. To the extent that there are shares remaining
after satisfaction of subscriptions by Eligible Account Holders, the Employee
Plans, and Supplemental Eligible Account Holders, each depositor on the Voting
Record Date and each borrower of the Bank as of December 10, 1986 whose loans
are outstanding as of the Voting Record Date ("Other Members") who are not
Eligible Account Holders or Supplemental Eligible Account Holders, will receive
nontransferable subscription rights to subscribe in the Subscription Offering
for $100,000 of Common Stock, subject to the overall purchase limitation. See
"--Limitations on Common Stock Purchases." If there are not sufficient shares
available to satisfy all subscriptions, available shares will be allocated in
proportion to the amounts of the subscriptions.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on June 17, 1998, unless extended for up to 45 days or such
additional periods by the Bank with the approval of the OTS, if necessary (as so
extended, the "Expiration Date"). The Bank and the Company are not required to
give subscribers notice of any such extension. Subscription rights which have
not been exercised prior to the Expiration Date will become void.
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Members in Nonqualified States or Foreign Countries. The Company will make
reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
Plan of Reorganization reside. However, the Company is not required to offer
stock in the Offering to any person who resides in a foreign country or resides
in a state of the United States with respect to which (i) a small number of
persons otherwise eligible to subscribe for shares of Common Stock reside; or
(ii) the Company determines that compliance with the securities laws of such
state would be impracticable for reasons of cost or otherwise, including but not
limited to a request that the Company or its officers or directors, under the
securities laws of such state, register as a broker, dealer, salesman or selling
agent or to register or otherwise qualify the subscription rights or Common
Stock for sale or subject any filing with respect thereto in such state. Where
the number of persons eligible to subscribe for shares in one state is small,
the Company will base its decision as to whether or not to offer the Common
Stock in such state on a number of factors, including the size of accounts being
held by account holders in the state, the cost of registering or qualifying the
shares or the need to register the Company, its officers, directors or employees
as brokers, dealers or salesmen.
Community Offering
Any shares of Common Stock not subscribed for in the Subscription Offering
may be offered for sale in a Community Offering. If a Community Offering is
conducted, it will be for a period of not more than 45 days unless extended by
the Company and the Bank, and may commence anytime subsequent to the
commencement of the Subscription Offering. The Common Stock will be offered and
sold in the Community Offering, in accordance with OTS regulations, so as to
achieve the widest distribution of the Common Stock. No person, by himself or
herself, or with an associate or group of persons acting in concert, may
subscribe for or purchase more than $200,000 of Common Stock offered in the
Community Offering. Further, the Company may limit total subscriptions so as to
assure that the number of shares available for the public offering may be up to
a specified percentage of the number of shares of Common Stock. Finally, the
Company may reserve shares offered in the Community Offering for sales to
institutional investors.
In the event of an oversubscription for shares in the Community Offering,
shares may be allocated in the sole discretion of the Bank (to the extent shares
remain available) first to cover orders of natural persons residing in the
Bank's local community of the New Jersey Counties of Union and Middlesex (the
"Community"), then to cover the orders of any other person subscribing for
shares in the Community Offering so that each such person may receive 1,000
shares, and thereafter, on a pro rata basis to such persons based on the amount
of their respective subscriptions.
The terms "residence," "reside," "resided" or "residing" as used herein
with respect to any person shall mean any person who occupied a dwelling within
the Bank's Community, has an intent to remain within the Community for a period
of time, and manifests the genuineness of that intent by establishing an ongoing
physical presence within the Community together with an indication that such
presence within the Community is something other than merely transitory in
nature. To the extent the person is a corporation or other business entity, the
principal place of business or headquarters shall be in the Community. To the
extent a person is a personal benefit plan, the circumstances of the beneficiary
shall apply with respect to this definition. In the case of all other benefit
plans, the circumstances of the trustee shall be examined for purposes of this
definition. The Bank may utilize deposit or loan records or such other evidence
provided to it to make a determination as to whether a person is a resident. In
all cases, however, such a determination shall be in the sole discretion of the
Bank.
The Bank and the Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person.
Syndicated Community Offering
Any shares of Common Stock not sold in the Subscription Offering or in the
Community Offering, if any, may be offered for sale to the general public by a
selling group of broker-dealers, which may include Ryan Beck, to be managed by
Ryan Beck in a Syndicated Community Offering, subject to terms, conditions and
procedures as may be determined by the Bank and the Company in a manner that is
intended to achieve the widest distribution of the Common Stock subject to the
rights of the Company to accept or reject in whole or in part all orders in the
Syndicated Community Offering. It is expected that the Syndicated Community
Offering, if any, will commence as soon as practicable after termination of the
Subscription Offering and the Community Offering. The Syndicated Community
Offering shall be completed within 45 days after the termination of the
Subscription Offering, unless such period is extended as provided herein. The
Company will pay a fee of up to 5.5% of the total dollar amount of the Common
Stock sold by selected dealers.
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If for any reason a Syndicated Community Offering of unsubscribed shares of
Common Stock cannot be effected and any shares remain unsold after the
Subscription Offering and any Community Offering, the Boards of Directors of the
Bank and the Company will seek to make other arrangements to sell the remaining
shares. Such other arrangements will be subject to OTS approval and to
compliance with applicable state and federal securities laws.
Plan of Distribution and Selling Commissions
Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at the Bank's
offices and by Ryan Beck. All prospective purchasers are to send payment along
with a properly completed Order Form directly to the Bank, where such funds will
be held in a segregated special escrow account and not released until the
Offering is completed or terminated.
To assist in the marketing of the Common Stock, the Bank and the Company
have retained Ryan Beck, a broker-dealer registered with the National
Association of Securities Dealers, Inc. (the "NASD"). Ryan Beck will provide
advisory assistance and assist the Bank in the Offering as follows: (i) in
training and educating the Bank's employees regarding the mechanics and
regulatory requirements of the Reorganization; (ii) in conducting any
informational meetings for employees, customers and the general public; (iii) in
coordinating the selling efforts in the Bank's local communities; and (iv)
keeping records of all orders for Common Stock. For these services, Ryan Beck
will receive an advisory and marketing fee of $135,000. The Bank has made an
advance payment to Ryan Beck in the amount of $25,000. Offers and sales in the
Offering will be on a best efforts basis and, as a result, Ryan Beck is not
obligated to purchase Shares of the Common Stock in the Offering.
The Bank also will reimburse Ryan Beck for its reasonable out-of-pocket
expenses associated with its marketing effort, the estimated maximum of which
are $35,000 (including legal fees up to a maximum of $25,000). The Bank and the
Company will indemnify Ryan Beck against liabilities and expenses (including
legal fees) incurred in connection with certain claims or litigation arising out
of or based upon untrue statements or omissions contained in the offering
material for the Common Stock, including liabilities under the Securities Act of
1933.
Certain directors and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Such persons
will be reimbursed by the Bank for their reasonable out-of-pocket expenses,
including, but not limited to, de minimis telephone and postage expenses,
incurred in connection with such solicitation. Other regular, full-time
employees of the Bank may participate in the Offering but only in ministerial
capacities, providing clerical work in effecting a sales transaction or
answering questions of a potential purchaser provided that the content of the
employee's responses is limited to information contained in the Prospectus or
other offering documents, and no offers or sales may be made by tellers or at
the teller counter. All sales activity will be conducted in a segregated or
separately identifiable area of the Bank's offices apart from the area
accessible to the general public for the purpose of making deposits or
withdrawals. Other questions of prospective purchasers will be directed to
executive officers or registered representatives. Such other employees have been
instructed not to solicit offers to purchase Common Stock or provide advice
regarding the purchase of Common Stock. The Company will rely on Rule 3a4-1
under the Exchange Act, and sales of Common Stock will be conducted within the
requirements of Rule 3a4-1, so as to permit officers, directors and employees to
participate in the sale of Common Stock. No officer, director or employee of the
Company or the Bank will be compensated in connection with his participation by
the payment of commissions or other remuneration based either directly or
indirectly on the transactions in the Common Stock.
Procedure for Purchasing Shares
Expiration Date. The Offering will terminate at 10:00 a.m., New Jersey
time, on June 17, 1998, unless extended by the Company, with prior approval of
the OTS, if required, for up to an additional 45 days. The Company may extend
the Offering in its sole discretion, without further approval or additional
notice to purchasers in the Offering. Any extension of the Offering beyond the
Expiration Date would be subject to OTS approval and potential purchasers would
be given the right to increase, decrease, or rescind their orders for Common
Stock. If the minimum number of shares offered in the Offering (1,178,525
shares) is not sold by the Expiration Date the Company may terminate the
Offering and promptly refund all orders for Common Stock. If the number of
shares is reduced below the minimum of the Offering Range, purchasers will be
given an opportunity to increase, decrease, or rescind their orders.
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To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of an Order Form
will confirm receipt or delivery in accordance with Rule 15c2-8. Order Forms
will be distributed only with a Prospectus.
The Company reserves the right in its sole discretion to terminate the
Offering at any time and for any reason, in which case the Company will promptly
return all purchase orders, plus interest at its current passbook rate from the
date of receipt and cancel all authorized withdrawals from savings accounts.
Use of Order Forms. In order to purchase the Common Stock, each purchaser
must complete an Order Form, except for certain persons purchasing in the
Syndicated Community Offering as more fully described above. Incomplete Order
Forms will not be accepted. Any person receiving an Order Form who desires to
purchase Common Stock must do so by delivering (by mail or in person) to the
Company a properly executed and completed Order Form, together with full payment
for the shares purchased, which must be received by the Company prior to 10:00
a.m., New Jersey time on June 17, 1998. Once tendered, an Order Form cannot be
modified or revoked without the consent of the Company. The Company reserves the
absolute right, in its sole discretion, to reject orders received in the
Community Offering, in whole or in part, at the time of receipt or at any time
prior to completion of the Offering. Each person ordering shares is required to
represent that he is purchasing such shares for his own account and that he has
no agreement or understanding with any person for the sale or transfer of such
shares. The interpretation by the Company of the terms and conditions of the
Plan of Reorganization and of the acceptability of the Order Forms will be
final.
Payment for Shares. Payment for all shares will be required to accompany
all completed Order Forms for the purchase to be valid. Payment for shares may
be made by (i) cash, (ii) check or money order made payable to the Company, or
(iii) authorization of withdrawal from savings accounts (including certificates
of deposit) maintained with the Bank. Appropriate means by which such
withdrawals may be authorized are provided in the Order Forms. Once such a
withdrawal amount has been authorized, a hold will be placed on such funds,
making them unavailable to the depositor until the Offering has been completed
or terminated. In the case of payments authorized to be made through withdrawal
from deposit accounts, all funds authorized for withdrawal will continue to earn
interest at the contract rate until the Offering is completed or terminated.
Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares; however, if a
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal without penalty, and the remaining balance will earn interest
at the passbook rate subsequent to the withdrawal. In the case of payments made
by cash, check or money order, such funds will be placed in a segregated savings
account and interest will be paid by the Bank at the current passbook rate per
annum, from the date payment is received until the Offering is completed or
terminated. An executed Order Form, once received by the Bank, may not be
modified, amended or rescinded without the consent of the Bank, unless the
Offering is not completed by the Expiration Date, in which event purchasers may
be given the opportunity to increase, decrease, or rescind their orders for a
specified period of time.
A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since the Bank does not offer such
accounts, it will allow a depositor to make a trustee-to-trustee transfer of the
IRA funds to a trustee offering a self-directed IRA program without early
withdrawal penalties with the agreement that such funds will be used to purchase
the Common Stock in the Offering. There will be no early withdrawal or IRS
interest penalties for such transfers. The new trustee would hold the Common
Stock in a self- directed account in the same manner as the Bank now holds the
depositor's IRA funds. An annual administrative fee may be payable to the new
trustee. Depositors interested in using funds in a Bank IRA to purchase Common
Stock should contact the Stock Information Center at the Bank as soon as
possible so that the necessary forms may be forwarded for execution and returned
prior to the Expiration Date.
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In addition, the provisions of ERISA and Internal Revenue Service
("Service") regulations require that executive officers, directors and 10%
stockholders who use self-directed IRA funds to purchase shares of Common Stock
in the Offering, make such purchase for the exclusive benefit of the IRA
participant.
The ESOP will not be required to pay for shares purchased until
consummation of the Offering, provided that there is in force from the time the
order is received a loan commitment from an unrelated financial institution or
the Company to lend to the ESOP the necessary amount to fund the purchase.
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Offering and Bank checks representing interest paid on
subscriptions made by cash, check, or money order will be mailed by the Bank to
the persons entitled thereto at the address noted on the Order Form, as soon as
practicable following consummation of the Offering and receipt of all necessary
regulatory approvals. Any certificates returned as undeliverable will be held by
the Bank until claimed by persons legally entitled thereto or otherwise disposed
of in accordance with applicable law. Until certificates for the Common Stock
are available and delivered to purchasers, purchasers may not be able to sell
the shares of stock which they ordered. Regulations prohibit the Bank from
lending funds or extending credit to any persons to purchase Common Stock in the
Offering.
Other Restrictions. Notwithstanding any other provision of the Plan of
Reorganization, no person is entitled to purchase any Common Stock to the extent
such purchase would be illegal under any federal or state law or regulation
(including state "blue-sky" registrations), or would violate regulations or
policies of the NASD, particularly those regarding free riding and withholding.
The Bank and/or its agents may ask for an acceptable legal opinion from any
purchaser as to the legality of such purchase and may refuse to honor any such
purchase order if such opinion is not timely furnished.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Reorganization, OTS conversion regulations
prohibit any person with subscription rights from transferring or entering into
any agreement or understanding to transfer the legal or beneficial ownership of
the subscription rights issued under the Plan of Reorganization or the shares of
Common Stock to be issued upon their exercise. Such rights may be exercised only
by the person to whom they are granted and only for his account. Each person
exercising such subscription rights will be required to certify that he is
purchasing shares solely for his own account and that he has no agreement or
understanding regarding the sale or transfer of such shares. The regulations
also prohibit any person from offering or making an announcement of an offer or
intent to make an offer to purchase such subscription rights or shares of Common
Stock prior to the completion of the Reorganization.
The Bank and the Company will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
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Limitations on Common Stock Purchases
The following additional limitations have been imposed upon purchases of
shares of Common Stock. Defined terms used in this section and not otherwise
defined in this Prospectus shall have the meaning set forth in the Plan of
Reorganization. In all cases, the Bank shall have the right, in its sole
discretion, to determine whether prospective purchasers are "Associates," or
"Acting in Concert" as defined by the Plan and in interpreting any and all other
provisions of the Plan. All such determinations are in the sole discretion of
the Bank, and may be based on whatever evidence the Bank chooses to use in
making any such determination.
(1) The aggregate amount of outstanding Common Stock of the Company owned
or controlled by persons other than Mutual Holding Company at the close of the
Offering shall not exceed 49.9% of the Company's total outstanding Common Stock.
(2) Except for the ESOP, no Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member may in their capacities as such purchase in the
Subscription Offering more than $100,000 of Common Stock, and no person or group
of persons Acting in Concert may purchase more than $200,000 of Common Stock
issued in the Offering to Persons other than the Mutual Holding Company, except
that: (i) the Company may, in its sole discretion and without further notice to
or solicitation of subscribers or other prospective purchasers, increase such
maximum purchase limitation to up to 5% of the number of shares issued in the
Offering or decrease such maximum aggregate purchase limitation to 1% of the
number of shares issued in the Offering; (ii) Tax-Qualified Employee Plans may
purchase up to 10% of the shares issued in the Offering; and (iii) for purposes
of this paragraph shares to be held by any Tax-Qualified Employee Plan and
attributable to a person shall not be aggregated with other shares purchased
directly by or otherwise attributable to such person.
(3) The aggregate amount of Common Stock acquired in the Offering by all
Management Persons and their Associates, exclusive of any stock acquired by such
persons in the secondary market, shall not exceed 31% of the outstanding shares
of Common Stock of the Company held by persons other than the Mutual Holding
Company at the close of the Offering. In calculating the number of shares held
by Management Persons and their Associates under this paragraph or under the
provisions of paragraph 4 below, shares held by any Tax-Qualified Employee
Benefit Plan or any Non-Tax-Qualified Employee Benefit Plan of the Bank that are
attributable to such persons shall not be counted.
(4) The aggregate amount of Common Stock acquired in the Offering by all
Management Persons and their Associates, exclusive of any common stock acquired
by such persons in the secondary market, shall not exceed 31% of the
stockholders' equity of the Bank. In calculating the number of shares held by
Management Persons and their Associates under this paragraph or under the
provisions of paragraph 3 of this section, shares held by any Tax-Qualified
Employee Benefit Plan or any Non-Tax-Qualified Employee Benefit Plan of the Bank
that are attributable to such persons shall not be counted.
(5) The Boards of Directors of the Bank and the Company may, in their sole
discretion, increase the maximum purchase limitation to up to 9.9%, provided
that orders for Common Stock in excess of 5% of the number of shares of Common
Stock issued in the Offering shall not in the aggregate exceed 10% of the total
shares of common stock issued in the Offering (except that this limitation shall
not apply to purchases by Tax-Qualified Employee Plans). If such 5% limitation
is increased, subscribers for the maximum amount will be, and certain other
large subscribers in the sole discretion of the Company and the Bank may be,
given the opportunity to increase their subscriptions up to the then applicable
limit. Requests to purchase additional shares of Common Stock under this
provision will be determined by the Board of Directors of the Company, in its
sole discretion.
(6) In the event of an increase in the total number of shares offered in
the Subscription Offering due to an increase in the maximum of the Estimated
Valuation Range of up to 15% (the "Adjusted Maximum"), the additional shares
will be issued in the following order of priority: (i) to fill the Employee
Plans' subscription; and (ii) to fill unfulfilled subscriptions of such
subscribers according to their respective priorities set forth in the Plan of
Reorganization.
(7) Notwithstanding any other provision of the Plan of Reorganization, no
person shall be entitled to purchase any Common Stock to the extent such
purchase would be illegal under any federal law or state law or regulation or
would violate regulations or policies of the NASD, particularly those regarding
free riding and withholding. The Company and/or its agents may ask for an
acceptable legal opinion from any purchaser as to the legality of such purchase
and may refuse to honor any purchase order if such opinion is not timely
furnished.
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(8) The Board of Directors of the Company has the right in its sole
discretion to reject any order submitted by a person whose representations the
Board of Directors believes to be false or who it otherwise believes, either
alone or acting in concert with others, is violating, circumventing, or intends
to violate, evade or circumvent the terms and conditions of the Plan of
Reorganization.
The Company, in its sole discretion, may make reasonable efforts to comply
with the securities laws of any state in the United States in which its
depositors reside, and will only offer and sell the common stock in states in
which the offers and sales comply with such states' securities laws. However, no
person will be offered or allowed to purchase any common stock under the Plan if
they reside in a foreign country or in a state of the United States with respect
to which any of the following apply: (i) a small number of persons otherwise
eligible to purchase shares under the Plan reside in such state or foreign
county; (ii) the offer or sale of shares of common stock to such persons would
require the Bank or its employees to register, under the securities laws of such
state or foreign country, as a broker or dealer or to register or otherwise
qualify its securities for sale in such state or foreign country; or (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise.
OTS regulations define "acting in concert" as (i) knowing participation in
a joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. The Bank will presume that
certain persons are acting in concert based upon various facts, including the
fact that persons have joint account relationships or the fact that such persons
have filed joint Schedules 13D with the SEC with respect to other companies.
Directors are not treated as Associates of one another solely because of
their board membership. Compliance with the foregoing limitations does not
necessarily constitute compliance with other regulatory restrictions on
acquisitions of the Common Stock. For a further discussion of limitations on
purchases of the common stock during and subsequent to Reorganization, see
"--Certain Restrictions on Purchases or Transfer of Shares After
Reorganization."
Tax Effects of the Reorganization
The Bank intends to proceed with the Reorganization on the basis of an
opinion from its special counsel, Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C., as to certain tax matters that are material to the
Reorganization. The opinion is based, among other things, on certain
representations made by the Bank, including the representation that the exercise
price of the subscription rights to purchase the Common Stock will be
approximately equal to the fair market value of the stock at the time of the
completion of the Reorganization. With respect to the subscription rights, the
Bank has received an opinion of FinPro which, based on certain assumptions,
concludes that the subscription rights to be received by Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members do not have any
economic value at the time of distribution or the time the subscription rights
are exercised, whether or not a Community Offering takes place, and Luse Lehman
Gorman Pomerenk & Schick, P.C.'s opinion is given in reliance thereon. If the
subscription rights granted to Eligible Account Holders and Supplemental
Eligible Account Holders are deemed to have an ascertainable value, receipt of
such rights could result in taxable gain to those Eligible Account Holders and
Supplemental Eligible Account Holders who exercise the subscription rights in an
amount equal to such value and the Bank could recognize gain on such
distribution. Eligible Account Holders and Supplemental Eligible Account Holders
are encouraged to consult with their own tax advisor as to the tax consequences
in the event that such subscription rights are deemed to have an ascertainable
value. The material aspects of Luse Lehman Gorman Pomerenk & Schick, P.C.'s
federal tax opinion are as follows:
1. The change in the Bank's form from a mutual savings bank to a stock
savings bank (the "Stock Bank") will qualify as a reorganization under
Section 368(a)(1)(F) of the Code, and no gain or loss will be
recognized to the Bank in either its mutual form or stock form by
reason of the Reorganization.
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2. No gain or loss will be recognized by the Bank or the Stock Bank upon
the transfer of the Bank's assets to the Stock Bank solely in exchange
for shares of Stock Bank stock and the assumption by the Stock Bank of
the liabilities of the Bank.
3. The Stock Bank's holding period in the assets received from the Bank
will include the period during which such assets were held by the
Bank.
4. The Stock Bank's basis in the assets of the Bank will be the same as
the basis of such assets in the Bank immediately prior to the
Reorganization.
5. The Stock Bank will succeed to and take into account the Bank's
earnings and profits or deficit in earnings and profits, as of the
date of the Reorganization.
6. The Stock Bank's depositors will recognize no gain or loss solely by
reason of the Reorganization.
7. The Mutual Holding Company and the Minority Stockholders will
recognize no gain or loss upon the transfer of Stock Bank stock and
cash, respectively, to the Company in exchange for Common Stock of the
Company.
8. The Company will recognize no gain or loss upon its receipt of
property from the Mutual Holding Company and Minority Stockholders in
exchange for Common Stock of the Company.
9. The basis of the Company Common Stock to the Minority Stockholders
will be the actual purchase price thereof, and the holding period for
Common Stock acquired through the exercise of subscription rights will
begin on the date the rights are exercised.
The opinions of Luse Lehman Gorman Pomerenk & Schick, P.C., unlike a letter
ruling issued by the Service, are not binding on the Service and the conclusions
expressed therein may be challenged at a future date. The Service has issued
favorable rulings for transactions substantially similar to the proposed
Reorganization, but any such ruling may not be cited as precedent by any
taxpayer other than the taxpayer to whom the ruling is addressed. The Bank does
not plan to apply for a letter ruling concerning the transactions described
herein.
The Bank has also received an opinion from Radics & Co., LLC that
implementation of the Plan will not result in any New Jersey income tax
liability to the Bank, its depositors, borrowers, the Company or the Mutual
Holding Company.
Certain Restrictions on Purchase or Transfer of Shares After Reorganization
All Common Stock purchased in the Offering by a director or an executive
officer of the Bank will be subject to a restriction that the shares not be sold
for a period of one year following the Reorganization, except in the event of
the death of such director or executive officer. Each certificate for restricted
shares will bear a legend giving notice of this restriction on transfer, and
instructions will be issued to the effect that any transfer within such time
period of any certificate or record ownership of such shares other than as
provided above is a violation of the restriction. Any shares of Common Stock
issued at a later date as a stock dividend, stock split, or otherwise, with
respect to such restricted stock will be subject to the same restrictions. The
directors and executive officers of the Bank and the Company and certain other
persons in receipt of material non-public information will also be subject to
the insider trading rules promulgated pursuant to the Exchange Act.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Reorganization) and their
associates during the three-year period following the Reorganization may be made
only through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to a stock option plan or any
tax qualified employee stock benefit plan of or non-tax qualified employee stock
benefit plan of the Bank or Company (including any employee plan, recognition
plan or restricted stock plan).
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OTS regulations and policy currently prohibit the Company from repurchasing
any of its shares within three years following the Offering unless the
repurchase is (i) part of a general repurchase made on a pro rata basis pursuant
to an offer approved by the OTS and made to all stockholders (except the Mutual
Holding Company may be excluded from the repurchase with OTS approval), (ii)
limited to the repurchase of qualifying shares of a director, or (iii) in open
market transactions by a tax-qualified or nontax qualified employee benefit plan
of the Bank (but not the Company) in an amount reasonable and appropriate to
fund such plan.
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY AND THE BANK
General
The following discussion is a general summary of certain regulatory
restrictions on the acquisition of the Common Stock. In addition, the following
discussion generally summarizes certain provisions of the charter and bylaws of
the Company and the Bank and certain regulatory provisions that may be deemed to
have an "anti-takeover" effect.
The Mutual Holding Company Structure
Under OTS regulations, the Plan of Reorganization, and the Charter of the
Company, at least a majority of the Company's voting shares must be owned by the
Mutual Holding Company. The Mutual Holding Company will be controlled by its
Board of Directors, which will initially consist of the same persons who are
members of the Board of Directors of the Bank and the Company. The Mutual
Holding Company will be able to elect all members of the Board of Directors of
the Company, and as a general matter, will be able to control the outcome of all
matters presented to the stockholders of the Company for resolution by vote,
except for matters that require a vote greater than a majority. The Mutual
Holding Company, acting through its Board of Directors, will be able to control
the business and operations of the Company and the Bank, and will be able to
prevent any challenge to the ownership or control of the Company by Minority
Stockholders. Accordingly, a change in control of the Company and the Bank
cannot occur unless the Mutual Holding Company first converts to the stock form
of organization. Although OTS regulations and policy and the Plan of
Reorganization permit the Mutual Holding Company to convert from the mutual to
the capital stock form of organization, the Board of Directors has no current
plan to do so.
Provisions of the Company's Charter and Bylaws
In addition to the anti-takeover aspects of the mutual holding company
structure, the following discussion is a general summary of certain provisions
of the Company's Charter and Bylaws and certain other regulatory provisions
which will restrict the ability of stockholders to influence management
policies, and which may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in the Company's and the Bank's proposed
charter and bylaws and the Bank's proposed stock charter and bylaws, reference
should be made in each case to the document in question, each of which is part
of the Bank's application to the OTS and the Company's registration statement
filed with the SEC. See "Additional Information."
Classified Board of Directors and Related Provisions. The Company's Charter
provides that the Board of Directors is to be divided into three classes which
shall be as nearly equal in number as possible. The directors in each class hold
office for terms of three years and until their successors are elected and
qualified. One class is elected annually. Management of the Company believes
that the staggered election of directors tends to promote continuity and
stability of management but makes it more difficult for stockholders to change a
majority of the directors because it generally takes at least two annual
elections of directors for this to occur.
89
<PAGE>
Absence of Cumulative Voting. The Company's Charter provides that there
shall be no cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The Company's Charter authorizes shares
of serial preferred stock, without par value. The Company is authorized to issue
preferred stock from time to time in one or more series subject to applicable
provisions of law; and the Board of Directors is authorized to fix the
designations, and relative preferences, limitations, voting rights, if any,
including without limitation, conversion rights of such shares (which could be
multiple or as a separate class). In the event of a proposed merger, tender
offer or other attempt to gain control of the Company that the Board of
Directors does not approve, it might be possible for the Board of Directors to
authorize the issuance of a series of preferred stock with rights and
preferences that would impede the completion of such a transaction. An effect of
the possible issuance of preferred stock, therefore, may be to deter a future
takeover attempt. The Board of Directors has no present plans or understandings
for the issuance of any preferred stock but it may issue any preferred stock on
terms which the Board considers to be in the best interests of the Company and
its stockholders.
Restrictions on Acquisitions of Securities. The Company's Charter provides
that for a period of five years from the effective date of the charter, no
person other than the Mutual Holding Company, may directly or indirectly offer
to acquire or acquire the beneficial ownership of more than 10% of any class of
equity security of the Company. In addition, for a period of five years
following the effective date of the Charter each share beneficially owned in
violation of the foregoing percentage limitation shall not be counted as shares
entitled to vote, shall not be voted by any person or counted as voting shares
in connection with any matter submitted to stockholders for a vote, and shall
not be counted as outstanding for purposes of determining a quorum or the
affirmative vote necessary to approve any matter submitted to the stockholders
for a vote.
Special Meeting of Stockholders. The Company's Charter provides that for
five years after the effective date of the Charter, special meetings of
stockholders relating to changes in control of the Company or amendments to the
Charter may be called only by the Board of Directors.
Change in Bank Control Act and Savings and Loan Holding Company Provisions of
the HOLA
The Change in Bank Control Act 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 and loan holding company unless the OTS has been given 60
days' prior written notice. The HOLA provides that no company may acquire
"control" of a savings and loan holding company without the prior approval of
the OTS. Any company that acquires such control becomes a "savings and loan
holding company" subject to registration, examination, and regulation by the
OTS. Pursuant to federal regulations, control of a savings and loan holding
company is conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of the institution or
the ability to control the election of a majority of the directors of the
institution. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock, of a savings and loan holding company,
where certain enumerated "control factors" are also present in the acquisition.
The OTS may prohibit an acquisition of control if (i) it would result in a
monopoly or substantially lessen competition, (ii) the financial condition of
the acquiring person might jeopardize the financial stability of the
institution, or (iii) the competence, experience, or integrity of the acquiring
person indicates that it would not be in the interest of the depositors or of
the public to permit the acquisition of control by such person. The foregoing
restrictions do not apply to the acquisition of the Company's capital stock by
one or more tax-qualified employee stock benefit plans, provided that the plan
or plans do not have beneficial ownership in the aggregate of more than 25% of
any class of equity security of the Company.
90
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
Company Capital Stock
The 30,000,000 shares of capital stock authorized by the Company's Charter
are divided into two classes, consisting of 20,000,000 shares of common stock
($1.00 par value) and 10,000,000 shares of serial preferred stock. The aggregate
stated value of the issued shares will constitute the capital account of the
Company on a consolidated basis. The balance of the Subscription Price of Common
Stock, less expenses of the Reorganization and Offering, will be reflected as
paid-in capital on a consolidated basis. See "Capitalization." Upon payment of
the Subscription Price for the Common Stock, in accordance with the Plan, all
such stock will be duly authorized, fully paid, validly issued and
nonassessable.
Common Stock. Each share of the Common Stock will have the same relative
rights and will be identical in all respects with each other share of the Common
Stock. The Common Stock of the Company will represent non-withdrawable capital,
will not be of an insurable type and will not be insured by the FDIC. The
holders of the Common Stock will possess exclusive voting power in the Company.
Each stockholder will be entitled to one vote for each share held on all matters
voted upon by stockholders, subject to the limitation discussed under
"Restrictions on Acquisition of the Company--Provisions of the Company's Charter
and Bylaws." If the Company issues preferred stock subsequent to the
Reorganization, holders of the preferred stock may also possess voting powers.
No Preemptive Rights. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Company of the full purchase price therefor, each share of the Common Stock will
be fully paid and nonassessable.
Preferred Stock. After the Reorganization, the Board of Directors of the
Company will be authorized to issue preferred stock in series and to fix and
state the voting powers, designations, preferences and relative, participating,
optional or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. Preferred stock may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both, and may have full or limited voting rights. The holders of preferred stock
will be entitled to vote as a separate class or series under certain
circumstances, regardless of any other voting rights which such holders may
have.
Except as discussed herein, the Company has no present plans for the
issuance of the additional authorized shares of Common Stock or for the issuance
of any shares of preferred stock. In the future, the authorized but unissued and
unreserved shares of Common Stock will be available for general corporate
purposes including but not limited to possible issuance as stock dividends or
stock splits, in future mergers or acquisitions, under a cash dividend
reinvestment and stock purchase plan, in a future underwritten or other public
offering or under an employee stock ownership plan, stock option or restricted
stock plan. The authorized but unissued shares of preferred stock will similarly
be available for issuance in future mergers or acquisitions, in a future
underwritten public offering or private placement or for other general corporate
purposes. Except as described above or as otherwise required to approve the
transaction in which the additional authorized shares of Common Stock or
authorized shares of preferred stock would be issued, no stockholder approval
will be required for the issuance of these shares. Accordingly, the Board of
Directors of the Company, without stockholder approval, can issue preferred
stock with voting and conversion rights which could adversely affect the voting
power of the holders of Common Stock.
Dividends. Upon consummation of the Reorganization the Company's primary
assets will be the common stock of the Bank and the proceeds of the Offering
that are not infused into the Bank. Future dividends from the Bank, should they
be paid, will be an important source of income for the Company. Should the Bank
elect to retain its income, the ability of the Company to pay dividends to its
own shareholders may be adversely affected. Furthermore, if at any time in the
future the Company owns less than 100% of the outstanding stock of the Bank,
certain tax benefits under the Code as to inter-company distributions will not
be fully available to the Company and it will be required to pay federal income
tax on a portion of the dividends received from the Bank, thereby reducing the
amount of income available for distribution to the shareholders of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services.
91
<PAGE>
EXPERTS
The consolidated financial statements of the Bank as of December 31, 1997
and 1996 have been included herein in reliance upon the report of Radics & Co.,
LLC, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
FinPro has consented to the publication herein of the summary of its report
to the Bank and Company setting forth its opinion as to the estimated pro forma
market value of the Common Stock upon Reorganization and its opinion with
respect to subscription rights.
LEGAL OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Reorganization will be passed upon for the Bank and Company by Luse Lehman
Gorman Pomerenk & Schick, P.C., Washington, D.C., special counsel to the Bank
and Company. The New Jersey income tax consequences of the Reorganization will
be passed upon for the Bank and the Company by Radics & Co., LLC. Certain legal
matters will be passed upon for Ryan Beck by McCarter & English, LLP, Newark,
New Jersey.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information, including
the Reorganization Valuation Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
The SEC maintains a web site (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants,
including the Company, that file electronically. The statements contained in
this Prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete.
In connection with the Reorganization, the Bank has filed with the OTS a
notice of its intent to reorganize into a mutual holding company and to conduct
a minority stock issuance, and the Company filed with the OTS an application to
become a savings and loan holding company. Pursuant to the rules and regulations
of the OTS, this Prospectus omits certain information contained in that
application. The application may be examined at the principal office of the OTS,
1700 G Street, N.W., Washington, D.C. 20552 and at the Office of the Director of
the OTS located at 10 Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
In connection with the Reorganization, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan of Reorganization, the Company has undertaken that it will
not terminate such registration for a period of at least three years following
the Reorganization.
A copy of the Charter and Bylaws of the Company and the Bank are available
without charge from the Bank.
92
<PAGE>
AXIA FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Financial Statements
CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(As of December 31, 1997 and 1996)........................ F-3
CONSOLIDATED STATEMENTS OF INCOME
(For the years ended December 31, 1997 and 1996).......... 30
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(For the years ended December 31, 1997 and 1996).......... F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the years ended December 31, 1997 and 1996).......... F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(For the years ended December 31, 1997 and 1996).......... F-7
All schedules are omitted as the required information is not applicable or the
information is presented in the consolidated financial statements.
Financial statements of Liberty Bancorp, Inc. (the "Company") are not presented
herein because the Company has not yet issued any stock, has no assets and no
liabilities, and has not conducted any business other than of an organizational
nature.
F-1
<PAGE>
[RADICS & CO. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors
Axia Federal Savings Bank
We have audited the accompanying consolidated statements of financial condition
of Axia Federal Savings Bank (the "Savings Bank") and Subsidiary as of December
31, 1997 and 1996 and the related consolidated statements of income, retained
earnings and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Savings Bank's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the consolidated
financial position of Axia Federal Savings Bank and Subsidiary as of December
31, 1997 and 1996, and the results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/ Radics & Co., LLC
January 23, 1998
Pine Brook, New Jersey
F-2
<PAGE>
AXIA FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------
Note(s) 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Assets
- ------
Cash and amounts due from depository institutions $ 1,192,270 $ 1,303,678
Interest-bearing deposits in other banks 4,738,621 4,471,105
------------ ------------
Total cash and cash equivalents 1 and 11 5,930,891 5,774,783
Securities available for sale 1,2 and 11 53,917,520 59,589,169
Loans receivable 1,3 and 11 152,199,868 130,689,693
Premises and equipment 1,4 and 10 2,113,904 2,308,323
Foreclosed real estate 1 121,064 --
Federal Home Loan Bank of New York stock 1,804,100 1,615,400
Interest receivable 1,5 and 11 1,219,978 1,223,487
Other assets 9 and 13 129,395 372,903
------------ ------------
Total assets $217,436,720 $201,573,758
============ ============
Liabilities and retained earnings
- ---------------------------------
Liabilities
- -----------
Deposits 6 and 11 $198,362,828 $184,709,001
Advance payments by borrowers for taxes and insurance 1,659,615 1,484,384
Other liabilities 1,8 and 9 873,434 568,610
------------ ------------
Total liabilities 200,895,877 186,761,995
------------ ------------
Commitments and contingencies 10 -- --
Retained earnings 7,9 and 13
- -----------------
Retained earnings - substantially restricted 16,122,933 14,569,728
Unrealized gain on securities available for sale,
net of income taxes 1 417,910 242,035
------------ ------------
Total retained earnings 16,540,843 14,811,763
------------ ------------
Total liabilities and retained earnings $217,436,720 $201,573,758
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
AXIA FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
--------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Retained Gain on
Earnings - Securities
Substantially Available
Restricted For Sale, net Total
------------- ------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 13,960,806 $ 408,239 $ 14,369,045
Net income for the year ended December 31, 1996 608,922 -- 608,922
Change in unrealized gain on securities
available for sale, net -- (166,204) (166,204)
------------- ------------- ------------
Balance, December 31, 1996 14,569,728 242,035 14,811,763
Net income for the year ended December 31, 1997 1,553,205 -- 1,553,205
Change in unrealized gain on securities
available for sale, net -- 175,875 175,875
------------- ------------- ------------
Balance, December 31, 1997 $ 16,122,933 $ 417,910 $ 16,540,843
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,553,205 $ 608,922
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (24,501) (21,793)
Depreciation and amortization of premises and equipment 218,465 216,424
Amortization of premiums, net of accretion of discounts
and deferred loan fees 60,411 100,565
Loss on sale of real estate owned 520 --
Provision for loan losses 200,000 43,056
Gain on sale of securities available for sale (128,716) --
Gain on sale of premises and equipment -- (23,372)
Gain on sale of loans (4,395) --
Decrease in accrued interest receivable 3,509 68,844
Decrease (increase) in other assets 243,508 (172,067)
(Decrease) in accrued interest payable (1,154) (946)
Increase (decrease) in other liabilities 230,278 (200,324)
------------ ------------
Net cash provided by operating activities 2,351,130 619,309
------------ ------------
Cash flows from investing activities:
Purchases of securities available for sale (41,279,181) (6,280,414)
Principal repayments on securities available for sale 13,375,397 14,051,794
Calls of securities available for sale 2,000,000 1,000,000
Proceeds from sale of securities available for sale 31,842,498 --
Net increase in loans receivable (22,422,328) (26,144,078)
Proceeds from sale of loans receivable 651,014 --
Net additions to premises and equipment (24,046) (254,510)
Proceeds from sale of office building -- 84,000
Capitalized expense on foreclosed real estate (675) --
Proceeds from sale and recovery from insurance on foreclosed
real estate 20,787 134,068
Purchase of Federal Home Loan Bank of New York stock (188,700) (78,400)
------------ ------------
Net cash (used in) investment activities (16,025,234) (17,487,540)
------------ ------------
Cash flows from financing activities:
Increase in deposits 13,654,981 14,867,718
Increase in advance payments by borrowers for taxes
and insurance 175,231 295,709
------------ ------------
Net cash provided by financing activities 13,830,212 15,163,427
------------ ------------
Net increase (decrease) in cash and cash equivalents 156,108 (1,704,804)
Cash and cash equivalents - beginning 5,774,783 7,479,587
------------ ------------
Cash and cash equivalents - ending $ 5,930,891 $ 5,774,783
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AXIA FEDERAL SAVINGS BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 9,005,195 $ 8,049,631
=========== ===========
Income taxes, net of refunds $ 455,900 $ 493,017
=========== ===========
Supplemental disclosure of noncash activities:
Loans receivable transferred from foreclosed real estate $ 204,696 $ --
=========== ===========
Loan to facilitate the sale of foreclosed real estate $ (63,000) $ --
=========== ===========
Loan made in conjunction with sale of office building $ -- $ 75,000
Imputed interest -- (13,544)
----------- -----------
$ -- $ 61,456
=========== ===========
Unrealized gain on securities available for sale:
Unrealized appreciation (depreciation) $ 274,922 $ (259,611)
Deferred income taxes (benefit) (99,047) 93,407
----------- -----------
$ 175,875 $ (166,204)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of the
Savings Bank and its wholly owned subsidiary, Axia Financial
Corporation (the "Corporation"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Basis of presentation
---------------------
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the consolidated statement of
financial condition and revenues and expenses for the period then
ended. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
changes relate to the determination of the allowance for loan losses
and the assessment of prepayment risks associated with mortgage-backed
securities. Management believes that the allowance for loan losses is
adequate and that the risks associated with mortgage-backed securities
prepayments have been properly recognized. While management uses
available information to recognize losses on loans, future additions to
the allowance for loan losses may be necessary based on changes in
economic conditions in the market area. Additionally, assessments of
prepayment risks related to mortgage-backed securities are based upon
current market conditions, which are subject to frequent change.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Savings Bank's allowances
for loan losses. Such agencies may require the Savings Bank to
recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash and amounts due from depository
institutions and interest-bearing deposits in other banks with initial
maturities of three months or less.
Securities
----------
Investments in debt securities that the Savings Bank has the positive
intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost. Debt and
equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized holding gains and losses
included in earnings. Debt and equity securities not classified as
trading securities nor as held-to-maturity securities are classified as
available for sale securities and reported at fair value, with
unrealized holding gains or losses, net of applicable deferred income
taxes, reported in a separate component of retained earnings.
F-7
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Securities (Cont'd.)
----------
Premiums and discounts on all securities are amortized/accreted using
the interest method. Interest and dividend income on securities, which
includes amortization of premiums and accretion of discounts, is
recognized in the consolidated financial statements when earned. The
adjusted cost basis of an identified security sold or called is used
for determining security gains and losses recognized in the
consolidated statements of income.
Loans receivable
----------------
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan origination fees and
discounts.
The Savings Bank defers loan origination fees and certain direct loan
origination costs and accretes such amounts as an adjustment of yield
over the contractual lives of the related loans. Discounts on loans are
recognized as income by use of a method which approximates the
level-yield method over the terms of the respective loans.
Allowance for loan losses
-------------------------
An allowance for loan losses is maintained at a level considered
adequate to absorb loan losses. Management of the Savings Bank, in
determining the allowance for loan losses, considers the risks inherent
in its loan portfolio and changes in the nature and volume of its loan
activities, along with general economic and real estate market
conditions. The Savings Bank utilizes a two tier approach: (1)
identification of impaired loans and the establishment of specific loss
allowances on such loans; and (2) establishment of general valuation
allowances on the remainder of its loan portfolio. The Savings Bank
maintains a loan review system which allows for a periodic review of
its loan portfolio and the early identification of potential impaired
loans. Such system takes into consideration, among other things,
delinquency status, size of loans, types of collateral and financial
condition of the borrowers. Specific loan loss allowances are
established for identified loans based on a review of such information
and/or appraisals of the underlying collateral. General loan loss
allowances are based upon a combination of factors including, but not
limited to, actual loan loss experience, composition of the loan
portfolio, current economic conditions and management's judgment.
Although management believes that adequate specific and general loan
loss allowances are established, actual losses are dependent upon
future events and, as such, further additions to the level of the loan
loss allowance may be necessary.
Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. A
loan evaluated for impairment is deemed to be impaired when, based on
current information and events, it is probable that the Savings Bank
will be unable to collect all amounts due according to the contractual
terms of the loan agreement. All loans identified as impaired are
evaluated independently. The Savings Bank does not aggregate such loans
for evaluation purposes. Payments received on impaired loans are
applied first to accrued interest receivable and then to principal. The
Savings Bank does not have any loans deemed to be impaired.
F-8
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Concentration of risk
---------------------
The Savings Bank's lending activity is concentrated in loans secured by
real estate located in the State of New Jersey.
Premises and equipment
----------------------
Premises and equipment are comprised of land, at cost, and buildings,
building improvements, furnishings and equipment and leasehold
improvements, at cost, less accumulated depreciation and amortization.
Depreciation and amortization charges are computed on the straight-line
method over the following estimated useful lives:
Buildings and improvements 30 to 50 years
Furnishings and equipment 3 to 10 years
Leasehold improvements Shorter of estimated useful
life or term of lease
Significant renewals and betterments are charged to the premises and
equipment account. Maintenance and repairs are charged to operations in
the year incurred.
Foreclosed real estate
----------------------
Real estate properties acquired through, or in lieu of, foreclosure are
initially recorded at the lower of cost or estimated fair value at date
of acquisition. Subsequent valuations are periodically performed and an
allowance for losses established by a charge to operations if the
carrying value of a property exceeds its fair value less estimated
selling costs. Costs relating to development or improvement of
properties for sale are capitalized. Income and expenses of holding and
operating properties are recorded in operations as incurred or earned.
Gains and losses from sales of these properties are recognized as
incurred.
F-9
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Allowance for uncollected interest
----------------------------------
The Savings Bank provides an allowance for the loss of uncollected
interest on loans based upon management's evaluation of the
collectibility of such interest. Such interest ultimately collected is
credited to income in the period of recovery.
Income taxes
------------
The Savings Bank and its subsidiary file a consolidated federal income
tax return. Income taxes are allocated based on the contribution of
income to the consolidated income tax return. Separate state income tax
returns are filed.
Federal and state income taxes have been provided on the basis of
reported income. The amounts reflected on the Savings Bank's tax return
differ from these provisions due principally to temporary differences
in the reporting of certain items for financial reporting and income
tax reporting purposes. Deferred income tax expense or benefit is
determined by recognizing deferred tax assets and liabilities for the
estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in earnings in
the period that includes the enactment date. The realization of
deferred tax assets is assessed and a valuation allowance provided,
when necessary, for that portion of the asset which is not likely to be
realized. Management believes, based upon current facts, that it is
more likely than not that there will be sufficient taxable income in
future years to realize all deferred tax assets.
Interest rate risk
------------------
The Savings Bank is principally engaged in the business of attracting
deposits from the general public and using these deposits, together
with other funds, to purchase securities and to make loans secured by
real estate. The potential for interest-rate risk exists as a result of
the generally shorter duration of the Savings Bank's interest-sensitive
liabilities compared to the generally longer duration of
interest-sensitive assets. In a rising rate environment, liabilities
will reprice faster than assets, thereby reducing net interest income.
For this reason, management regularly monitors the maturity structure
of the Savings Bank's interest-earning assets and interest-bearing
liabilities in order to measure its level of interest-rate risk and to
plan for future volatility.
Fair value of financial instruments
-----------------------------------
The fair value of a financial instrument is defined as the amount at
which the instrument could be exchanged in a current transaction
between willing parties, other than a forced or liquidation sale.
Significant estimations were used for the purposes of this disclosures.
Estimated fair value have been determined using the best available data
and estimation methodology suitable for each category of financial
instruments. The estimation methodologies used and assumptions made in
estimating fair values of financial instruments are set forth below.
F-10
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Cash and cash equivalents and accrued interest receivable
---------------------------------------------------------
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value because they mature in three months
or less.
Securities
----------
The fair values for securities available for sale are based on quoted
market or dealer prices, if available. If quoted market or dealer
prices are not available, fair value is estimated using quoted market
prices for similar securities.
Loans receivable
----------------
Fair value is estimated by discounting future cash flows, using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities, of such
loans.
Deposits
--------
The fair value of demand deposits, savings accounts and club accounts
is equal to the amount payable on demand at the reporting date. The
fair value of certificates of deposit is estimated by discounting
future cash flows, using rates currently offered for deposits of
similar remaining maturities. The fair value estimates do not include
the benefit that results from the low-cost funding provided by deposit
liabilities compared to the cost of borrowing funds in the market.
Commitments
-----------
The fair value of loan commitments is estimated using fees currently
charged to enter into similar agreements taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed rate loan commitments, fair value also
considers the difference between current levels of interest and the
committed rates.
F-11
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Impact of new accounting standards
----------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income". SFAS No. 130 requires that all items
that are components of "comprehensive income" be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as the "change in
equity [net assets] of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources.
It includes all changes in equity during a period except those
resulting from investments by owners and distributors to owners".
Companies will be required to (a) classify items of other comprehensive
income by their nature in the financial statements and (b) display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity-section
of a statement of financial position. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and requires
reclassification of prior periods presented. As the requirements of
SFAS No. 130 are disclosure-related, its implementation will have no
impact on the Savings Bank's consolidated financial condition or
results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 requires that
enterprises report certain financial and descriptive information about
operating segments in complete sets of financial statements of the
company and in condensed financial statements of interim period issued
to shareholders. It also requires that a company report certain
information about their products and services, geographic areas in
which they operate and their major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997 and requires interim
periods to be presented in the second year of application. As the
requirements of SFAS No. 131 are disclosure-related, its implementation
will have no impact on the Savings Bank's consolidated financial
condition or results of operations.
Reclassification
----------------
Certain amounts for the year ended December 31, 1996 have been
reclassified to conform to the current year's presentation.
F-12
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. SECURITIES AVAILABLE FOR SALE
- --------------------------------
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
Gross Unrealized
Amortized ------------------------- Carrying
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed:
Due in one year or less $ 71,353 $ -- $ 1,360 $ 69,993
Due after one year through five years 5,113,106 25,322 -- 5,138,428
Due after five years 47,080,077 636,835 -- 47,716,912
----------- ----------- ----------- -----------
52,264,536 662,157 1,360 52,925,333
U.S. Government Agencies
Due after five years 1,000,000 -- 7,813 992,187
----------- ----------- ----------- -----------
$53,264,536 $ 662,157 $ 9,173 $53,917,520
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------
Gross Unrealized
Amortized ------------------------- Carrying
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed:
Due in one year or less $ 1,474,247 $ 5,672 $ -- $ 1,479,919
Due after one year through five years 2,170,818 24,897 27 2,195,688
Due after five years 51,558,568 693,144 402,605 51,849,107
----------- ----------- ----------- -----------
55,203,633 723,713 402,632 55,524,714
----------- ----------- ----------- -----------
U.S. Government Agencies:
Due after one year through five years 999,061 -- 9,061 990,000
Due after five years 3,008,413 -- 54,038 2,954,375
----------- ----------- ----------- -----------
4,007,474 -- 63,099 3,944,375
----------- ----------- ----------- -----------
Equity securities -- 120,080 -- 120,080
----------- ----------- ----------- -----------
$59,211,107 $ 843,793 $ 465,731 $59,589,169
=========== =========== =========== ===========
</TABLE>
All mortgage-backed securities available for sale are issued by the Government
National Mortgage Association, Federal Home Loan Mortgage Corporation or Federal
National Mortgage Association.
Proceeds from the sales of securities available for sale during the year ended
December 31, 1997 totalled $31,842,498. Gross gains of $389,869 and gross losses
of $261,153 were realized on those sales. There were no sales of securities
available for sale during the year ended December 31, 1996.
Securities available for sale with a carrying value of approximately $220,000
and $476,000 at December 31, 1997 and 1996, respectively, were pledged to secure
public funds.
F-13
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. LOANS RECEIVABLE
- -------------------
December 31,
-----------------------------
1997 1996
------------ ------------
Real estate mortgage:
One-to-four family $142,551,575 $119,501,193
Multi-family 1,257,488 1,875,303
Commercial 1,906,160 2,034,955
FHA insured and VA guaranteed 1,072,455 1,390,124
------------ ------------
146,787,678 124,801,575
------------ ------------
Real estate construction -- 237,000
------------ ------------
Consumer:
Home improvement 6,644 9,819
Student education 90,148 782,919
Passbook or certificate 394,039 308,660
Home equity loans 2,978,788 2,606,151
Home equity line of credit 2,727,096 2,757,462
------------ ------------
6,196,715 6,465,011
------------ ------------
Total loans 152,984,393 131,503,586
------------ ------------
Less:
Loans in process -- 3,360
Allowance for loan losses 723,319 533,840
Deferred loan fees and discounts 61,206 276,693
------------ ------------
784,525 813,893
------------ ------------
$152,199,868 $130,689,693
============ ============
The Savings Bank has granted loans to its officers and directors and to their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. Activity in such loans is as follows:
Year Ended December 31,
---------------------------
1997 1996
--------- ----------
Balance - beginning $ 438,000 $ 453,000
New loans 323,000 --
Repayments (19,000) (15,000)
Other changes (172,000) --
--------- ---------
Balance - ending $ 570,000 $ 438,000
========= =========
F-14
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. LOANS RECEIVABLE (Cont'd.)
- -------------------
Nonaccrual loans totalled approximately $909,000 and $904,000 at December 31,
1997 and 1996, respectively. Interest income recognized on these loans during
the years ended December 31, 1997 and 1996, was approximately $36,000 and
$35,000, respectively. Had these loans been performing in accordance with their
original terms, interest income for the years ended December 31, 1997 and 1996,
would have been approximately $84,000 and $77,000, respectively. The Savings
Bank is not committed to lend additional funds to the borrowers whose loans have
been placed on nonaccrual status.
The activity in allowance for loan losses follows:
Year Ended
December 31,
--------------------------
1997 1996
--------- ---------
Balance - beginning $ 533,840 $ 490,000
Provisions charged to operations 200,000 43,056
Loans charged off (10,521) --
Loans recovered -- 784
--------- ---------
Balance - ending $ 723,319 $ 533,840
========= =========
At December 31, 1997 and 1996, loans serviced for the benefit of others totalled
approximately $337,000 and $416,000, respectively.
4. PREMISES AND EQUIPMENT
- -------------------------
December 31,
-------------------------
1997 1996
---------- ----------
Land $ 181,386 $ 181,386
---------- ----------
Buildings and improvements 628,179 628,179
Less accumulated depreciation 52,847 31,916
---------- ----------
575,332 596,263
---------- ----------
Leasehold improvements, net of amortization 983,089 1,031,998
---------- ----------
Furnishings and equipment 1,440,226 1,421,384
Less accumulated depreciation 1,066,129 922,708
---------- ----------
374,097 498,676
---------- ----------
$2,113,904 $2,308,323
========== ==========
F-15
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. INTEREST RECEIVABLE
- ----------------------
December 31,
------------------------
1997 1996
---------- ----------
Loans, net of allowance for uncollected
interest of $134,403 (1997) and $126,660 (1996) $ 769,385 $ 685,890
Mortgage-backed securities available for sale 426,039 450,057
Investment securities available for sale 23,958 86,776
Other interest-earnings assets 596 764
---------- ----------
$1,219,978 $1,223,487
========== ==========
6. DEPOSITS
- -----------
December 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------- ------------ -------- ------------
Demand accounts:
Non-interest bearing 0% $ 3,375,404 0% $ 2,417,617
Money Market 2.69% 2,809,401 2.75% 3,159,630
NOW 1.50% 9,695,916 2.25% 8,815,781
------------ ------------
1.39% 15,880,721 1.98% 14,393,028
Savings and clubs 3.00% 45,168,430 2.99% 44,120,173
Certificates of deposit 5.52% 137,313,677 5.39% 126,195,800
------------ ------------
4.62% $198,362,828 4.55% $184,709,001
============ ============
The scheduled maturities of certificates of deposit are as follows:
December 31,
--------------------------
Maturity Period 1997 1996
--------------- -------- --------
(In Thousands)
One year or less $ 90,301 $ 84,876
After one through three years 45,697 38,355
After three years 1,316 2,965
-------- --------
$137,314 $126,196
======== ========
At December 31, 1997 and 1996, certificates of deposit of $100,000 or more
totalled approximately $8,312,000 and $6,541,000, respectively. Deposits in
excess of $100,000 are not insured by the Savings Association Fund.
F-16
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. DEPOSITS (Cont'd.)
- -----------
Interest expense on deposits consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Money Market $ 80,720 $ 93,505
NOW 163,128 196,627
Savings club 1,345,955 1,311,719
Certificates of deposit 7,344,414 6,476,132
---------- ----------
8,934,217 8,077,983
Less penalties for early withdrawal of certificates
of deposits 25,950 29,943
---------- ----------
$8,908,267 $8,048,040
========== ==========
</TABLE>
7. REGULATORY CAPITAL
- ---------------------
The Savings Bank is subject to various regulatory capital requirements
administered by the Federal 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 Savings Bank. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Savings Bank must meet
specific capital guidelines that involve quantitative measures of the Savings
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Savings Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
The Office of Thrift Supervision ("OTS") has prescribed capital requirements
which include three separate measurements of capital adequacy (the "Capital
Rule"). The Capital Rule requires each savings institution to maintain tangible
capital equal to at least 1.5% of its tangible assets and core capital equal to
at least 3.0% of its adjusted total assets. The Capital Rule further requires
each savings institution to maintain total capital equal to at least 8.0% of its
risk-weighted assets. The following table sets forth the capital position of the
Savings Bank as of December 31, 1997:
<TABLE>
<CAPTION>
Tangible Capital Core Capital Risk-based Capital
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
GAAP retained earnings $ 16,541 7.62% $ 16,541 7.62% $ 16,541 17.38%
Unrealized (gain) on securities
available for sale, net (418) (.19) (418) (.19) (418) (.44)
General loan loss allowance -- -- -- -- 711 .75
-------- ----- -------- ----- -------- -----
Regulatory capital 16,123 7.43 16,123 7.43 16,834 17.69
Required regulatory capital 3,255 1.50 6,510 3.00 7,614 8.00
-------- ----- -------- ----- -------- -----
Excess $ 12,868 5.93% $ 9,613 4.43% $ 9,220 9.69%
======== ===== ======== ===== ======== =====
</TABLE>
F-17
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
7. REGULATORY CAPITAL (Cont'd.)
- ---------------------
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios of Total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). Management
believes, as of December 31, 1997, that the Savings Bank meets all capital
adequacy requirements to which it is subject.
As of March 31, 1997, the most recent notification from the OTS, the Savings
Bank was categorized as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Savings
Bank must maintain minimum total, risk-based, and Tier I leverage ratios of 10%,
6% and 5%, respectively. There are no conditions existing or events which have
occurred since notification that management believes have changed the
institution's category.
8. BENEFIT PLANS
- ----------------
Retirement plan
- ---------------
The Savings Bank has a non-contributory pension plan covering all eligible
employees. The plan is a defined benefit plan which provides benefits based on a
participant's years of service and compensation. The Savings Bank's funding
policy is to contribute annually the maximum amount that can be deducted for
federal income tax purposes.
Plan assets are comprised primarily of stocks, bonds, mutual funds and bank
deposits. The following tables set forth the plan's funded status and components
of net periodic pension cost:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligation, including
vested benefits of $943,000 and $642,000, respectively $ 954,000 $ 670,000
=========== ===========
Projected benefit obligation $ 1,366,000 $ 1,067,000
Plan assets at fair value 1,047,000 809,000
----------- -----------
Projected benefit obligation in excess of plan assets 319,000 258,000
Unrecognized net transition liability (90,000) (54,000)
Unrecognized net (loss) (198,000) (130,000)
----------- -----------
Pension liability included in other liabilities $ 31,000 $ 74,000
=========== ===========
</TABLE>
Net periodic pension cost for the plan included the following components:
Year Ended
December 31,
----------------------
1997 1996
--------- ---------
Service cost $ 77,439 $ 74,260
Interest cost 80,404 68,982
Return on plan assets (97,001) (38,148)
Net amortization and deferral 41,197 2,343
--------- ---------
Net periodic pension cost
included in salaries and employee benefits $ 102,039 $ 107,437
========= =========
F-18
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. BENEFIT PLANS (Cont'd.)
- ----------------
Assumptions used in accounting for the plan are as follows:
Year Ended
December 31,
--------------------
1997 1996
-------- --------
Discount rate 7.5% 7.0%
Rate of increase in compensation 5.5% 5.0%
Long-term rate of return on plan assets 8.0% 7.0%
Postretirement benefits
- -----------------------
Postretirement benefits offered by the Savings Bank include health care and life
insurance coverage. Benfits under the plan are available to all employees
retiring after attainment of age 60 and fifteen years of service. The plan is
unfunded. The following tables set forth the plan's funded status and components
of postretirement benefit costs:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 274,758 $ 282,204
Other active plan participants 281,060 249,237
--------- ---------
Accumulated and unfunded postretirement benefit
obligation 555,818 531,441
Unrecognized prior service cost (421,711) (446,517)
Unrecognized net loss 50,143 37,617
--------- ---------
Postretirement obligation included in other liabilities $ 184,250 $ 122,541
========= =========
</TABLE>
Postretirement benefit cost for the plan included the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Service cost $ 21,004 $ 19,539
Interest cost on accumulated postretirement benefit
obligation 38,992 36,504
Amortization of unrecognized prior service costs 24,806 24,806
--------- ---------
Net postretirement benefit cost included in
compensation and employee benefits $ 84,802 $ 80,849
========= =========
</TABLE>
Assumptions used in accounting for the plan are as follows:
Year Ended
December 31,
------------------------
1997 1996
--------- ---------
Discount rate 7.50% 7.50%
Rate of increase in compensation 5.50% 5.50%
F-19
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. BENEFIT PLANS (Cont'd.)
- ----------------
Postretirement benefits
For the years ended December 31, 1997 and 1996, a medical cost trend rate
of 7.00% and 7.50%, respectively, decreasing 0.5% per year thereafter until
an ultimate rate of 5.00% is reached, was used in the plan's valuation.
Increasing the assumed medical cost trend by one percent in each year would
increase the accumulated postretirement benefit obligation as of December
31, 1997, by $91,000 and the aggregate of the service and interest
components of net periodic postretirement benefit cost for the year ended
December 31, 1997, by $14,000.
9. INCOME TAXES
- ---------------
The Savings Bank qualifies as a thrift institution under the provisions of the
Internal Revenue Code and, therefore, was permitted, prior to January 1, 1996,
to deduct from taxable income an allowance for bad debts based on eight percent
of taxable income before such deduction. Effective January 1, 1996, the Savings
Bank must calculate its bad debt deduction using either the experience or the
specific charge off method. Retained earnings at December 31, 1997, includes
approximately $3,009,000 of such bad debt, for which income taxes have not been
provided. If such amount is used for purposes other than for bad debts losses,
including distributions in liquidation, it will be subject to income tax at the
then current rate. See Note 12.
The components of income taxes are summarized as follows:
Year Ended
December 31,
------------------------------
1997 1996
--------- ---------
Current tax expense:
Federal income $ 827,699 $ 281,585
State income 73,752 23,689
--------- ---------
901,451 305,274
--------- ---------
Deferred tax (benefit):
Federal income (22,466) (20,058)
State income (2,035) (1,735)
--------- ---------
(24,501) (21,793)
--------- ---------
$ 876,950 $ 283,481
========= =========
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate of 34% to income before income taxes:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Federal income tax expense $ 826,253 $ 303,417
Increases (reductions) in income taxes resulting from:
New Jersey savings institution tax, net of federal income tax effect 47,333 14,490
Other items, net 3,364 (34,426)
--------- ---------
Effective income tax $ 876,950 $ 283,481
========= =========
</TABLE>
F-20
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
9. INCOME TAXES (Cont'd.)
- ---------------
The effective income tax rate for the years ended December 31, 1997 and 1996 is
36.09% and 31.77%, respectively.
The tax effects of existing temporary differences that give rise to significant
positions of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
Deferred tax assets 1997 1996
------------------- --------- ---------
<S> <C> <C>
Benefit plans $ 84,742 $ 89,608
Deferred loan fees 80,311 98,602
Uncollected interest 49,729 45,572
Allowance for loss on loans 267,628 192,075
Other items 1,433 4,527
--------- ---------
483,843 430,384
--------- ---------
Deferred tax liabilities
------------------------
Unrealized gain on securities available for sale 235,074 136,027
Depreciation 128,936 108,950
Bad debt deduction in excess of base year 325,439 316,467
--------- ---------
689,449 561,444
--------- ---------
Net deferred tax liabilities included in other liabilities $(205,606) $(131,060)
========= =========
</TABLE>
Refundable income taxes of $232,757 at December 31, 1996 are included in other
assets. Current income tax liabilities of $192,516 at December 31, 1997 are
included in other liabilities.
10. COMMITMENTS AND CONTINGENCIES
- ---------------------------------
The Savings Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and purchase securities. The
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated statement of
financial condition. The Savings Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of those
instruments. The Savings Bank uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
F-21
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. COMMITMENTS AND CONTINGENCIES (Cont'd.)
- -------------------------------------------
Commitments to extend credit are agreements to lend a customer as long as there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since commitments may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Savings Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Savings Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but primarily includes
residential real estate.
Commitments to purchase securities are contracts for delayed delivery of
securities in which the seller agrees to make delivery at a specified future
date of a specified instrument, at a specified price or yield. Risks arise from
the possible inability of counterparties to meet the terms of their contracts
and from movements in securities values and interest rates.
The Savings Bank has the following outstanding commitments:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
To originate loans, expiring in three months or less:
Mortgage $1,950,000 $2,410,000
Fixed rate home equity loans 74,000 90,000
Home equity credit lines 29,000 54,000
---------- ----------
$2,053,000 $2,554,000
========== ==========
</TABLE>
At December 31, 1997, of the $2,053,000 in commitments to originate loans,
$1,849,000 are for loans at fixed interest rates ranging from 6.50% to 9.625%
and $204,000 are for loans at adjustable interest rates with initial rates
ranging from 6.75% to 10.25%.
At December 31, 1997 and 1996, outstanding commitments related to unused home
equity lines of credit totalled approximately $3,098,000 and $3,633,000,
respectively. At December 31, 1997 and 1996, the Savings Bank had outstanding
$150,000 and $250,000, respectively, in loan participation purchase commitments.
Loan participation purchase commitments represent commitments to purchase
participation interests in loans where the interest rate will be set at the
funding date based upon the Federal Home Loan Bank of New York C.I.P. advance
rates plus a margin.
Commitments under home equity credit line programs represent undisbursed funds
from approved lines of credit. Unless specifically cancelled by notice from the
Savings Bank, these are firm commitments to the respective borrowers on demand.
The lines of credit are secured by one-to-four family residential property owned
by the borrowers. The interest rate charged for any month on funds disbursed
under the Homeowners' Equity Credit Line Program is 1.75% above the prime rate
as most recently published in The Wall Street Journal prior to the last business
day of the month immediately preceding the month in which the billing cycle
begins. The interest rate charged under the Preferred Home Equity Credit Line is
fixed at 6.49% for one year, and thereafter is adjusted monthly to a rate of
1.00% above the prime rate as discussed above.
F-22
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. COMMITMENTS AND CONTINGENCIES (Cont'd.)
- ---------------------------------
Rentals, including related expenses, under long-term operating leases for
certain branch offices amounted to approximately $178,000 and $166,000 for the
years ended December 31, 1997 and 1996, respectively. At December 31, 1997, the
minimum rental commitments under all noncancellable leases with initial or
remaining terms of more than one year and expiring through March 31, 2002 are as
follows:
Year Ending Minimum
December 31, Rent
------------- ---------
1998 $ 177,000
1999 181,000
2000 152,000
2001 117,000
2002 29,000
---------
$ 656,000
=========
The Savings Bank also has, in the normal course of business, commitments for
services and supplies. Management does not anticipate losses on any of these
transactions.
The Savings Bank is also a party to litigation which arises primarily in the
ordinary course of business. In the opinion of management, the ultimate
disposition of such litigation should not have a material effect on consolidated
financial position or operations.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
The carrying amounts and fair values of the Savings Bank's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Financial assets Amount Fair Value Amount Fair Value
---------------- -------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5,931 $ 5,931 $ 5,775 $ 5,775
Securities available for sale 53,918 53,918 59,589 59,589
Loans receivable 152,200 154,192 130,690 131,153
Interest receivable 1,220 1,220 1,223 1,223
Financial liabilities
---------------------
Deposits 198,363 198,717 184,709 185,122
Commitments
-----------
To originate loans 2,053 2,053 2,554 2,554
Unused lines of credit 3,098 3,098 3,633 3,633
Loan participation purchase 150 150 250 250
</TABLE>
F-23
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- ---------------------------------------
The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. Because no
market exists for a significant portion of the Savings Bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
In addition, the fair value estimates were based on existing on-and-of balance
sheet financial instruments without attempting to value anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets and liabilities include premises and equipment and
advances from borrowers for taxes and insurance. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
12. LEGISLATIVE MATTERS
- -----------------------
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on Savings Association Insurance fund
("SAIF") member institutions, including the Savings Bank, to recapitalize the
SAIF and spread the obligation for payment of Financial Corporation ("FICO")
bonds across all SAIF and Bank Insurance Fund ("BIF") members. The special
assessment levied amounted to 65.7 basis points on SAIF assessable deposits held
as of March 31, 1995. The special assessment was recognized in September 1996
and was tax deductible. The Savings Bank took a charge of approximately
$1,012,000 as a result of the special assessment. This legislation eliminated
the substantial disparity between the amount that BIF and SAIF members had been
paying for deposit insurance premiums.
Currently, the Federal Deposit Insurance Corporation ("FDIC") has estimated
that, in addition to normal deposit insurance premiums, BIF members will pay a
portion of the FICO payments equal to 1.3 basis points on BIF-insured deposits
compared to 6.3 basis points by SAIF members on SAIF-insured deposits. All
institutions will pay a pro-rata share of the FICO payment on the earlier of
January 1, 2000 or the date upon which the last savings association ceases to
exist. The legislation also requires BIF and SAIF to be merged by January 1,
1999 provided that legislation is adopted to eliminate the savings association
charter and no savings associations remain as of that time.
The FDIC has lowered SAIF assessments to a range comparable to that of BIF
members, although SAIF members must also make the FICO payments described above.
Management cannot predict the precise level of FDIC insurance assessments on an
ongoing basis or whether the BIF and SAIF will eventually be merged.
F-24
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. LEGISLATIVE MATTERS (Cont'd.)
- -----------------------
On August 21, 1996, legislation was enacted to allow for the recapture of
post-1987 tax bad debt reserves ("excess reserves"). Prior to enactment, certain
thrift institutions such as the Savings Bank were allowed deductions for bad
debts under methods more favorable than those granted to other taxpayers. This
legislation repealed the Code Section 593 reserve method of accounting for bad
debts by thrift institutions, effective for taxable years beginning after 1995.
Thrift institutions that are treated as small banks are allowed to utilize the
experience method applicable to such institutions, while thrift institutions
that are treated as large banks are required to use only the specific charge off
method.
For small institutions such as the Savings Bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988 tax
reserves or (b) what the reserves would have been at the close of its last tax
year beginning before January 1, 1996, had the Savings Bank always used the
experience method. The amount of the applicable excess reserves will be
recaptured ratably over a six taxable year period, beginning with the first
taxable year beginning after 1995, subject to a residential loan requirement
which can delay the beginning of the recapture period by up to two years. The
Savings Bank has met the residential loan requirement and, as such, the
recapture period will begin in 1998. At December 31, 1995, the Savings Bank had
approximately $880,000 of excess reserves. Since the percentage of taxable
income method for tax bad debt deductions and the corresponding increase in the
tax bad debt reserve in excess of the base year have been recorded as temporary
differences pursuant to FASB Statement No. 109, this change in the tax law is
not expected to have a material effect on the Savings Bank's consolidated
financial statements.
13. PROPOSED CONVERSION TO STOCK FORM OF OWNERSHIP
- --------------------------------------------------
On October 15, 1997, the Board of Directors the Bank unanimously adopted the
Plan of Reorganization from Mutual Savings Association to Mutual Holding Company
and Stock Issuance (the "Plan"). Pursuant to the Plan, the Bank will: (i)
convert to a stock savings bank as the successor to the Bank in its current
mutual form; (ii) organize the Company as a federally-chartered corporation that
will own 100% of the common stock of the Stock Bank; and (iii) organize the
Mutual Holding Company as a federally-chartered mutual holding company that will
own at least 51% of the Common Stock of the Company so long as the Mutual
Holding Company remains in existence. The Stock Bank will succeed to the
business and operations of the Bank in its mutual form, and the Company will
sell 47% of its Common Stock in the Offering. The Plan must be approved by both
the OTS and by the Savings Bank's depositors and borrowers with outstanding
loans as of September 30, 1996, provided such loans remain outstanding as of the
voting record date (the "Members").
Following the completion of the reorganization, all depositors who had
membership or liquidation rights with respect to the Savings Bank as of the
effective date of the reorganization will continue to have such rights solely
with respect to the holding company so long as they continue to hold deposit
accounts with the Savings Bank. In addition, all persons who become depositors
of the Savings Bank subsequent to the reorganization will have such membership
and liquidation rights with respect to the holding company. Borrower members of
the Savings Bank at the time of the reorganization will have the same membership
rights in the holding company that they had in the Bank immediately prior to the
reorganization so long as their existing borrowings remain outstanding.
Borrowers will not receive membership rights in connection with any new
borrowings made after the reorganization.
F-25
<PAGE>
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. PROPOSED CONVERSION TO STOCK FORM OF OWNERSHIP (Cont'd.)
- --------------------------------------------------
The Company plans to offer to the public shares of common stock representing a
minority ownership of the estimated pro forma market value of the Savings Bank
as determined by an independent appraisal. The Mutual Holding Company will
maintain the majority ownership of the Company. Cost incurred in connection with
the offering, which totalled $5,000 at December 31, 1997, and is included in
other assets, will be recorded as a reduction of the proceeds from the offering.
If the transaction is not consummated, all costs incurred in connection with the
transaction will be expensed. The transaction is subject to approval by the OTS
and the majority of the Bank's members.
F-26
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by the Company, the Bank or the Agent. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus nor any sale hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company or the
Bank since any of the dates as of which information is furnished herein or since
the date hereof.
------------
SUMMARY................................................... 6
SELECTED CONSOLIDATED FINANCIAL AND OTHER
DATA OF AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY.......... 11
RECENT DEVELOPMENTS....................................... 13
RISK FACTORS.............................................. 17
THE MUTUAL HOLDING COMPANY................................ 21
THE COMPANY............................................... 22
THE BANK.................................................. 23
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE............... 24
USE OF PROCEEDS........................................... 24
DIVIDEND POLICY........................................... 25
MARKET FOR THE COMMON STOCK............................... 26
CAPITALIZATION............................................ 26
PRO FORMA DATA............................................ 27
AXIA FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME......................... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 31
BUSINESS OF THE BANK...................................... 40
REGULATION................................................ 59
TAXATION.................................................. 65
MANAGEMENT OF THE COMPANY................................. 67
MANAGEMENT OF THE BANK.................................... 68
PARTICIPATION BY MANAGEMENT............................... 74
THE REORGANIZATION AND OFFERING........................... 75
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY
AND THE BANK.............................................. 88
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY............... 90
TRANSFER AGENT AND REGISTRAR.............................. 91
EXPERTS................................................... 91
LEGAL OPINIONS............................................ 91
ADDITIONAL INFORMATION.................................... 91
------------
Until June 19, 1998 or 25 days after commencement of the Syndicated
Community Offering, if any, whichever is later, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments of subscriptions.
<PAGE>
1,594,475 Shares
Liberty
Bancorp, Inc.
(Proposed Holding Company for
Liberty Bank)
COMMON STOCK
Par Value $1.00 per share
----------
PROSPECTUS
----------
RYAN, BECK & CO., INC.
May 13, 1998
