U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended March 31, 2000
COMMISSION FILE NUMBER 0-27747
Dollar Bancorp, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-2197122
------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
893 Franklin Avenue
Newark, New Jersey 07107
-------------------------------- ------------------------------------
(Address of principal executive (Zip Code)
offices)
Telephone Number: (973) 483-0001
---------------
Securities Registered Pursuant to Section 12(g) of the Exchange Act: Common
Stock, par value $0.01 per share
Check whether the issuer: (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
------ ------
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
The Registrant's revenues for the fiscal year ended March 31, 2000 were
$75,002.
The voting stock of the Company is not traded on an exchange and is
illiquid. Based upon the last sale of the common stock at May 31, 2000 of $37.00
per share the aggregate market value was $2,812,000. The aggregate market value
of the voting equity held by non-affiliates computed by reference to the price
at which the common equity was sold, as of May 31, 2000 was $2,556,108.
The number of shares outstanding of the Registrant's Common Stock, the
Registrant's only class of outstanding capital stock, as of May 31, 2000 was
76,000.
Documents Incorporated by Reference
The following documents, in whole or in part, are specifically
incorporated by reference in the indicated Part of this Annual Report on Form
10-KSB:
I. Portions of the Dollar Bancorp, Inc. 2000 Annual Report to Stockholders
are incorporated by reference into certain items of Part II.
II. Portions of the Dollar Bancorp, Inc. Proxy Statement for the 2000
Annual Meeting of Stockholders are incorporated by reference into certain items
of Part III.
<PAGE>
PART I
Item 1. Business
-----------------
Dollar Bancorp Inc.
Dollar Bancorp, Inc. (the "Company") is a Delaware corporation which
was organized in October 1999. The only significant asset of the Company is its
investment in Dollar Savings Bank (the "Bank"). On October 20, 1999, the Company
acquired all of the issued and outstanding common stock of the Bank in
connection with the Bank's reorganization holding company structure. At that
time, each share of the Bank's common stock was automatically converted into one
share of Company common stock, par value $0.01 per share (the "Common Stock").
At March 31, 2000, the Company had total assets of $10.2 million, total deposits
of $8.6 million, and stockholders' equity of $1.5 million.
The Company's principal office is located at 893 Franklin Avenue,
Newark, New Jersey, 07107, and its telephone number at that address is (973)
483-0001.
Dollar Savings Bank
The Bank is a federally chartered stock savings bank headquartered in
Newark, New Jersey which completed its conversion from the mutual to stock form
of ownership on October 10, 1997. Its deposits are insured up to the maximum
allowable amount by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC"). Through its office in
Newark, the Bank serves communities located in Essex County, New Jersey. The
principal business of the Bank has historically consisted of attracting retail
deposits from the general public and investing those funds primarily in first
mortgage loans on one- to four-family residential real estate, and commercial
real estate loans, and to a lesser extent multi-family real estate. The Bank
also originates other loans consisting primarily of loans secured by deposit
accounts. At March 31, 2000, substantially all of the Bank's real estate
mortgage loans were secured by properties located in the Bank's market area. At
March 31, 2000, total loans receivable were $6.0 million, or 58.8% of total
assets.
The Bank currently offers passbook savings, club accounts and
certificate accounts. The Bank obtains deposits within its primary market area.
The Bank does not accept any brokered deposits. See "--Sources of
Funds--Deposits."
In the past, the Bank has invested in mortgage-backed securities. At
March 31, 2000, mortgage-backed securities totaled $20,879. See "--Investment
Activities."
Recent Developments
On April 17, 2000, the Company entered into a Dealer-Manager Agreement
with stockholders owning 90.1% of the common stock of the Company (the "Selling
Stockholders") and National Securities Corporation ("NSC") whereby NSC would
assist the Selling Stockholders in an effort to sell their shares of common
stock in a private placement. The Dealer-Manager Agreement provides that the
common stock will only been marketed to "accredited investors," as that term is
defined in the General Rules and Regulations of the Securities Act of 1933.
Under the terms of the Dealer- Manager Agreement, the Dealer-Manager Agreement
will expire upon NSC's raising $4.0 million of gross proceeds for the common
stock of the Selling Stockholders, or July 15, 2000, whichever comes first.
Market Area and Competition
As a community-oriented financial institution, the Bank seeks to serve
the financial needs of the families in its market area. The Bank's market area
is Newark, New Jersey which is located in Essex County, New Jersey. The Bank's
market area has been in an extended economic decline over the past fifteen years
and is characterized by high levels of unemployment in lower income
neighborhoods. Newark's population declined over 20% from 1980 to 1995.
The economy of the Bank's market area consists primarily of small
business retailers. The Bank is significantly affected by the Newark economy
which, in recent years, has experienced a significant decline and reduction in
employment due to layoffs, corporate relocations to achieve lower operating
costs, a reduced tax base, and a decline
1
<PAGE>
in the manufacturing sector of the economy. Consequently, the market area has
experienced a decline in real estate values, and the ability of the Bank's
borrowers to make timely payment on their loans has been adversely affected.
These factors have contributed to a decline in the Bank's asset quality in the
early 1990's.
The Bank faces significant competition in attracting deposits from
commercial banks, other savings institutions and credit unions. The Bank faces
additional competition for deposits from short-term money market funds, from
other corporate and government securities funds and from brokerage funds and
insurance companies. The Bank also faces significant competition in the
origination of loans from savings institutions, mortgage banking companies,
credit unions and commercial banks.
Lending Activities
General. The Bank's loan portfolio consists primarily of loans secured
by real estate. Such loans are secured by one- to four-family residences,
commercial real estate loans, and to a lesser extent by multi-family dwellings.
The Bank also originates other loans consisting primarily of loans secured by
deposit accounts. At March 31, 2000, the Bank's loans totaled $6.0 million, of
which $4.0 million or 61.51% were one-to four-family residential mortgage loans,
$1.2 million or 19.29% were commercial loans and $661,000, or 10.25% were
multi-family loans. Of the one- to four- family mortgage loans outstanding at
that date, $3.3 million, or 84.0% were fixed-rate loans, and $635,000, or 16.0%
were adjustable-rate loans. At March 31, 2000, loans secured by deposit accounts
totaled $62,000, or 0.96% of the Bank's loan portfolio.
The Bank's loans-to-one borrower limit is generally the greater of 15%
of unimpaired capital and surplus or $500,000. See "Regulation--Federal
Regulation of Savings Banks." At March 31, 2000, the maximum loan amount which
the Bank could have had outstanding to any one borrower and the borrower's
related entities was approximately $500,000. At March 31, 2000, the Bank had no
loans or groups of loans to related borrowers with outstanding balances in
excess of this amount. The Bank's largest lending relationship at March 31, 2000
was $403,000 in loans-to-one borrower which was secured by one single family and
two multi-family properties. The Bank's second largest lending relationship at
March 31, 2000 was $309,000 which was secured by multi-family real estate. The
Bank's third largest lending relationship totaled $295,000, which consisted of a
real estate loan secured by a single-family residence. At March 31, 2000, all of
these loans were performing in accordance with their terms.
Loan Portfolio Composition. Set forth below is data relating to the
composition of the Bank's loan portfolio by type of loan as of the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------
2000 1999
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family............................ $ 3,967 61.51% $ 4,551 68.21%
Multi-family................................... 661 10.25 688 10.31
Construction................................... 515 7.99 -- --
Commercial..................................... 1,244 19.29 1,385 20.76
-------- ----- ------- -----
Total real estate loans...................... $ 6,387 99.04 $ 6,624 99.28
======== ===== ======= =====
Other loans:
Deposit account................................ $ 62 0.96 $ 48 0.72
-------- ----- ------- -----
Total other loans............................ 62 0.96 48 0.72
-------- ----- ------- -----
Total loans...................................... 6,449 100.00% 6,672 100.00%
======== ====== ======= ======
Less:
Deferred fees and discounts...................... 14 8
Allowance for losses............................. 351 432
Loans in process................................. 111 --
-------- -------
Total loans receivable, net...................... $ 5,973 $ 6,232
======== =======
</TABLE>
2
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed and adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------
2000 1999
--------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-rate loans:
Real estate:
One- to four-family............................ $ 3,332 51.67% $ 3,683 55.20%
Multi-family................................... 661 10.25 688 10.31
Construction................................... 515 7.99 -- --
Commercial..................................... 1,050 16.28 1,188 17.81
-------- ------ ------- -----
Total real estate loans...................... 5,558 86.19 5,559 83.32
Other.......................................... 62 0.96 48 0.72
-------- ------ ------- -----
Total fixed-rate loans....................... 5,620 87.15 5,607 84.04
======== ====== ======= =====
Adjustable-rate loans:
Real estate:
One- to four family............................ 635 9.85 868 13.01
Commercial..................................... 194 3.00 197 2.95
-------- ------ ----- -----
Total adjustable rate loans.................. 829 12.85 1,065 15.96
-------- ------ ------- ------
Total loans.................................. $ 6,449 100.00% $ 6,672 100.00%
======== ====== ======= ======
Less:
Deferred fees.................................... 14 8
Allowance for loan losses........................ 351 432
Loans in process................................. 111 --
-------- -------
Total loans receivable, net.................. $ 5,973 $ 6,232
======== =======
</TABLE>
One- to Four-Family Mortgage Loans. The Bank's primary lending activity
is the origination of one- to four- family, owner-occupied, residential mortgage
loans secured by property located in the State of New Jersey. Loans are
generated through the Bank's marketing efforts, its existing customers and
referrals. The Bank generally has limited its real estate loan originations to
the financing of properties located within the State of New Jersey and will not
make out of state loans. At March 31, 2000, the Bank had $4.0 million, or 61.51%
of its loan portfolio, invested in mortgage loans secured by one- to four-family
residences.
The Bank originates for retention in its portfolio fixed-rate
residential one- to four-family loans with terms of up to 10 years. The Bank
originates balloon loans generally with five year terms and which amortize over
30 years. The Bank's fixed-rate mortgage loans amortize monthly with principle
and interest due each month.
The Bank currently offers ARM loans with amortization periods ranging
up to 30 years. The Bank generally offers ARM loans that adjust at either every
one, three or five years from the date of origination, with interest rate
adjustment limitations up to two percentage points per adjustment and with a cap
of up to six percentage points on total interest rate increases over the life of
the loan. In a rising interest rate environment, such rate limitations may
prevent ARM loans from repricing to market interest rates, which would have an
adverse effect on net interest income. The Bank's ARM loans adjust at 300 basis
points over the corresponding one, three or five year Treasury Bill rates. At
March 31, 2000, ARM loans secured by residential one- to four-family real estate
totaled $635,000. The origination of fixed-rate mortgage loans versus ARM loans
is monitored on an ongoing basis and is affected significantly by the level of
market interest rates, customer preference, the Bank's interest rate gap
position and loan products offered by the Bank's competitors. During fiscal
2000, the Bank originated $390,000 of fixed-rate residential mortgage loans and
no ARM loans secured by residential one- to four-family real estate.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Bank predictable cash flows as would long-term, fixed-rate loans. ARM loans
carry increased credit risk associated with potentially higher monthly payments
by borrowers as general market interest rates increase. It is possible,
therefore,
3
<PAGE>
during periods of rising interest rates, that the risk of delinquencies and
defaults on ARM loans may increase due to the upward adjustment of interest
costs to the borrower, resulting in increased loan losses.
The Bank's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the underlying real property serving as
security for the loan. Due-on-sale clauses are a means of imposing assumption
fees and increasing the interest rate on the Bank's mortgage portfolio during
periods of rising interest rates.
Effective December 19, 1993, all financial institutions were required
to adopt and maintain comprehensive written real estate lending policies that
are consistent with safe and sound banking practices. These lending policies
must reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies adopted by the Federal banking agencies, including the OTS, in December
1992 ("Guidelines"). The Guidelines set forth, pursuant to the mandates of the
FDICIA, uniform regulations prescribing standards for real estate lending. Real
estate lending is defined as extension of credit secured by liens on interests
in real estate or made for the purpose of financing the construction of a
building or other improvements to real estate, regardless of whether a lien has
been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate based upon the size of the institution and the nature and scope of
its operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with an LTV ratio being
the total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must combine all
senior liens when calculating this ratio. The Guidelines, among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%); construction (commercial, multi-family and nonresidential) (80%);
improved property (85%); and owner occupied one- to four-family residential (no
maximum ratio, however, any LTV ratio in excess of 90% requires appropriate
insurance or readily marketable collateral).
Certain institutions are permitted to make real estate loans that do
not conform with the established LTV ratio limits up to 100% of the
institution's total capital. Within this aggregate limit, total loans for all
commercial, agricultural, multi-family and other non-one- to four-family
residential properties should not exceed 30% of total capital. An institution
will come under increased supervisory scrutiny as the total of such loans
approaches these levels. Certain loans are exempt from the LTV ratios (e.g.,
those guaranteed by a government agency, loans to facilitate the sale of real
estate owned, loans renewed, refinanced or restructured by the original
lender(s) to the same borrower(s) where there is no advancement of new funds,
etc.).
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum LTV ratio of 95% for residential property (and 100% for loans
guaranteed by the Veterans Administration) and 90% for all other real estate
loans. The maximum LTV ratio on other types of real estate loans is generally
the lesser of 80% of the appraisal value or the purchase price of the property.
The Bank will not originate residential mortgage loans with LTV ratio in excess
of 80%.
When underwriting residential real estate loans, the Bank reviews and
verifies each loan applicant's employment, income and credit history. Management
believes that stability of income and past credit history are integral parts in
the underwriting process. Generally, the applicant's total monthly mortgage
payment, including all escrow amounts, is limited to 25% of the applicant's
total monthly income. Written appraisals are generally required on real estate
property offered to secure an applicant's loan. The Bank requires fire, casualty
and, where necessary, flood insurance on all properties securing real estate
loans. The Bank also requires title insurance. The Bank will generally not
originate a one- to four-family residential loan in excess of $250,000.
4
<PAGE>
Commercial Real Estate Loans. The Bank originates commercial real
estate loans which may be secured by retail facilities, religious facilities and
office buildings. At March 31,2000, $1.2 million, or 19.29% of the Bank's loan
portfolio consisted of commercial real estate loans. At March 31, 2000,
substantially all of the Bank's commercial real estate loans were secured by
properties within Essex County. The maximum LTV for commercial real estate loans
originated by the Bank is 70%. At March 31, 2000, the largest commercial real
estate loan had a principle balance of $215,000, and was secured by an office
building. The loan was performing in accordance with its terms at March 31,
2000.
The underwriting standards employed by the Bank for commercial real
estate loans include a determination of the applicant's credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan. Written appraisals are obtained on all commercial real
estate loans. The Bank assesses the creditworthiness of the applicant by
reviewing a credit report, financial statements and tax returns on the
applicant.
Loans secured by commercial real estate generally involve a greater
degree of credit risk than one- to four- family mortgage loans. The increased
risk is the result of several factors, including the effects of general economic
conditions in income producing properties and the successful operation or
management of the properties securing the loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related business and real estate property. If the
cash flow from the project is reduced, the borrower's ability to repay the loan
may be impaired.
Multi-family Real Estate Loans. Loans secured by multi-family real
estate constituted $661,000, or 10.25% of total loans at March 31, 2000. At
March 31, 2000, the Bank had 5 loans secured by multi-family real estate. At
March 31, 2000 the Bank's largest multi-family loan had a principle balance of
$237,000 and was performing in accordance with its terms. Multi-family real
estate loans are offered with fixed-rates of interest. Multi-family loans are
underwritten as five year balloon loans with 30 amortization periods.
In underwriting multi-family real estate loans, the Bank reviews the
expected net operating income generated by the real estate to support the debt
service, the age and condition of the collateral, the financial resources and
income level of the borrower and the borrower's experience in owning or managing
similar properties. The Bank generally requires a debt service coverage ratio of
at least 125% of the monthly loan payment. The Bank makes multi-family real
estate loans up to 70% of the appraised value of the property securing the loan.
The Bank always obtains personal guarantees from all multi-family real estate
borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four- family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principle in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate and commercial real estate is typically dependent upon the successful
operation of the related real estate property. If the cash flow from the project
is reduced, the borrower's ability to repay the loan may be impaired.
Other Lending. The Bank currently offers loans secured by deposits. The
Bank currently originates substantially all of its other loans in its primary
market area generally to its existing customers. At March 31, 2000, the Bank's
other loan portfolio totaled $62,000 or 0.96% of total loans.
5
<PAGE>
Loan Maturity Schedule
The following table illustrates the interest rate sensitivity rate of
the Bank's loan portfolio at March 31, 2000. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Multi-family
One-to Four-Family Construction and Commercial Other Total
------------------ --------------- ------------------- ------------------ ---------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ --------- ------ -------- ------ -------- ------ --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Years Ending March 31,
2001.............................. $ 1,311 8.85% $ 515 19.62% $ 706 11.26% $ 62 5.00% $ 2,594 11.55%
2002.............................. 637 10.26 -- -- 264 11.26 -- -- 901 10.55
2003.............................. 367 8.89 -- -- 195 10.20 -- -- 562 9.34
2004.............................. 721 8.81 -- -- 69 9.00 -- -- 790 8.83
2005.............................. 332 9.71 -- -- 597 9.67 -- -- 929 9.68
2006-2010......................... 432 7.48 -- -- 74 9.50 -- -- 506 10.38
2011-2020......................... 167 7.90 -- -- -- -- $ -- -- 167 7.90
------- -------- -------- --------
Total............................. $ 3,967 8.29% $ 515 19.62% $ 1,905 10.48% $ 62 5.00% $ 6,449 10.43%
======= ======== ======== ======== ========
</TABLE>
The total amount of loans due after March 31, 2001 which have predetermined
interest rates is $3.3 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $526,000.
6
<PAGE>
Origination of Loans
Loan originations are developed from continuing business with
depositors and borrowers and walk-in customers. All real estate loans must be
approved by the Bank's Board of Directors. Consumer and other loans secured by
deposits may be approved by the Bank's President.
While the Bank originates both adjustable-rate and fixed-rate loans,
its ability to originate loans to a certain extent is dependent upon the
relative customer demand for loans in its market, which is affected by the
interest rate environment, among other factors. For the year ended March 31,
2000, the Bank originated $1.1 million in fixed-rate loans and no adjustable
rate loans.
Set forth below is a table showing the Bank's loan originations and
repayments for the periods indicated. In recent years the Bank has not purchased
any loans.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
2000 1999
----------- ----------
(In Thousands)
<S> <C> <C>
Total loans receivable at beginning of period............. $ 6,232 $ 6,368
-------- --------
Originations by type:
Adjustable rate:
One- to four-family real estate.......................... -- 474
Non-real estate - other................................... -- --
-------- --------
Total adjustable rate................................... -- 474
-------- --------
Fixed-rate:
One- to four-family real estate.......................... 390 823
Commercial real estate................................... 140 --
Construction............................................ 515
Non-real estate - other................................... 16 283
-------- --------
Total fixed-rate........................................ 1,061 1,106
-------- --------
Total loans originated................................. 1,061 1,580
-------- --------
Sales and repayments:
One- to four-family real estate........................... -- --
Commercial real estate.................................... -- --
Total loans sold........................................ -- --
Principle repayments...................................... 1,356 1,796
-------- -------
Total reductions........................................ --
-------- -------
Increase (decrease) in other items, net................... 36 80
-------- -------
Net increase (decrease)................................. (259) (136)
-------- -------
Total loans receivable, net............................ $ 5,973 $ 6,232
======== ========
</TABLE>
Delinquencies and Classified Assets
The Bank's collection procedures provide that when a loan is 15 days
past due, the Bank will call the borrower and send a letter seeking to obtain a
commitment to make the loan current. If the loan remains delinquent a certified
letter is sent to the borrower stressing the importance of reinstating the loan
and obtaining reasons for the delinquency and additional telephone contact is
attempted. If the borrower is unable or unwilling to make the loan current,
foreclosure proceedings will be initiated once the loan becomes 90 days or more
delinquent.
In recent years the Bank has increased its collection efforts by more
closely monitoring delinquent loans and employing diligent collection efforts.
At March 31, 2000 and 1999 the percentage of total loans delinquent 90 days or
more to net loans receivable were 8.5% and 6.5%, respectively.
Delinquent Loans and Nonperforming Assets. Generally, when a loan
becomes more than 60 days delinquent, the Bank will place the loan on nonaccrual
status and previously accrued interest income on the loan is charged against
7
<PAGE>
current income. The loan will remain on a non-accrual status as long as the loan
is more than 60 days delinquent. The Bank will classify a loan as a
nonperforming asset once it becomes delinquent 60 days or more.
Real estate acquired through foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principle balance of the related loan, or its fair market value, less estimated
selling expenses. Any further write-down of real estate owned is charged against
earnings. At March 31, 2000, the Bank owned one property with a book value of
$275,000 as of March 31, 2000, which is a single-family residence. This property
is currently under contract for sale.
Delinquent consumer loans are handled in a similar manner as to those
described above; however, shorter time frames for each step apply due to the
type of collateral generally associated with such types of loans. The Bank's
procedures for repossession and sale of consumer collateral are subject to
various requirements under New Jersey and federal consumer protection laws.
At March 31, 2000, the Bank had nonperforming loans totaling $657,000,
which were comprised of 6 loans. At that date, the largest nonperforming loan
consisted of a residential real estate loan secured by a single family home.
This loan was originated in 1997, and the original principle amount was
$355,000. At March 31, 2000, the loan had a net principle balance of $278,313.
The borrower's loan payments have been chronically late and loan payments are
more than sixty days in arrears. In 1997, the property securing the loan was
appraised at $415,000.
The Bank has no other nonperforming loans with principle balances in
excess of $100,000.
8
<PAGE>
The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at March 31, 2000.
<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.............. 2 $ 150 3.8% 4 $ 507 12.8% 6 $ 657 16.6%
Commercial....................... -- -- -- -- -- -- -- -- --
Multi-family..................... -- -- -- -- -- -- -- -- --
------ ------ ------ ----- ------- ----- ----- ------ -----
Total (1).................... 2 $ 150 2.3% 4 $ 507 7.9% 6 $ 657 10.2%
====== ====== ====== ===== ======= ===== ===== ====== =====
</TABLE>
-----------------
(1)Percentage of loan category is to total loans.
9
<PAGE>
The table below sets forth the amounts and categories of nonperforming
assets in the Bank's loan portfolio. Loans are placed on non-accrual status when
the loan becomes 60 days or more past due. The Bank does not have any accruing
loans delinquent more than 90 days. Foreclosed assets include assets acquired in
settlement of loans.
<TABLE>
<CAPTION>
At March 31,
--------------------------------
2000 1999
--------- ----------
(Dollars in Thousands)
<S> <C> <C>
Non-accruing loans:
One- to four-family ........................... $ 657 $ 368
Multi-family................................... -- 43
--------- ---------
Total (1).................................... 657 411
--------- ---------
Foreclosed Assets:
One-to four-family............................. 275 --
--------- ---------
Total ....................................... 275 --
--------- ---------
Total nonperforming assets....................... $ 932 $ 411
========= =========
Total as a percentage of total assets............ 9.12% 4.34%
========= =========
</TABLE>
--------------------------
(1) Gross loan amounts
For the years ended March 31, 2000 and March 31, 1999, gross interest
income which would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $69,000 and $40,000,
respectively. The amounts that were included in interest income on such loan
were $38,000 and $26,000 for the years ended March 31, 2000 and March 31, 1999,
respectively.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities, considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full" on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the Bank to sufficient risk to warrant classification in one of
the aforementioned categories but possess weaknesses are designated "special
mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
10
<PAGE>
On the basis of management's review of its assets, at March 31, 2000,
the Bank had classified a total of $948,000 of its loans and other assets as
follows:
<TABLE>
<CAPTION>
At March 31, 2000
-----------------
(In Thousands)
<S> <C>
Special mention............................................... $ 278
Substandard................................................... 670
Doubtful assets............................................... --
Loss assets................................................... --
-----------
Total....................................................... $ 948
===========
General loss allowance........................................ $ 331
===========
Specific loss allowance....................................... $ 20
===========
</TABLE>
Other Loans of Concern. Other than the nonperforming loans set forth in
the tables above, as of March 31, 2000, there were no loans classified by the
Bank with respect to which known information about the possible credit problems
of the borrowers or the cash flows of the security properties have caused
management to doubt the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the nonperforming asset categories.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectible may not be reasonably assured, considers, among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, the amount of
loans outstanding and other factors that warrant recognition in providing for an
adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value minus estimated cost to sell. If fair value at the
date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management, and if the value
declines, a specific provision for losses on such property is established by a
charge to operations. At March 31, 2000, the Bank had one property which was
acquired through foreclosure. This property is a single family residence with a
fair value of $275,000 as of March 31, 2000.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments, and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an integral
part of the examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination. At March 31, 2000, the Bank had a total allowance for loan losses
of $351,000, representing 53.4% of total nonperforming loans and 5.9% of the
Bank's loans, net. See Note 3 of the Notes to Financial Statements.
11
<PAGE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------
2000 1999
------------------------------ ------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ---------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family.............................. $ 68 $ 3,967 61.51% $ 149 $4,551 68.21%
Multi-family..................................... 124 661 10.25 124 688 10.31
Commercial real estate........................... 106 1,244 19.29 106 1,385 20.76
Construction..................................... -- 515 7.99 -- -- --
Other............................................ -- 62 0.96 -- 48 0.72
Unallocated...................................... 53 -- -- 53 -- --
------- ------- ------ ------ ------ ------
Total.......................................... $ 351 $ 6,449 100.00% $ 432 $6,672 100.00%
======= ======= ====== ====== ====== ======
</TABLE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------
2000 1999
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of period............................................... $ 432 $ 348
-------- --------
Charge-offs:
Commercial real estate..................................................... -- --
Total.................................................................... -- --
-------- --------
Recoveries................................................................... -- --
-------- --------
Net charge-offs.............................................................. 100 --
Provisions charged to operations............................................. 19 84
-------- --------
Balance at end of period..................................................... $ 351 $ 432
======== ========
Ratio of net charge-offs during the period to average loans
outstanding during the period 1.72% --%
======== ========
Allowance for loan losses as a percent of total loans outstanding............ 5.44% 6.47%
======== ========
</TABLE>
12
<PAGE>
Investment Activities
General. The Bank must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
generally maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At March 31, 2000, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 41.53%.
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
Mortgage-backed Securities. The Bank has not purchased mortgage-backed
securities within the past 10 years. The mortgage-backed securities in the
Bank's portfolio have fixed-rates of interest. The Bank's mortgage-backed
securities are principally Freddie Mac and Government National Mortgage Bank
("GNMA") obligations. At March 31, 2000, the Bank's investment in
mortgage-backed securities totaled $21,000. At March 31, 2000 all of the Bank's
mortgage-backed securities were classified as held-to-maturity.
Freddie Mac and GNMA certificates are modified pass-through
mortgage-backed securities that represent undivided interests in underlying
pools of fixed-rate, single-family residential mortgages issued by these
government- sponsored entities. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. Freddie Mac provides the certificate holder a guarantee of timely
payments of interest and ultimate collection of principle, whether or not they
have been collected. GNMA's guarantee to the holder timely payments of principle
and interest and are backed by the full faith and credit of the U.S. government.
Mortgage-backed securities generally yield less than the loans that
underlie such securities, because of the cost of payment guarantees or credit
enhancements that reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
obligations of the Bank. In general, mortgage- backed securities issued or
guaranteed by Freddie Mac are weighted at no more than 20% for risk-based
capital purposes, and mortgage-backed securities issued or guaranteed by GNMA
are weighted at 0% for risk-based capital purposes, compared to whole
residential mortgage loans which are assigned a risk weighting of 50% to 100%.
Therefore, mortgage-backed securities allow the Bank to optimize regulatory
capital to a greater extent than non- securitized whole loans.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed
and value of such securities.
13
<PAGE>
The following table shows the balance of mortgage-backed securities as
well as purchase, sale and repayment activities of the Bank for the period
indicated. The Bank did not purchase or sell any mortgage-backed securities
during the periods presented.
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
2000 1999
-------- --------
(In Thousands)
<S> <C> <C>
Balance, beginning......................................................... $ 29 $ 35
Purchases.................................................................. -- --
Sales...................................................................... -- --
Principle repayments:...................................................... (8) (6)
----- -----
Balance, ending............................................................ $ 21 $ 29
===== =====
</TABLE>
At March 31, 2000, the Bank's investment securities consisted of FHLB
stock totaling $56,000. The Bank also has interest bearing cash which consists
of certificates of deposit of insured banks and savings institutions of $2.0
million. The Bank invests excess liquidity in FHLB overnight deposits.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, plus an additional 10% if the investments are fully secured by
readily marketable collateral. At March 31, 2000, the Bank was in compliance
with this regulation. See "Regulation--Federal Regulation of Savings Banks" for
a discussion of additional restrictions on the Bank's investment activities.
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated. At March 31, 2000, the market
value of the Bank's mortgage-backed securities portfolio was $21,000.
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------
2000 1999
----------------------- --------------------
Book % of Book % of
Value Total Value Total
-------- ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities held for investment:
GNMA................................................. $ 18 85.71% $ 25 86.21%
Freddie Mac.......................................... 3 14.29 4 13.79
----- ------ ----- ------
Total mortgage-backed securities....................... $ 21 100.00% $ 29 100.00%
===== ====== ===== ======
</TABLE>
The following table sets forth the composition of the Bank's investment
securities and interest bearing cash at the dates indicated.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
2000 1999
---------------------- -----------------------
Book % of Book % of
Value Total Value Total
--------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
FHLB stock................................................ $ 56 1.7% $ 56 2.2%
======= ====== ====== =====
Interest-bearing deposits with banks...................... $ 3,166 98.3% $2,505 97.8%
======= ====== ====== =====
</TABLE>
14
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10
1 Year Years Years Years Total Investment Securities
--------- -------- -------- --------- -----------------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
--------- -------- -------- --------- -----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits
with other banks $ 3,166 $ -- $ -- $ -- $ 3,166 $3,166
Mortgage-backed securities.......... -- -- 18 3 21 21
Weighted average yield.............. 6.09% --% 7.74% 13.08% 6.11% 6.11%
</TABLE>
The Bank's investment securities portfolio at March 31, 2000, contained
neither tax-exempt securities nor securities of any issuer with an aggregate
book value in excess of 10% of the Bank's retained earnings, excluding those
issued by the U.S. government, or its agencies.
Sources of Funds
General. The Bank's primary sources of funds are deposits, receipt of
principle and interest on loans and securities, interest-earning deposits with
other banks, FHLB advances, and other funds provided from operations.
FHLB advances are used to support lending activities and to assist in
the Bank's asset/liability management strategy. Typically, the Bank does not use
other forms of borrowings. At March 31, 2000, the Bank had no outstanding FHLB
advances.
Deposits. The Bank offers a limited variety of deposit accounts. The
Bank's deposits consist of savings accounts, club accounts and certificate
accounts. The terms of certificate accounts currently range from 30 days to two
years.
The Bank relies primarily on advertising, competitive pricing policies
and customer service to attract and retain these deposits. Currently, the Bank
solicits deposits from its market area only, and does not use brokers to obtain
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in money markets and prevailing interest rates and
competition.
The Bank has become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious.
Notwithstanding the foregoing, a significant percentage of the Bank's
certificates of deposit are for terms of less than one year. At March 31, 2000,
$3.3 million, or 37.8% of the Bank's deposits were in certificates of deposits
with terms of one year or less. The Bank believes that upon maturity most of
these deposits will remain at the Bank. The ability of the Bank to attract and
maintain savings accounts and certificates of deposit, and the rates paid on
these deposits, has been and will continue to be significantly affected by
market conditions.
15
<PAGE>
Savings Portfolio
Deposits in the Bank as of March 31, 2000, were represented by the
deposit programs described below. The following table sets forth the dollar
amount of savings deposits in the various types of deposit programs offered by
the Bank as of the dates indicated.
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------
2000 1999
--------------------- --------------------
Savings Deposits Amount Percent Amount Percent
---------------- ------ -------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Regular savings accounts 2.00%................... $ 5,280 61.32% $ 4,444 56.24%
Club accounts 2.00%.............................. 38 0.44 40 0.51
------- ------ ------- -----
Total non-certificates........................... 5,318 61.76 4,484 56.75
------- ------ ------- -----
Certificates
0.00 - 3.99%..................................... 85 0.99 1,051 13.30
4.00% - 5.99%.................................... 3,170 36.81 2,329 29.47
6.00% - 7.99%.................................... -- -- -- --
------- ------ ------- -----
Total certificates............................... 3,255 37.80 3,380 42.77
------- ------ ------- -----
Accrued interest payable......................... 38 0.44 38 0.48
------- ------ ------- ------
Total deposits................................... $ 8,611 100.00% $ 7,902 100.00%
======= ====== ======= ======
</TABLE>
Deposit Activity
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
2000 1999
-------- ----------
(Dollars In Thousands)
<S> <C> <C>
Opening balance....................................... $ 7,902 $ 7,675
Interest credited..................................... 248 247
Net increase (decrease)............................... 461 (20)
------- --------
Ending balance........................................ 8,611 7,902
======= ========
Percent increase (decrease)........................... 8.97% 2.96%
======= ========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposits and other deposits by time remaining until maturity as of March 31,
2000.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
----------- -------- -------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000........... $1,518 $568 $155 $-- $2,241
Certificates of deposit of $100,000 or more.......... 501 -- 516 -- 1,017
------ -------- ------- ------- ------
Total certificates of deposit........................ $2,019 $568 $671 $-- $3,258
====== ======== ======= ======= ------
Accrued Interest Payable............................. 35
--
Total........................................... $3,293
======
</TABLE>
16
<PAGE>
Time Deposit Maturity Schedule
The following table shows rate and maturity for the Bank's certificates of
deposits as of March 31, 2000.
<TABLE>
<CAPTION>
Percent
2.00-3.99% 4.00-5.99% 6.00-7.99% Total of Total
---------- ---------- ---------- -------- ----------
(Dollars in Thousands)
Certificate accounts maturing in quarter ending:
<S> <C> <C> <C> <C> <C>
June 30, 2000...................... $ 85 $ 1,934 $ -- $ 2,019 61.31%
September 30, 2000................. -- 568 -- 568 17.25
December 31, 2000.................. -- 95 -- 95 2.89
March 31, 2001..................... -- 568 -- 568 17.25
June 30, 2001...................... -- 8 -- 8 .24
September 30, 2001................. -- -- -- -- --
December 31, 2001.................. -- -- -- -- --
Subtotal......................... $ 85 $ 3,173 $ -- $ 3,258 98.94%
======= ========= ======= --------- ------
Accrued Interest Payable........... $ 35 1.06%
--------- ------
Total............................ $ 3,293 100.00%
========= ======
</TABLE>
Borrowings. The Bank's borrowings historically have consisted of
advances from the FHLB of New York. Such advances may be made pursuant to
different credit programs, each of which has its own interest rate and range of
maturities. Federal law limits an institution's borrowings from the FHLB to 20
times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At March 31, 2000, the Bank had no advances from the
FHLB. The Bank has the ability to purchase additional capital stock from the
FHLB.
Employees
At March 31, 2000, the Bank had a total of 5 full-time and no part-time
employees. The Bank's employees are not represented by any collective bargaining
group. Management considers its employee relations to be excellent.
REGULATION AND SUPERVISION
General
As a federally chartered savings institution, the Bank is subject to
extensive regulation by the OTS. Both the OTS and FDIC, as insurer of deposit
accounts, periodically examine the Bank for compliance with various regulatory
requirements. The Bank must file reports with the OTS describing its activities
and financial condition. The Bank is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). This supervision and regulation is intended primarily
for the protection of depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the OTS, the FDIC or the Congress could have a material adverse impact on the
Bank and its operations. Certain of these regulatory requirements are referred
to below or appear elsewhere herein.
Federal Regulation of Savings Banks
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Bank were as of 2000.
When these examinations are conducted by the OTS and the FDIC, the examiners may
require the Bank to provide for higher general or specific loan loss reserves.
17
<PAGE>
All savings associations are subject to a semi-annual assessment, based
upon the savings association's total assets. The Bank's OTS assessment for the
fiscal year ended March 31, 2000, was approximately $3,347.
The OTS also has extensive enforcement authority over all savings
institutions including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws and regulations, and the Bank is prohibited
from engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. The Bank is in
compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
The Bank is in compliance with the loans-to-one borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a capital compliance
plan. A failure to submit a plan or to comply with an approved plan will subject
the institution to further enforcement action. The OTS and the other federal
banking agencies have also adopted proposed additional guidelines on asset
quality and earnings standards. The guidelines were designed to enhance early
identification and resolution of problem assets.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.
In September 1996, Congress enacted legislation to recapitalize the
SAIF by a one-time assessment on all SAIF-insured deposits held as of March 31,
1995. The assessment was 65.7 basis points per $100 in deposits, payable on
November 27, 1996 and amounted to $55,000 for the Bank. In addition, interest
payments on FICO bonds issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation are
now paid jointly by Bank Insurance Fund ("BIF") insured institutions and
SAIF-insured institutions. The FICO assessment is 1.29 basis points per $100 for
BIF deposits and 6.44 basis points per $100 for SAIF deposits. Beginning January
1, 2000, the FICO interest payments will be paid pro rata by banks and thrifts
based on deposits (approximately 2.4 basis points per $100 in deposits). In
addition, as of January 1, 1997, SAIF assessment rates dropped significantly and
currently range from zero to 27 basis points based upon an institution's
regulatory risk classification and capital group.
18
<PAGE>
Regulatory Capital Requirements
Federally insured savings associations, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings associations. Generally, these capital requirements must be
generally as stringent as the comparable capital requirements for national
banks. The OTS is also authorized to impose capital requirements in excess of
these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. Further, the valuation allowance applicable to the write-down
of investments and mortgage-backed securities in accordance with SFAS No. 115 is
excluded from the regulatory capital calculation.
Pursuant to FDICIA, the federal banking agencies, including the OTS,
have also proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities. No assurance can be
given as to the final form of any such regulation.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The federal banking agencies, including the OTS,
have additional enforcement authority over undercapitalized depository
institutions. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions, which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
Any undercapitalized association is also subject to the general
enforcement activity of the OTS and the FDIC, including the appointment of a
receiver or conservator.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose restrictions applicable to such category if
the institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
19
<PAGE>
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability and the value of the Bank's common stock. Bank shareholders do not
have preemptive rights, and therefore, if the Bank is directed by the OTS or the
FDIC to issue additional shares of Common Stock, such issuance may result in the
dilution in the percentage of ownership of the Bank of its stockholders..
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. A "well
capitalized" institution can, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year in an amount up to 100
percent of its net income during the calendar year, plus its retained net income
for the preceding two years. As of March 31, 2000 the Bank was a
"well-capitalized" institution.
Liquidity
All savings associations, including the Bank, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Bank
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
This liquid asset ratio requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 4%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short- term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At March 31, 2000, the Bank was in compliance with both
requirements, with a short-term liquid assets ratio and overall liquid asset
ratio of 41.5%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS. The Bank is in compliance with
these amended rules.
Qualified Thrift Lender Test
The HOLA requires savings institutions to be qualified thrift lenders
("QTL"). To be a QTL, the Bank can either satisfy the QTL test, or the Domestic
Building and Loan Association ("DBLA") Test of the Internal Revenue Code of
1986, as amended (the "Code"). Under the QTL test, a savings bank is required to
maintain at least 65% of its "portfolio assets" (total assets less (i) specified
liquid assets up to 20% of total assets, (ii) intangibles, including goodwill,
and (iii) the value of property used to conduct business) in certain "qualified
thrift investments," primarily residential mortgages and related investments,
including certain mortgage-backed and related securities on a monthly basis in 9
out of every 12 months. Under the DBLA test, an institution must meet a
"business operations test" and a "60% of assets test." The business operations
test requires the business of a DBLA to consist primarily of acquiring the
20
<PAGE>
savings of the public and investing in loans. An institution meets the public
savings requirements when it meets one of two conditions: (i) the institution
acquires its savings in conformity with OTS rules and regulations; or (ii) the
general public holds more than 75% of its deposits, withdrawable shares, and
other obligations. The general public may not include family or related business
groups or persons who are officers or directors of the institution.
The 60% of assets test requires that at least 60% of a DBLA's assets
must consist of assets that thrifts normally hold, except for consumer loans
that are not educational loans. The DBLA test does not include, as the QTL test
does to a limited or optional extent, mortgage loans originated and sold into
the secondary market and subsidiary investments. A savings bank that fails to be
a QTL must either convert to a bank charter or operate under certain
restrictions. As of March 31, 2000, the Bank met the QTL test.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. In addition, a savings association may not lend to
any affiliate engaged in activities not permissible for a bank holding company
or acquire the securities of most affiliates.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Generally, such loans must be
made on terms substantially the same as for loans to unaffiliated individuals.
However, recent regulations now permit executive officers and directors to
receive loans with the same terms as those provided to other employees through
benefit or compensation plans, as long as executive officers or directors are
not given preferential treatment compared to the other participating employees.
Federal Securities Law
The common stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At March 31, 2000, the Bank was in compliance with these reserve requirements.
The balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "--Liquidity."
21
<PAGE>
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of New York, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. At March 31, 2000, the Bank had $56,000 of FHLB stock, which
was in compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock. Dividends received were $3,000, or 5.3%
for the year ended March 31, 2000. No assurance can be given that such dividends
will continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
Item 2. Description of Property
--------------------------------
The Company conducts its business through one office, located in
Newark, New Jersey. The following table sets forth information relating to the
Company's office as of March 31, 2000.
<TABLE>
<CAPTION>
Total
Approximate Net Book
Year Square Value at
Location Opened Footage March 31, 2000
----------------------------------- --------- ------------ -----------------
<S> <C> <C> <C>
Main Office:
893 Franklin Avenue
Newark, New Jersey 1957 2,500 $288,000
</TABLE>
Item 3. Legal Proceedings
--------------------------
The Company is involved, from time to time, as plaintiff or defendant
in various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing the
Company in the proceedings, that the resolution of these proceedings should not
have a material effect on the Company's financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
Not applicable.
22
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------
The "Stockholder Information" and "Common Stock and Related Matters"
sections of the Company's annual report to stockholders for the fiscal year
ended March 31, 2000 (the "2000 Annual Report to Stockholders") are incorporated
herein by reference. No other sections of the 2000 Annual Report to Stockholders
are incorporated herein by this reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's 2000 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 2000
Annual Report to Stockholders are incorporated herein by this reference.
Item 7. Financial Statements
-----------------------------
The material identified in Item 13(a)(1) hereof is incorporated herein
by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
------------------------------------------------------------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
---------------------------------------------------------------------
The "Proposal I--Election of Directors" section of the Company's
definitive proxy statement for its 2000 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference.
Item 10. Executive Compensation
--------------------------------
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
PART IV
Item 13. Exhibits and Reports on Form 8-K
-----------------------------------------
(a)(1) Financial Statements
--------------------
23
<PAGE>
The following documents appear in sections of the Company's 2000 Annual
Report to Stockholders under the same captions, and are incorporated herein by
reference. No other sections of the 2000 Annual Report to Stockholders are
incorporated herein by this reference.
(i) Selected Financial Information and Other Data;
(ii) Management's Discussion and Analysis of Financial
Condition and Results of Operations;
(iii) Independent Auditors' Report;
(iv) Statements of Financial Condition;
(v) Statements of Operations;
(vi) Statements of Stockholders' Equity;
(vii) Statements of Cash Flows; and
(viii) Notes to Financial Statements.
With the exception of the aforementioned sections, the Company's 2000
Annual Report to Stockholders is not deemed filed as part of this Annual Report
on Form 10-KSB, and no other sections of the 2000 Annual Report to Stockholders
are incorporated herein by this reference.
(a)(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Financial
Statements.
(a)(3) Exhibits
--------
Please see the exhibit index which immediately precedes the attached
exhibits.
(b) Reports on Form 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DOLLAR BANCORP, INC.
Date: June 26, 2000 By: \s\ Robert DeMane
--------------------------------------
Robert DeMane, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: \s\ Robert DeMane By: \s\ Susan L. Velardi
--------------------------------- ------------------------------------
Robert DeMane, President, Chief Susan L. Velardi, Vice President
Executive Officer and Director and Secretary
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Date: June 26, 2000 Date: June 26, 2000
By: By: \s\ Ira Geller
--------------------------------- ------------------------------------
David J. Breitkopf, Ira Geller, Director
Chairman of the Board
Date: Date: June 26, 2000
By: By: \s\ Alex Velto
--------------------------------- ------------------------------------
Karin Meyer, Director Alex Velto, Director
Date: Date: June 26, 2000
25
<PAGE>
EXHIBIT INDEX
3.1 Certificate of Incorporation of Dollar Bancorp, Inc.*
3.2 Bylaws of Dollar Bancorp, Inc.*
4 Form of Stock Certificate of Dollar Bancorp, Inc.*
10 Dealer Merger Agreement
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
----------
* Incorporated herein by reference to the Company's Current Report on
Form 8-K, as filed with the SEC on October 21, 1999.
26
<PAGE>
EXHIBIT 10.1
DEALER MERGER AGREEMENT
<PAGE>
DEALER MANAGER AGREEMENT
by and among
DOLLAR BANCORP, INC.,
DOLLAR SAVINGS BANK,
NATIONAL SECURITIES CORPORATION
and
EACH OF THE SELLING SHAREHOLDERS REFERRED TO HEREIN
Dated as of April 17, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I. DEFINITIONS
Section 1.1 Definitions............................................................................1
ARTICLE II. SALE OF SHARES OF COMMON STOCK
Section 2.1 Appointment of Dealer Manager .........................................................6
Section 2.2 Costs, Expenses and Fees ..............................................................6
Section 2.3 Closing ...............................................................................7
ARTICLE III. REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of the Company and the Bank.............................7
Section 3.2 Representations and Warranties of the Selling Shareholders............................14
Section 3.3 Representations and Warranties of the Dealer Manager..................................16
ARTICLE IV. CONDITIONS PRECEDENT TO THE CLOSING
Section 4.1 Conditions to the Obligations of the Parties..........................................17
Section 4.2 Conditions to the Obligations of the Dealer Manager...................................18
Section 4.3 Conditions to the Obligations of the Selling Shareholders.............................20
Section 4.4 Conditions to the Obligations of the Company and the Bank.............................20
ARTICLE V. COVENANTS
Section 5.1 Information...........................................................................20
Section 5.2 Blue Sky..............................................................................20
Section 5.3 Issuance..............................................................................21
Section 5.4 Press Releases........................................................................21
Section 5.5 No Solicitation.......................................................................21
Section 5.6 Compliance ...........................................................................21
ARTICLE VI. INDEMNIFICATION
Section 6.1 Company and Bank Indemnification......................................................22
Section 6.2 Dealer Manager Indemnification........................................................23
Section 6.3 Selling Shareholders Indemnification..................................................24
Section 6.4 Notice................................................................................25
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE VII. CONTRIBUTION
Section 7.1 Contribution..........................................................................25
ARTICLE VIII. BUSINESS COMBINATION ADVISORY SERVICES
AND RIGHT OF FIRST REFUSAL
Section 8.1 Purpose ..............................................................................26
Section 8.2 Engagement Period ....................................................................27
Section 8.3 Compensation .........................................................................27
Section 8.4 Payment of Advisory Fees .............................................................27
Section 8.5 Expenses .............................................................................28
Section 8.6 Indemnification ......................................................................28
Section 8.7 Limitation on Use of Advice ..........................................................28
Section 8.8 Right of First Refusal ...............................................................28
ARTICLE IX. MISCELLANEOUS
Section 9.1 Survival of Provisions................................................................28
Section 9.2 Termination...........................................................................29
Section 9.3 Waiver; Amendments....................................................................30
Section 9.4 Communications........................................................................30
Section 9.5 Entire Agreement; Amendment...........................................................31
Section 9.6 Governing Law and Time................................................................31
Section 9.7 Consent to Jurisdiction...............................................................31
Section 9.8 Severability..........................................................................31
Section 9.9 Headings and Gender...................................................................31
Appendix A Dealer Manager Warrant
Appendix B Form of Employment Agreement with Robert DeMane
Appendix C Form of Opinion of Counsel to the Company and the Bank
Appendix D Indemnification for Advisory Services
</TABLE>
ii
<PAGE>
DEALER MANAGER AGREEMENT
Agreement, dated as of April 17, 2000 (the "Agreement") by and among
Dollar Bancorp, Inc., a Delaware corporation (the "Company"), Dollar Savings
Bank, its wholly-owned subsidiary (the "Bank"), National Securities Corporation
(the "Dealer Manager") and the shareholders of the Company listed on the
signature pages to the Purchase and Sale Agreement (as defined herein) (the
"Selling Shareholders"), with respect to the sale of the shares of Common Stock
of the Selling Shareholders to each of the purchasers listed on the investor
signature pages to the Purchase and Sale Agreement (collectively, the
"Transaction").
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. As used in this Agreement, and unless the context
requires a different meaning, the following terms have the meanings
indicated:
"Acquisition Transaction" has the meaning set forth in Section 5.5.
"Advisory Fee" has the meaning set forth in Section 8.3.
"Advisory Warrant" has the meaning set forth in Section 8.3(b).
"Affiliate" means, with respect to any Person, any Person that,
directly or indirectly, controls, is controlled by or is under common control
with such Person. For the purposes of this definition, "control" (including,
with correlative meanings, the terms "controlled by" and "under common control
with") shall mean the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of such Person, whether
through the ownership of voting securities, by contract or otherwise.
"Agreement" means this Dealer Manager Agreement by and between the
Company, the Bank, the Dealer Manager and the Selling Shareholders, as amended,
supplemented or modified from time to time.
"Attorney-in-Fact" has the meaning set forth in Section 3.2(a).
"Bank" means Dollar Savings Bank, a federally chartered savings bank,
together with its successors.
"Business Combination" has the meaning set forth in Section 8.1.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks and savings institutions in the State of New Jersey are
authorized or obligated by law to close.
<PAGE>
"Capital Securities" of any Person means Capital Stock of the Person
and Stock Equivalents of the Person.
"Capital Stock" of any Person means any and all shares or other equity
interest of such Person.
"Closing" has the meaning set forth in Section 2.3.
"Closing Date" has the meaning set forth in Section 2.3.
"Code" means the Internal Revenue Code of 1986, as amended (or any
successor statute in effect from time to time), and the rules and regulations
promulgated thereunder.
"Commission" means the Securities and Exchange Commission and any
successor thereto.
"Common Stock" means the Common Stock, par value $.01 per share, of the
Company.
"Company" means Dollar Bancorp, Inc., a Delaware corporation, together
with its successors.
"Company Financial Statements" means the (i) consolidated statements of
financial condition of the Bank as of March 31, 1999 and 1998 and consolidated
statements of income, stockholders' equity and cash flows of the Bank for each
of the years ended March 31, 1999 and 1998, accompanied by the related audit
report of Fontanella and Babitts and (ii) an unaudited consolidated statement of
financial condition of the Company as of December 31, 1999 and an unaudited
consolidated statement of income of the Company for the nine months ended
December 31, 1999.
"Confidential Private Placement Memorandum" means the Confidential
Private Placement Memorandum, dated April 14, 2000, as amended or supplemented
by the Company at any time prior to the Closing.
"Custody Agreement" means the Letter Agreement, dated as of April 7,
2000, by Eugene Boffa, as the Custodian, as amended, supplemented and modified
from time to time.
"Dealer Manager" means National Securities Corporation in its capacity
as private placement agent pursuant to this Agreement.
"Engagement Period" has the meaning set forth in Section 8.2.
"Environmental Claim" means any written notice from any governmental
authority or third party alleging potential liability (including without
limitation potential liability for investigating costs, cleanup costs,
governmental response costs, natural resource damages, property damages,
2
<PAGE>
personal injuries or penalties) arising out of, based on, or resulting from the
presence, or release into the environment of any Materials of Environmental
Concern.
"Environmental Laws" means any law, statute, rule or regulation of any
governmental, judicial, legislative, executive, administrative or regulatory
authority of the United States, or of any state, local or foreign government or
any subdivision thereof or of any governmental body or other regulatory or
administrative agency or commission, domestic or foreign (a "Law"), relating to
pollution or protection of the environment (including ambient air, surface
water, groundwater, land surface or subsurface strata), including without
limitation the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, the Resource Conservation and Recovery Act of 1976, as
amended, and other Laws relating to (i) emissions, discharges or releases of
pollutants, contaminants, chemicals, or industrial toxic or hazardous substances
or wastes (collectively known as "Polluting Substances") or (ii) the handling,
storage, disposal, reclamation, recycling or transportation of Polluting
Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended (or any successor statute in effect from time to time).
"Escrow Agent" means US Bank National Association, and any successor
thereto engaged by the Company and the Selling Shareholders pursuant to the
Escrow Agreement.
"Escrow Agreement" means the Escrow Agreement, dated as of April 7,
2000, by and among the Company, the Dealer Manager and the Escrow Agent, as
amended, supplemented or modified from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
and in effect from time to time (or any successor statute in effect from time to
time), and the rules and regulations of the Commission promulgated thereunder.
"FDIA" means the Federal Deposit Insurance Act, as amended (or any
successor statute in effect from time to time).
"FDIC" means the Federal Deposit Insurance Corporation and any
successor thereto.
"Fee" has the meaning set forth in Section 2.2(iii).
"HOLA" means the Home Owners' Loan Act, as amended (or any successor
statute in effect from time to time).
"Letter of Intent" means the letter dated March 21, 2000, by and among
the Dealer Manager, the Company and the Selling Shareholders.
3
<PAGE>
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
encumbrance, charge or security interest of any kind in respect of such asset.
"Management" means the following members of the senior management of
the Company or the Bank: President, Chief Executive Officer, Chief Financial
Officer and any Executive Vice President or persons holding similar positions.
"Material Adverse Effect" means a material adverse effect on the
financial condition, business or results of operations of the Company and the
Bank, taken as a whole; provided, however, that Material Adverse Effect shall
not be deemed to include the impact of the transactions contemplated by this
Agreement or any Related Agreement, including the fees and expenses to be paid
in connection with the consummation of the transactions contemplated by this
Agreement and the Related Agreements or any impact or effect on the Company or
the Bank resulting from actions taken by the Company or the Bank after the
Closing.
"Materials of Environmental Concern" means pollutants, contaminants,
wastes, toxic substances, petroleum and petroleum products and any other
materials regulated under Environmental Laws.
"Non-performing Assets" means the following consolidated assets of the
Company: (i) loans, securities or other assets with respect to which the Company
or the Bank has ceased recognizing interest under generally accepted accounting
principles or as to which any payments of principal or interest are past due 90
days or more as of the applicable date and (ii) Real Estate Owned; and
references herein to the amounts of Non-performing Assets shall mean and refer
to the aggregate carrying value of such assets as stated in the books and
financial statements of the Company and the Bank under generally accepted
accounting principles.
"OTS" means the Office of Thrift Supervision and any successor thereto.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or a political subdivision or an agency or instrumentality thereof.
"Power of Attorney" means the Power of Attorney granted to Robert
DeMane by the Selling Shareholders as the Attorney-in-Fact, dated as of April 7,
2000, as amended, supplemented or modified from time to time.
"Preferred Stock" has the meaning set forth in Section 3.1(a).
"Previously Disclosed" means disclosed either (i) in a letter dated the
date hereof delivered from the Selling Shareholders to the Company, specifically
referring to the appropriate section of this Agreement and describing in
reasonable detail the matters contained therein, or (ii) in the Confidential
Private Placement Memorandum.
4
<PAGE>
"Purchase and Sale Agreement" means the Purchase and Sale Agreement by
and among the Company, the Dealer Manager, the Selling Shareholders and the
Purchasers, as amended, supplemented or modified from time to time.
"Purchaser" means each Person (other than the Company) listed on the
investor signature pages to the Purchase and Sale Agreement, and its permitted
successors and assigns as provided therein, including any Person who becomes a
party thereto by executing and delivering an investor signature page thereto
after the date of the Purchase and Sale Agreement.
"Real Estate Owned" means the consolidated properties of the Company
acquired by foreclosure on a loan or deed-in-lieu thereof or otherwise included
in the Company's real estate owned for purposes of reporting asset quality of
the Bank in its reports filed with the OTS.
"Related Agreements" means the Letter of Intent, the Purchase and Sale
Agreement, the Custody Agreement, the Escrow Agreement and the Power of
Attorney.
"SAIF" means the Savings Association Insurance Fund administered by the
FDIC, and any successor thereto.
"Securities Act" means the Securities Act of 1933, as amended (or any
successor statute thereto as in effect from time to time), and the rules and
regulations of the Commission promulgated thereunder.
"Selling Shareholders" means the shareholders of the Company who have
signed the signature pages to the Purchase and Sale Agreement.
"State" means each of the states of the United States, the District of
Columbia and the Commonwealth of Puerto Rico.
"Stock Equivalents" means, with respect to any Person, options,
warrants, calls, contracts or other rights entered into or issued by such Person
which confer upon the holder thereof the right (whether or not contingent) to
acquire any Capital Stock, voting securities or securities convertible into or
exchangeable for Capital Stock or voting securities of such Person.
"Subsidiary" of any Person means any entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are owned
directly or indirectly by such Person.
"Target Business" has the meaning set forth in Section 8.1.
"Taxes" means all taxes, charges, fees, levies or other governmental
assessments, including, without limitation, all net income, gross income, gross
receipts, sales, use, ad valorem, transfer,
5
<PAGE>
franchise, profits, license, withholding, payroll, employment, excise,
estimated, severance, stamp, occupation, property or other taxes, customs, dues,
fees, assessments or charges of any kind whatsoever, together with any interest
and any penalties, additions to tax or additional amounts imposed by any taxing
authority (domestic or foreign).
"Tax Returns" means all federal, State and local returns relating to
Taxes.
ARTICLE II
SALE OF SHARES OF COMMON STOCK
Section 2.1 Appointment of Dealer Manager. On the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Selling Shareholders hereby appoint National
Securities Corporation as the Dealer Manager to solicit purchase orders for the
shares of Common Stock owned by the Selling Shareholders which are to be sold to
the Purchasers. On the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, National
Securities Corporation hereby accepts such appointment and agrees to use its
best efforts to assist in the solicitation of purchase orders for the shares of
Common Stock owned by the Selling Shareholders in accordance with this
Agreement; provided, however, that the Dealer Manager shall not be obligated to
take any action which is inconsistent with any applicable laws, regulations,
decisions or orders. It is understood that the Dealer Manager is not and will
not be an underwriter of Common Stock, and that there can be no assurance that
its solicitation of purchase orders for Company Common Stock under this
Agreement will be successful.
Section 2.2 Costs, Expenses and Fees.
(i) The costs and expenses (calculated as of the Closing) and the fees
of the transactions contemplated by this Agreement shall be paid at the Closing
out of the gross proceeds from the sale of the shares of Common Stock. The costs
and expenses for such transaction includes, without limitation, (i) a 3.0%
non-accountable expense allowance to be paid to the Dealer Manager in connection
with its engagement hereunder; (ii) the fees and expenses of the Dealer
Manager's counsel; (iii) the cost of obtaining all securities approvals (if
any); (iv) the cost of printing and distributing the offering materials; and (v)
the costs of blue sky qualification (including fees and reasonable expenses
(including any requisite filing fees) of the Dealer Manager's counsel) of the
Common Stock in the various states (if any).
(ii) The Selling Shareholders shall be responsible for any federal and
state taxes or withholding obligations associated with the sale of their shares
of Common Stock pursuant to the Purchase and Sale Agreement. The provisions of
this paragraph are not intended to apply to or in any way impair the
indemnification provisions of Article VI.
(iii) The Dealer Manager will be paid a placement fee of 10% of the
gross proceeds raised from the sale of the Common Stock in immediately available
funds at the Closing Date out of the
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proceeds raised from the sale of shares of Common Stock pursuant to this
Agreement. The placement fee to be paid to the Dealer Manager hereunder is
referred to as the "Fee."
(iv) In connection with the Closing, the Company shall issue to the
Dealer Manager a warrant to purchase 9.947% of the Common Stock of the Company
in the form attached hereto as Appendix A.
Section 2.3 Closing. The purchase and sale of the shares of Common
Stock will take place at a closing (the "Closing") to be held at the offices of
the Dealer Manager's legal counsel in Washington, D.C., on such date as all of
the conditions to the parties' obligations hereunder specified in Article IV of
this Agreement (other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing) have been satisfied or
waived, or at such other location, and on such other Business Day and time as
the parties hereto shall mutually agree. The date on which the Closing is to
occur is referred to herein as the "Closing Date."
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of the Company and the Bank.
The Company and the Bank represent and warrant to, and covenant and agree with,
the Dealer Manager as follows:
(a) Capital Structure. As of the date hereof, the authorized capital
stock of the Company consists of 900,000 shares of Common Stock and 100,000
shares of preferred stock, par value $.01 per share ("Preferred Stock"). As of
the date hereof, there were 76,000 shares of Common Stock issued and outstanding
and no shares of Preferred Stock were issued or outstanding. Immediately prior
to the Closing, subject to the receipt of shareholder approval, the Company
shall amend its Certificate of Incorporation in order to increase its authorized
Capital Stock to 5,000,000 shares of Common Stock and 2,000,000 shares of
Preferred Stock. As of the date hereof, all outstanding shares of Common Stock
have been duly authorized and validly issued and are fully paid and
nonassessable and none of the outstanding shares of Common Stock has been issued
in violation of the preemptive rights of any Person. There are no Stock
Equivalents authorized, issued or outstanding with respect to the Capital Stock
of the Company as of the date hereof.
(b) Organization, Standing and Authority of the Company. The Company is
a Delaware corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware with full corporate power and authority
to own or lease all of its properties and assets and to carry on its business as
now conducted and is duly licensed or qualified to do business and is in good
standing in each jurisdiction in which its ownership or leasing of property or
the conduct of its business requires such licensing or qualification, except
where the failure to be so licensed, qualified or in good standing would not
have a Material Adverse Effect. The Company is duly registered as a savings and
loan holding company under the HOLA and the regulations of the OTS thereunder.
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The Company has heretofore delivered true and complete copies of the Certificate
of Incorporation and Bylaws of the Company as in effect as of the date hereof to
the Dealer Manager.
(c) Ownership of the Bank. The Bank is the only direct or indirect
Subsidiary of the Company. Except for (i) Capital Stock of the Bank, (ii) stock
in the Federal Home Loan Bank of New York, and (iii) securities and other
interests taken in consideration of debts previously contracted, the Company
does not own or have the right to acquire, directly or indirectly, any
outstanding Capital Stock or other voting securities or ownership interests of
any corporation, bank, savings association, partnership, joint venture or other
organization. The outstanding shares of Capital Stock of the Bank have been duly
authorized and validly issued, are fully paid and nonassessable, and are
directly owned by the Company free and clear of all Liens. No Stock Equivalents
are authorized, issued or outstanding with respect to the Capital Stock of the
Bank and there are no agreements, understandings or commitments relating to the
right of the Company to vote or to dispose of such Capital Stock.
(d) Organization, Standing and Authority of the Bank. The Bank is a
federally chartered savings bank duly organized, validly existing and in good
standing under the laws of the United States. The deposit accounts of the Bank
are insured by the SAIF to the maximum extent permitted by law, and the Bank has
paid all premiums and assessments required by law and regulations. The Bank has
full power and authority to own or lease all of its properties and assets and to
carry on its business as now conducted and is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which its ownership or
leasing of property or the conduct of its business requires such qualification,
except where the failure to be so licensed, qualified or in good standing would
not have a Material Adverse Effect. The Company has heretofore delivered true
and complete copies of the Bank's Charter and Bylaws as in effect as of the date
hereof to the Dealer Manager.
(e) Authority. The Company and the Bank have full corporate power and
authority to perform their obligations under this Agreement and each of the
Related Agreements to which they are or will become a party, and the execution,
delivery and performance by the Company and the Bank of this Agreement and each
Related Agreement to which they are or will become a party has been duly
authorized by all necessary corporate action on the part of the Company and the
Bank.
(f) Due Execution. This Agreement and each of the Related Agreements to
which the Company and the Bank are or will become a party, when duly authorized,
executed and delivered by the Company and the Bank, will constitute valid and
binding obligations of the Company and the Bank enforceable against the Company
and the Bank in accordance with their terms, except as (A) enforceability may be
limited by bankruptcy, insolvency, moratorium and similar laws affecting
creditors' rights generally and (B) rights of acceleration and the availability
of equitable remedies may be limited by equitable principles of general
applicability.
(g) No Conflict. The execution, delivery and performance of this
Agreement and each of the Related Agreements by the Company and the Bank will
not conflict with or constitute a breach of, or a default under (i) the
Certificate of Incorporation, Charter or the Bylaws of the Company and
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the Bank, as the case may be, (ii) any obligation, agreement, indenture, bond,
debenture, note, instrument or any other evidence of indebtedness to which the
Company and the Bank are a party or as to which any of their respective assets
are subject, or (iii) any law, ordinance, order, license, rule or other
regulation or demand of any court or governmental agency, arbitration panel or
authority applicable to the Company and the Bank, except, in the case of clauses
(ii) and (iii) above, for such conflicts, breaches or defaults which would not,
individually or in the aggregate, have a Material Adverse Effect. No consent,
approval, order or other authorization of any governmental, administrative or
regulatory body or agency is legally required by or on behalf of the Company or
the Bank in connection with the execution, delivery and performance by the
Company and the Bank of this Agreement and each of the Related Agreements to
which the Company and the Bank is or will become a party. The representations
and warranties set forth in clause (iii) of the second preceding sentence and in
the preceding sentence, insofar as they relate to federal and State banking and
securities law requirements are made in reliance on the representations and
warranties of the Purchasers contained in the Purchase and Sale Agreement.
(h) Regulatory Reports. The Company and the Bank have filed with the
OTS and the FDIC, as the case may be, in correct form the reports required to be
filed under applicable laws and regulations and such reports fairly presented in
all material respects the information contained therein and such reports were in
all material respect complete and accurate and in material compliance with the
requirements of applicable laws and regulations, provided that information as of
a later date shall be deemed to modify information as of an earlier date. In
connection with the most recent examinations of the Company and the Bank by the
OTS and the FDIC, neither the Company or the Bank was required to correct or
change any action, procedure or proceeding which the Company or the Bank
believes has not been corrected or changed as requested.
(i) Financial Statements.
--------------------
(i) The Confidential Private Placement Memorandum includes the
Company Financial Statements, which fairly present the consolidated
financial condition of the Company as of the respective dates set forth
therein, and the consolidated results of operations, stockholders'
equity and cash flows of the Company for the respective periods or as
of the respective dates set forth therein.
(ii) The Company Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently
applied during the periods involved, except as stated therein. The
books and records of the Company and the Bank are being maintained in
material compliance with applicable legal and accounting requirements,
and such books and records accurately reflect in all material respects
all dealings and transactions in respect of the business, assets,
liabilities and affairs of the Company and the Bank.
(iii) Except to the extent (x) reflected, disclosed or
provided for in the consolidated statement of financial condition of
the Company as of December 31,
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1999 (including related notes) and (y) of liabilities incurred since
such date in the ordinary course of business, neither the Company nor
the Bank has any liabilities, whether absolute, accrued, contingent or
otherwise, which would have a Material Adverse Effect.
(iv) The accountants who certified the audited Company
Financial Statements included in the Confidential Private Placement
Memorandum have advised the Company that they are independent public
accountants within the meaning of the Securities Act.
(v) Since December 31, 1999, there have been no material
changes to the Company Financial Statements which would individually or
in the aggregate have a Material Adverse Effect.
(j) Material Adverse Change. Since December 31, 1999, (i) neither the
Company nor the Bank has incurred any material liability (on a consolidated
basis), except in the ordinary course of business consistent with past practice
(excluding the incurrence of expenses or obligations in connection with this
Agreement, any Related Agreement or any of the transactions contemplated hereby
or thereby) and except for such liability or liabilities as would not,
individually or in the aggregate, have a Material Adverse Effect, and (ii) no
events or developments involving the Company or the Bank have occurred which,
individually or in the aggregate, (A) have had a Material Adverse Effect, or (B)
materially impair the ability of the Company to perform its obligations under
this Agreement or any Related Agreement to which it is or will become a party,
in either case, except for any material adverse change caused by (i) general
changes in market interest rates or (ii) regulatory changes affecting the
savings and loan industry.
(k) Environmental Matters.
---------------------
(i) To the knowledge of the Company, the Company and the Bank
are in compliance with all Environmental Laws, except for any
violations of any Environmental Law which would not, individually or in
the aggregate, have a Material Adverse Effect. Neither the Company nor
the Bank has received any communication alleging that the Company or
the Bank is not in such compliance and, to the knowledge of the
Company, there are no present circumstances that would prevent or
interfere with the continuation of such compliance.
(ii) To the knowledge of the Company, none of the properties
owned, leased or operated by the Company or the Bank has been or is in
violation of or liable under any Environmental Law, except for any such
violations or liabilities which would not individually or in the
aggregate have a Material Adverse Effect.
(iii) To the knowledge of the Company, there are no past or
present actions, activities, circumstances, conditions, events or
incidents that would
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reasonably form the basis of any Environmental Claim or other claim or
action or governmental investigation that would result in the
imposition of any liability arising under any Environmental Law against
the Company or the Bank or against any Person whose liability for any
Environmental Claim the Company or the Bank has or may have retained or
assumed either contractually or by operation of law, except such as
would not have a Material Adverse Effect.
(l) Allowance for Loan Losses. The allowance for loan losses reflected
in the consolidated statement of financial condition included in the Company
Financial Statements as of December 31, 1999 is adequate in all material
respects as of such date and has been determined in a manner consistent with the
requirements of generally accepted accounting principles to provide for
reasonably anticipated losses on outstanding loans net of recoveries. The Real
Estate Owned reflected in the consolidated statement of financial condition
included in the Company Financial Statements as of December 31, 1999 is carried
at the lower of cost or fair value, less estimated costs to sell, as required by
generally accepted accounting principles.
(m) Tax Matters. The Company and the Bank have timely filed all Tax
Returns required by applicable law to be filed by them (including, without
limitation, estimated tax returns, income tax returns, information returns and
withholding and employment tax returns) and have paid, or where payment is not
required to have been made, have set up an adequate reserve or accrual for the
payment of, all Taxes required to be paid pursuant to such Tax Returns, except
in all cases where the failure to have timely filed such Tax Returns or have
paid or have set up an adequate reserve or accrual for the payment of all such
Taxes would not have a Material Adverse Effect. As of the date hereof, there is
no audit examination, assessed deficiency, deficiency litigation or refund
litigation with respect to any Taxes of the Company or the Bank. All Taxes due
with respect to completed and settled examinations or concluded litigation
relating to the Company have been paid in full or adequate provision has been
made for any such Taxes on the Company's consolidated statement of financial
condition in accordance with generally accepted accounting principles. The
Company has not executed an extension or waiver of any statute of limitations on
the assessment or collection of any material tax due that is currently in
effect.
(n) ERISA. Neither the Company nor the Bank maintains any "employee
benefit plans" (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")).
(o) Litigation. There are no actions, suits, investigations or legal
proceedings pending against, or to the knowledge of the Company, threatened
against, or affecting the Company or the Bank or their respective properties
before any court or governmental body or agency which would reasonably be
expected to have a Material Adverse Effect or which in any manner challenge the
legality, validity or enforceability of this Agreement, any of the Related
Agreements or the Common Stock, or which would reasonably be expected to
materially impair the ability or obligation of the Company to perform fully on a
timely basis its obligations under this Agreement or under any Related Agreement
to which it will become a party.
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(p) Licenses and Permits. Each of the Company and the Bank has all
permits, licenses, certificates of authority, orders and approvals of, and has
made all filings, applications and registrations with, federal, State, local and
foreign governmental or regulatory bodies that are necessary in order to permit
it to carry on its business as it is presently being conducted and the absence
of which would have a Material Adverse Effect; all such permits, licenses,
certificates of authority, orders and approvals are in full force and effect;
and to the knowledge of the Company, no suspension or cancellation of any of the
same is threatened.
(q) No Default or Violation. Neither the Company nor the Bank currently
is in violation of its Certificate of Incorporation, Charter or its Bylaws, as
the case may be, and, neither the Company nor the Bank is in violation of any
applicable federal, state or local law or ordinance or any order, rule or
regulation of any federal, State, local or other governmental agency or body
(including, without limitation, all banking, securities, safety, health,
environmental, zoning, anti-discrimination, antitrust, and wage and hour laws,
ordinances, orders, rules and regulations), or in default with respect to any
order, writ, injunction or decree of any court, or in default under any order,
license, regulation or demand of any governmental agency, where any of such
violations or defaults would, individually or in the aggregate, reasonably be
expected (i) to have a Material Adverse Effect or (ii) materially adversely
impair the ability of the Company to perform on a timely basis any obligation
which it has under this Agreement, or under any Related Agreement, and neither
the Company nor the Bank has received any notice or communication from any
federal, State or local governmental authority asserting that the Company or the
Bank is in violation of any of the foregoing which would reasonably be expected
to have any effect set forth in clauses (i) or (ii) above. Neither the Company
nor the Bank is subject to any regulatory or supervisory cease and desist order,
agreement, written directive, memorandum of understanding or written commitment,
and none of them has received any written communication requesting that they
enter into any of the foregoing.
(r) Certain Contracts. Neither the Company nor the Bank is in default
or in non- compliance, which default or non-compliance would reasonably be
expected to have a Material Adverse Effect, under any contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to which it
is a party or by which its assets, business or operations may be bound or
affected, whether entered into in the ordinary course of business or otherwise
and whether written or oral, and there has not occurred any event that with the
lapse of time or the giving of notice, or both, would constitute such a default
or non-compliance.
(s) Insurance. The Company and the Bank are insured for such amounts
which the Company and the Bank believe are reasonable with insurance companies
which the Company and the Bank believe are financially sound and reputable
against such risks as the Company and the Bank consider to be necessary or
appropriate and have maintained all insurance required by applicable laws and
regulations, except where the failure to be so insured would not have a Material
Adverse Effect. Neither the Company nor the Bank has received any notice of
cancellation or notice of a material amendment of any such insurance policy or
bond or is in default under such policy or bond, no coverage thereunder is being
disputed and all material claims thereunder have been filed in a
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timely fashion, except where any such cancellation, default or dispute would
not, individually or in the aggregate, have a Material Adverse Effect.
(t) Properties. All real and personal property owned by the Company or
the Bank or presently used by either of them in their respective business is in
an adequate condition (ordinary wear and tear excepted) and is sufficient to
carry on the business of the Company and the Bank in the ordinary course of
business consistent with their past practices. The Company and the Bank have
good and marketable title free and clear of all Liens to all of the material
properties and assets, real and personal, reflected on the consolidated
statement of financial condition of the Company as of December 31, 1999 included
in the Company Financial Statements or acquired after such date, except (i) for
Liens for current taxes not yet due or payable, (ii) for pledges to secure
deposits and other Liens incurred in the ordinary course of its banking
business, (iii) for such Liens, if any, which would not, individually or in the
aggregate, have a Material Adverse Effect and (iv) as reflected on the
consolidated statement of financial condition of the Company as of December 31,
1999 included in the Company Financial Statements. All real and personal
property which is material to the Company's business on a consolidated basis and
leased or licensed by the Company or the Bank is held pursuant to leases or
licenses which are valid and enforceable in accordance with their respective
terms and such leases will not terminate or lapse prior to the Closing Date,
except where such invalidity, unenforceability, termination or lapse would not,
individually or in the aggregate, have a Material Adverse Effect.
(u) Certain Fees. Except for the Fees, costs and expenses payable
pursuant to this Agreement and the fees payable to Eugene Boffa in his capacity
as Custodian, no fees or commissions will be payable by the Company or the Bank
to brokers, finders, investment bankers or banks pursuant to any agreement
entered into by the Company or the Bank with respect to the transactions
contemplated by this Agreement and the Related Agreements.
(v) Similar Offerings. The Company has not, directly or indirectly,
solicited any offer to buy or offered to sell, and will not, directly or
indirectly, solicit any offer to buy or offer to sell, in the United States or
to any United States citizen or resident, any security which is or would be
integrated with the sale of the shares of Common Stock of the Company to the
Purchasers in a manner that would require such Common Stock to be registered
under the Securities Act.
(w) Regulation M. The Company has not taken and will not take, directly
or indirectly, any action designed to, or that might be reasonably expected to,
cause or result in stabilization or manipulation of the price of the shares of
Common Stock which are to be sold to the Purchasers pursuant to the Purchase and
Sale Agreement and this Agreement.
(x) No Registration. It is not necessary in connection with the sale
and delivery to the Purchasers of the shares of Common Stock in the manner
contemplated by the Purchase and Sale Agreement and this Agreement and the
Confidential Private Placement Memorandum to register the shares of Common Stock
under the Securities Act.
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(y) Memorandum. The Confidential Private Placement Memorandum does not,
and at the Closing Date will not, include an untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. Other than as set forth above, the Company makes no representation
or warranty as to compliance by the Company with any federal or State securities
disclosure requirements.
(z) Disclosure. None of the representations and warranties of the
Company or the Bank or any of the information or documents which have been
Previously Disclosed pursuant hereto are false or misleading in any material
respect or contain any untrue statement of a material fact, or omit to state any
material fact required to be stated or necessary to make any such information or
document, at the time and in light of the circumstances, not misleading.
Section 3.2 Representations and Warranties of the Selling Shareholders.
The Selling Shareholders represent and warrant to, and covenant and agree with,
the Dealer Manager as follows:
(a) Good Title and Other Matters.
----------------------------
(i) The Selling Shareholders have, and immediately prior to
the Closing such Selling Shareholders will have, good and valid title
to their shares of Common Stock, free and clear of all Liens.
(ii) Certificates in negotiable form representing all of the
shares of Common Stock have been placed in custody under the Custody
Agreement, duly executed and delivered by such Selling Shareholder to
the Custodian, and such Selling Shareholders have duly executed and
delivered the Power of Attorney, appointing the Selling Shareholders'
attorney-in-fact (the "Attorney-in-Fact") with authority to execute and
deliver this Agreement and the Related Agreements to which the Selling
Shareholders are or will become a party on behalf of such Selling
Shareholders, to authorize the delivery of the shares of Common Stock
to be sold pursuant to the Purchase and Sale Agreement and otherwise to
act on behalf of such Selling Shareholders in connection with the
transactions contemplated by this Agreement and the Related Agreements
to which the Selling Shareholders are or will become a party.
(iii) The obligations of the Selling Shareholders hereunder
are not intended to be terminated by operation of law, whether by the
death or incapacity of any individual Selling Shareholder or by the
occurrence of any other event; if any individual Selling Shareholder
should die or become incapacitated, or if any other such event should
occur, before the completion of the transaction contemplated hereunder,
it is the intention of the Selling Shareholders that certificates
representing the shares of Common Stock shall be delivered by or on
behalf of the Selling Shareholders in accordance with the terms and
conditions of this Agreement and of
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the Related Agreements to which the Selling Shareholders are or will
become a party; and it is the intention of the Selling Shareholders
that actions taken by the Attorney- in-Fact pursuant to the Power of
Attorney shall be as valid as if such death, incapacity or other event
had not occurred, regardless of whether or not the Custodian, the
Attorney-in-Fact, or any of them, shall have received notice of such
death, incapacity or other event.
(b) Authority. The Selling Shareholders have full power and authority
to perform their obligations under this Agreement and the Related Agreements to
which the Selling Shareholders are or will become a party.
(c) Due Execution. This Agreement and the Related Agreements to which
the Selling Shareholders are or will become a party constitute valid and binding
obligations of the Selling Shareholders enforceable against the Selling
Shareholders in accordance with their respective terms, except as (A)
enforceability may be limited by bankruptcy, insolvency, moratorium and similar
laws affecting creditors' rights generally and (B) rights of acceleration and
the availability of equitable remedies may be limited by equitable principles of
general applicability.
(d) No Conflict. The execution, delivery and performance of this
Agreement and the Related Agreements to which the Selling Shareholders are or
will become a party by the Selling Shareholders will not individually or in the
aggregate, materially impair the ability of the Selling Shareholders to perform
their obligations under this Agreement or the Related Agreements to which the
Selling Shareholders are or will become a party.
(f) Material Adverse Change. To the knowledge of the Selling
Shareholders, since December 31 ,1999, no events or developments involving the
Company or the Bank have occurred which, individually or in the aggregate,
materially impair the ability of the Selling Shareholders to perform their
obligations under this Agreement or the Related Agreements to which the Selling
Shareholders are or will become a party.
(g) Litigation. There are no actions, suits, investigations or legal
proceedings pending against, or to the knowledge of the Selling Shareholders,
threatened against, or affecting the Selling Shareholders before any court or
governmental body or agency which would reasonably be expected to in any manner
challenge the legality, validity or enforceability of this Agreement, any of the
Related Agreements to which the Selling Shareholders are or will become a party
or the Common Stock to be redeemed by the Company for such Selling Shareholders,
or which would reasonably be expected to materially impair the ability or
obligation of the Selling Shareholders to perform fully on a timely basis their
obligations under this Agreement or any Related Agreement to which the Selling
Shareholders are or will become a party.
(h) Certain Fees. Except for the Fee, costs and expenses payable to
the Dealer Manager pursuant to this Agreement, no fees or commissions will be
payable to brokers, finders, investment bankers or banks pursuant to any
agreement entered into by the Selling Shareholders with respect
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to their sale of shares of Common Stock or the purchase of Common Stock by the
Purchasers or any of the other transactions contemplated by this Agreement or
the Related Agreements to which the Selling Shareholders are or will become a
party. The Selling Shareholders represent, warrant and agree that to the extent
any fees or commissions shall be payable by the Selling Shareholders to brokers,
finders, investment bankers or banks pursuant to any other agreement entered
into by the Selling Shareholders with respect to the transactions contemplated
by this Agreement or the Related Agreements to which the Selling Shareholders
are or will become a party, the Selling Shareholders shall be jointly and
severally responsible for the payment of such fees and commissions.
(i) Private Offering. Neither the Selling Shareholders nor any Person
authorized to act on their behalf, has taken or will take any action which might
subject the sale of the shares of Common Stock to the registration requirements
of the Securities Act or comparable provisions of any applicable State
securities laws.
(j) Regulation M. The Selling Shareholders have not taken and will not
take, directly or indirectly, any action designed to, or that might be
reasonably expected to, cause or result in stabilization or manipulation of the
price of the shares of Common Stock which are to be sold to the Purchasers
pursuant to the Purchase and Sale Agreement and this Agreement.
Section 3.3 Representations and Warranties of Dealer Manager.
(a) The Dealer Manager has offered the shares of Common Stock for sale,
solicited offers to buy the shares of Common Stock, and otherwise negotiated in
respect of the shares of Common Stock only in a manner that conformed to the
offering procedures set forth in the Confidential Private Placement Memorandum.
(b) The Dealer Manager has delivered to each offeree a copy of the
Confidential Private Placement Memorandum.
(c) Immediately prior to making the offer to each offeree, the Dealer
Manager will have reasonable grounds to believe and will believe that each such
offeree was an "accredited investor" as such term is defined in Rule 501 of the
General Rules and Regulations of the Commission under the Securities Act. The
representations and warranties contained in this Section 3.3(c), insofar as they
relate to federal and State securities laws requirements, are made in reliance
on the representations and warranties of the Purchasers contained in Section 3.3
of the Purchase and Sale Agreement.
(d) The Dealer Manager will not, directly or through any agent, offer
the shares of Common Stock for sale, or solicit any offers to buy the shares of
Common Stock, or otherwise negotiate with any person with respect to the shares
of Common Stock on the basis of general solicitation or general advertising,
including without limitation, any advertisement, article, notice or other
communication published in any newspaper, magazine or similar medium or
broadcast over television or radio; or, distribute any letters, circulars,
notices, memoranda, or other written
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communications of a general nature to customers announcing or describing, or
inviting inquiries concerning the offering of the shares of Common Stock.
(e) The Dealer Manager is a corporation and is validly existing in good
standing under the laws of the State of Washington with full power and authority
to perform its obligations under this Agreement.
(f) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly authorized by
all necessary action on the part of the Dealer Manager, and this Agreement has
been duly and validly executed and delivered by the Dealer Manager and is the
legal, valid and binding agreement of the Dealer Manager, enforceable in
accordance with its terms, except as may be limited by bankruptcy, insolvency or
other laws affecting the enforceability of the rights of creditors generally and
judicial limitations on the right of specific performance.
(g) Each of the Dealer Manager and its employees, agents and
representatives who shall perform any of the services hereunder shall be duly
authorized and empowered, and shall have all licenses, approvals and permits
necessary to perform such services.
(h) No approval of any regulatory or supervisory or other public
authority is required in connection with the Dealer Manager's execution and
delivery of this Agreement, except as may have been received.
(i) There is no suit or proceeding or charge or action before or by any
court, regulatory authority or government agency or body or, to the best
knowledge of the Dealer Manager, pending or threatened, which might materially
adversely affect the Dealer Manager's performance under this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT TO THE CLOSING
Section 4.1 Conditions to the Obligations of the Parties. The
requirement of each of the parties hereto to fulfill their obligations hereunder
at the Closing shall be subject to the satisfaction or waiver prior to the
Closing of the following conditions:
(a) All requirements prescribed by law which are necessary to the
consummation of the transactions contemplated by this Agreement and the Related
Agreements shall have been satisfied.
(b) No party to this Agreement or the Related Agreements shall be
subject to any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits the consummation of any of the
transactions contemplated by this Agreement or the Related Agreements.
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(c) No statute, rule or regulation shall have been enacted, entered,
promulgated, interpreted, applied or enforced by any governmental authority
which prohibits, restricts or makes illegal consummation of any of the
transactions contemplated by this Agreement or the Related Agreements.
(d) The Selling Shareholders shall have completed the sale of all
2,000,000 shares of Common Stock owned by the Selling Shareholders as
contemplated by this Agreement, the aggregate consideration to be paid to the
Selling Shareholders for the Common Stock pursuant to Section 2.2(b) of the
Purchase and Sale Agreement shall have been paid, and the Fee, costs and
expenses provided hereunder shall have been paid from the proceeds of the
consideration received by the Selling Shareholders.
Section 4.2 Conditions to the Obligations of the Dealer Manager. The
requirement of the Dealer Manager to fulfill its obligations hereunder shall be
subject to the satisfaction or waiver prior to the Closing of the following
conditions:
(a) Each of the representations and warranties of the Company and the
Bank contained in this Agreement and the Related Agreements to which they are a
party shall be true and correct in all material respects as of the date of such
agreements and as of the Closing Date as if made on the Closing Date (or on the
date when made in the case of any representation or warranty which specifically
relates to an earlier date); the Company and the Bank shall have performed, in
all material respects, each of its covenants and agreements contained in this
Agreement and the Related Agreements to which they are a party to be performed
prior to the Closing; and the Dealer Manager and the Selling Shareholders shall
have received a certificate signed by the Chief Executive Officer and the Chief
Financial Officer of the Company and the Bank, dated the Closing Date, to the
foregoing effect.
(b) Each of the representations and warranties of the Selling
Shareholders contained in this Agreement and the Purchase and Sale Agreement
shall be true and correct in all material respects as of the date of such
agreements and as of the Closing Date as if made on the Closing Date (or on the
date when made in the case of any representation or warranty which specifically
relates to an earlier date); the Selling Shareholders shall have performed, in
all material respects, each of their covenants and agreements contained in the
Purchase and Sale Agreement and this Agreement to be performed prior to the
Closing; and the Company and the Dealer Manager shall have received a
certificate signed by Robert DeMane, as Attorney-in-Fact for the Selling
Shareholders, dated the Closing Date, to the foregoing effect.
(c) The Company shall have taken all appropriate actions required to
split the Common Stock, to be effective immediately prior to the Closing, which
will result in 2,220,914 shares of Common Stock being issued and outstanding.
(d) The Company shall have obtained the requisite stockholder approval
of an amendment to its Certificate of Incorporation to increase its authorized
Common Stock and Preferred
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Stock to 5,000,000 and 2,000,000 shares, respectively, and shall have filed with
the Secretary of State of the State of Delaware the appropriate documentation in
order to effect such amendment.
(e) Effective upon consummation of the Transaction, all of the
directors other than Mr. DeMane shall have resigned as directors of the Company
and the Bank and Messrs. Michael Allocca, Leonard Makowka, Robert Gault, Peter
Rodney Jackson, Donald Berg and Phil Esposito shall have been elected directors
of the Company and the Bank, subject to any required filing, notice or approval
of the OTS.
(f) Robert DeMane shall have executed the Employment Agreement attached
hereto as Appendix B.
(g) At the Closing Date, the Dealer Manager shall have received the
favorable opinion, dated as of the Closing Date, of Luse Lehman Gorman Pomerenk
and Schick, counsel for the Company and the Bank, the form of which is attached
hereto as Appendix C. Such counsel may state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company or Bank, as the case may be, and
certificates of public officials.
(h) At the Closing Date, there shall not have been, since the date
hereof or since the respective dates as of which information is given in the
Confidential Private Placement Memorandum, any material adverse change in the
financial condition, results of operations or business affairs of the Company
and the Bank considered as one enterprise, whether or not arising in the
ordinary course of business, and the Dealer Manager and the Selling Shareholders
shall have received a certificate of the President and Chief Executive Officer
of the Company and the Bank and the Chief Financial Officer of the Company and
the Bank, each dated as of Closing Date, to the effect that, except as
Previously Disclosed, (i) there has been no such material adverse change, (ii)
there shall have been no material transaction entered into by the Company from
the latest date as of which the financial condition of the Company as set forth
in the Confidential Private Placement Memorandum other than transactions
referred to or contemplated therein and transactions in the ordinary cause of
business, and (iii) the Company shall not have received from the OTS or the FDIC
any direction (oral or written) to make any material change in the method of
conducting its business with which it has not complied (which direction, if any,
shall have been disclosed to the Dealer Manager) or which materially and
adversely would affect the business, financial condition or results of
operations of the Company or the Bank.
(i) The Company shall have executed and delivered the Dealer Manager
Warrant to the Dealer Manager.
(j) The Dealer Manager shall have received such other certificates,
opinions, documents and instruments related to the transactions contemplated
hereby as may have been reasonably required by the Dealer Manager and are
customary for transactions of this type, and all documents,
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instruments and other legal matters in connection with the transactions
contemplated by this Agreement shall be reasonably satisfactory in form and
substance to it and its counsel.
Section 4.3 Conditions to Obligations of the Selling Shareholders. The
requirement of the Selling Shareholders to fulfill their obligations under this
Agreement shall be subject to the satisfaction or waiver prior to the Closing of
the following conditions:
(a) Each of the representations and warranties of the Dealer Manager
contained in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and as of the Closing Date as if made on the
Closing Date.
(b) Each Purchaser shall have delivered the applicable consideration
for each of the shares of Common Stock to be purchased by it pursuant to the
Purchase Agreement, such amount to be payable by wire transfer of immediately
available funds to an account with a bank designated by the Dealer Manager, by
notice to each Purchaser to be provided no later than two Business Days prior to
the Closing Date.
Section 4.4 Conditions to Obligations of the Company and the Bank. The
requirement of the Company and the Bank to fulfill their obligations hereunder,
shall be subject to the satisfaction, or waiver prior to the Closing, of the
following condition: No party to this Agreement (other than the Company) shall
be in material breach of this Agreement unless such breach shall have been
waived in writing by each of the other parties to this Agreement.
ARTICLE V
COVENANTS
Section 5.1 Information. If any event or circumstance shall occur as a
result of which it is necessary, in the reasonable opinion of counsel for the
Dealer Manager, to amend or supplement the Confidential Private Placement
Memorandum in order to make the Confidential Private Placement Memorandum not
misleading in the light of the circumstances existing at the time it is
delivered to a Purchaser, the Company will forthwith amend or supplement the
Confidential Private Placement Memorandum (in form and substance satisfactory to
counsel for the Dealer Manager) so that, as so amended or supplemented, the
Confidential Private Placement Memorandum will not include an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances existing at the time
it is delivered to a Purchaser, not misleading, and the Company will furnish to
the Dealer Manager a reasonable number of copies of such amendment or
supplement. For the purpose of this subsection, the Company will furnish such
information with respect to itself as the Dealer Manager may from time to time
reasonably request.
Section 5.2 Blue Sky. The Company will take all reasonably necessary
action, in cooperation with the Dealer Manager, to qualify, to the extent
required, the shares of Common Stock for offering and sale under the applicable
securities laws of such states of the United States and other
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jurisdictions as the Dealer Manager and the Company have agreed; provided,
however, that the Company shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation in any jurisdiction in
which it is not so qualified.
Section 5.3 Issuance. The Company will not, without the prior written
consent of the Dealer Manager, sell or issue, contract to sell or otherwise
dispose of, any shares of Common Stock or other securities convertible into
shares of Common Stock (other than the Warrant to be issued to the Dealer
Manager hereunder) for a period of 180 days following the Closing Date.
Section 5.4 Press Releases. The Company and the Dealer Manager shall
agree with each other as to the form and substance of any press release related
to this Agreement, the Related Agreements or the transactions contemplated
hereby or thereby, and consult with each other as to the form and substance of
other public disclosures which may relate to the transactions contemplated by
this Agreement or the Related Agreements, provided, however, that nothing
contained herein shall prohibit any party, following notification to such other
party, from making any disclosure which it determines in good faith is required
by law or regulation.
Section 5.5 No Solicitation. Between the time of execution of this
Agreement and the earlier of (i) the Closing or (ii) termination of this
Agreement in accordance with Section 8.2 hereof, neither the Selling
Shareholders, the Company or any of the Company's directors, officers or
employees, nor any representatives or agents of the Selling Shareholders the
Company shall (i) execute any agreement, letter or undertaking of any kind
whatsoever with respect to any acquisition, lease or purchase of all or a
substantial portion of the assets of, or any equity interest in (including,
without limitation, any sale of all or a portion of the Selling Shareholders'
shares of Common Stock), the Company or any business combination with the
Company (an "Acquisition Transaction"), other than as contemplated by this
Agreement, or (ii) solicit or encourage inquiries or proposals with respect to,
furnish any information relating to, or participate in any negotiations or
discussions concerning, an Acquisition Transaction. Other than as set forth
herein, the Selling Shareholders and/or the Company will immediately notify the
Dealer Manager orally and in writing if any such inquiries or proposals are
received by, and such information is required from, or any such negotiations or
discussions are sought to be initiated with, the Company.
Section 5.6 Compliance. The Company will conduct the purchase and sale
of the Securities in all material respects in accordance with all applicable
laws, statutes, rules, regulations, decisions and orders. The covenant contained
in this Section 5.6 insofar at it relates to federal and state securities law
requirements, is made in reliance on the representations and warranties of the
Purchasers contained in Section 3.2 of the Purchase Agreement.
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ARTICLE VI
INDEMNIFICATION
Section 6.1 Company and Bank Indemnification. The Company and the Bank
agree to indemnify and hold harmless the Dealer Manager, its affiliates, each
person, if any, who controls the Dealer Manager, within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, and their respective
partners, directors, officers, employees and agents (including counsel for the
Dealer Manager) as follows:
(i) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, related to or arising out
of the offer, purchase and sale of the Common Stock or any action taken
by the Dealer Manager where acting as described in Article II hereof,
except to the extent that any loss, liability, claim, damage or expense
is found in a final judgment by a court of competent jurisdiction to
have resulted primarily from the Dealer Manager's gross negligence or
willful misconduct;
(ii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, based upon or arising out
of any untrue statement or alleged untrue statement of a material fact
contained in the Confidential Private Placement Memorandum with respect
to the Company and the Bank (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, provided,
however, that the Company and the Bank shall not be liable in any such
case to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in the
Confidential Private Placement Memorandum (or any amendment or
supplement thereto) in reliance upon and in conformity with written
information furnished by the Dealer Manager expressly for use therein;
(iii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation involving or
affecting the Company and the Bank, or any investigation or proceeding
by any governmental agency or body, commenced or threatened involving
or affecting the Company or the Bank, or of any claim whatsoever
described in clauses (i) or (ii) above, if such settlement is effected
with the written consent of the Company and the Bank, which consent
shall not be unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as
incurred (including, subject to Section 6.2 hereof, the fees and
disbursements of counsel chosen by the Dealer Manager), reasonably
incurred in investigating, preparing for or defending against any
litigation, or any investigation, proceeding or inquiry by any
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governmental agency or body, commenced or threatened, or any claim
whatsoever described in clauses (i) or (ii) above, to the extent that
any such expense is not paid under (i), (ii) or (iii) above whether or
not the purchase and sale of the shares of Common Stock is consummated,
except to the extent that any such expense is incurred in connection
with a final judgment by a court of competent jurisdiction to have
resulted primarily from the Dealer Manager's gross negligence or
willful misconduct;
(v) In addition to, and without limiting, the provisions of
Section 6.1 hereof, in the event that the Dealer Manager, any person,
if any, who controls the Dealer Manager within the meaning of Section
15 of the Securities Act or Section 20 of the Securities Act or any of
its partners, directors, officers, employees and agents is requested or
required to appear as a witness or otherwise gives testimony in any
action, proceeding, investigation or inquiry involving or affecting the
Company and the Bank, which is brought by or on behalf of or against
the Company and the Bank, the Dealer Manager or any of their respective
affiliates in which the Dealer Manager or such person or agent is not
named as a defendant, the Company and the Bank agree to reimburse the
Dealer Manager for all reasonable and necessary out-of-pocket expenses
incurred by it in connection with preparing or appearing as a witness
or otherwise giving testimony.
Section 6.2 Dealer Manager Indemnification. The Dealer Manager agrees
to indemnify and hold harmless the Company and the Bank and each of its
directors, officers and each person, if any, who controls the Company and the
Bank, within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, against any loss, liability, claim, damage and expense to
which the Company and the Bank or any such director, officer, or controlling
person may become subject under any applicable federal or state law or
otherwise, insofar as such loss, liability, claim, damage and expense arises out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Confidential Private Placement Memorandum with
respect to information furnished to the Company and the Bank by or through the
Dealer Manager in writing expressly for use therein (or any amendment or
supplement thereto) or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, and will reimburse any
legal or other expenses reasonably incurred by the Company and the Bank or any
such director, officer or controlling person in connection with investigating or
defending any such loss, liability, claim, damage, action or proceeding;
provided, however, that the Dealer Manager will be liable in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Confidential Private
Placement Memorandum (or any amendment or supplement thereto) in reliance upon
and in conformity with written information furnished to the Company and the Bank
by or through the Dealer Manager expressly for use therein. In no event shall
the Dealer Manager be liable for an amount which exceeds the Fee which the
Dealer Manager has received or would have received pursuant to this Agreement.
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Section 6.3 Selling Shareholders Indemnification. The Selling
Shareholders, jointly and severally, agree to indemnify and hold harmless the
Dealer Manager, each person, if any, who controls the Dealer Manager, within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
and its respective partners, directors, officers, employees and agents
(including counsel for the Dealer Manager) as follows:
(i) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, related to or arising out
of the breach by the Selling Shareholders of their representations,
warranties or covenants set forth in this Agreement or the Related
Agreements to which they are a party, except to the extent that any
such expense is incurred in connection with a final judgment by a court
of competent jurisdiction to have resulted primarily from the Dealer
Manager's gross negligence or willful misconduct;
(ii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, based upon or arising out
of any untrue statement or alleged untrue statement of a material fact
contained in the Confidential Private Placement Memorandum with respect
to information furnished by the Selling Shareholders expressly for use
therein (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, provided, however, that the
Selling Shareholders shall not be liable in any such case to the extent
that any such loss, liability, claim, damage or expense arises out of
or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Confidential Private Placement
Memorandum (or any amendment or supplement thereto) in reliance upon
and in conformity with information furnished by the Company and the
Bank or written information furnished by the Dealer Manager expressly
for use therein;
(iii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation involving or
affecting the Selling Shareholders, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, involving
or affecting the Selling Shareholders, or of any claim whatsoever
described in clauses (i) or (ii) above, if such settlement is effected
with the written consent of the Selling Shareholders which consent
shall not be unreasonable withheld;
(iv) from and against any and all expense whatsoever, as
incurred (including, subject to Section 6.2 hereof, the fees and
disbursements of counsel chosen by the Dealer Manager), reasonably
incurred in investigating, preparing for or defending against any
litigation, or any investigation, proceeding or inquiry by any
governmental agency or body, commenced or threatened, or any claim
whatsoever described in clauses (i) or (ii) above, to the extent that
any such expense is not paid
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under (i), (ii) or (iii) above whether or not the purchase and sale of
the shares of Common Stock is consummated, except to the extent that
any such expense is incurred in connection with a final judgment by a
court of competent jurisdiction to have resulted primarily from the
Dealer Manager's gross negligence or willful misconduct; and
(v) In addition to, and without limiting, the provisions of
Section 6.3 hereof, in the event that the Dealer Manager, any person,
if any, who controls the Dealer Manager within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act or any of
its partners, directors, officers, employees and agents is requested or
required to appear as a witness or otherwise gives testimony in any
action, proceeding, investigation or inquiry involving or affecting the
Selling Shareholders, which is brought by or on behalf of or against
the Selling Shareholders, the Dealer Manager or any of their respective
affiliates in which the Dealer Manager or such person or agent is not
named as a defendant, the Selling Shareholders agree to reimburse the
Dealer Manager for all reasonable and necessary out-of-pocket expenses
incurred by it in connection with preparing or appearing as a witness
or otherwise giving testimony.
Section 6.4 Notice. Any party seeking indemnification shall give notice
as promptly as reasonably practicable to the other parties hereto of any action
commenced against it, but failure to so notify the other parties hereto shall
not relieve the party seeking indemnification from any liability which it may
have otherwise than on account of this indemnity agreement.
ARTICLE VII
CONTRIBUTION
Section 7.1 Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Article VI hereof is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Selling
Shareholders, the Company and the Bank and the Dealer Manager shall contribute
to the aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by said indemnity agreement incurred by the Selling Shareholders,
the Company and the Bank and the Dealer Manager, as incurred, in such
proportions (i) that the Dealer Manager is responsible for that portion
represented by the percentage that the Fee received by the Dealer Manager
pursuant to this Agreement (before deducting expenses) bears to the maximum
aggregate gross proceeds from the sale of the shares of Common Stock pursuant to
this Agreement and the Purchase Agreement and the Selling Shareholders and the
Company and the Bank severally but not jointly responsible for the balance or
(ii) if, but only if, the allocation provided for in clause (i) is for any
reason held unenforceable, in such proportion as is appropriate to reflect not
only the relative benefits to the Selling Shareholders and the Company and the
Bank on the one hand and the Dealer Manager on the other, as reflected in clause
(i), but also the relative fault of the Selling Shareholders and the Company and
the Bank on the one hand and the Dealer Manager on the other, as well as any
other
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relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company and the Bank or the Selling
Stockholders on the one hand or the Dealer Manager on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Article VII, each person, if
any, who controls the Dealer Manager within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Dealer Manager, and each director of the Company and the
Bank shall have the same rights to contribution as the Company and the Bank.
Notwithstanding anything to the contrary set forth herein, to the extent
permitted by applicable law, in no event shall the Dealer Manager be required to
contribute an aggregate amount in excess of the Fee received by the Dealer
Manager pursuant to this Agreement (before deducting expenses), and in no event
shall the Selling Shareholders be required to contribute an amount in excess of
the gross proceeds received by them pursuant to the Purchase and Sale Agreement
and this Agreement.
Notwithstanding the foregoing, the contribution provided for in this
Article VII shall not apply to the Company and the Bank to the extent that such
contribution by the Bank is found in a final judgment by a court of competent
jurisdiction to constitute a covered transaction under Section 23A of the
Federal Reserve Act.
ARTICLE VIII
BUSINESS COMBINATION ADVISORY SERVICES
AND RIGHT OF FIRST REFUSAL
Section 8.1 Purpose. The Dealer Manager will assist the Company in
connection with (a) general financial advice, (b) structuring potential equity
or debt financings, (c) modeling the Company's financial projections, and (d)
identifying and structuring potential strategic alliances and/or business
combinations. In connection therewith, the Dealer Manager will conduct a review
of the business operations and financial condition of the Company. The Company
and the Dealer Manager agree that during the Engagement Period (as defined
below), the Dealer Manager shall introduce the Company to and/or advise the
Company with respect to persons or entities (collectively, the "Target
Business") with whom the Company may effect a (i) merger, (ii) exchange of
capital stock, (iii) asset acquisition or disposition, (iv) sale of one or more
product lines, subsidiaries or divisions, (v) joint venture or strategic
alliance, or (vi) other similar business combinations (collectively, a "Business
Combination"). If the Company pursues a Business Combination with any Target
Business during such Engagement Period, it shall utilize the services of the
Dealer Manager as provided herein.
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Section 8.2 Engagement Period. The Company agrees to engage the Dealer
Manager to act as its exclusive financial advisor to assist the Company as set
forth above for a period of eighteen (18) months commencing on the Closing Date
(the "Engagement Period").
Section 8.3 Compensation.
(a) If a Business Combination is consummated during the Engagement
Period, the Dealer Manager shall be paid a fee equal to a percentage of the
value of the consideration paid for a Business Combination as follows: 5% on the
first $1,000,000 of consideration; 4% of the second $1,000,000 of consideration;
3% of the third $1,000,000 of consideration; and 2% of the consideration over
$3,000,000 (collectively, the "Advisory Fee"). The value of such consideration
shall include cash, securities, assumption of debt and all contingent
consideration. If the consideration paid by or to the Company in connection with
any Business Combination is in securities, the value of the consideration shall
be deemed to be closing price of such securities on the last trading date
immediately prior to the closing of the Business Combination. If the securities
are not publicly traded, the value shall be the fair market value of the
securities.
(b) If a Business Combination is consummated during the Engagement
Period with a Target Business introduced to the Company by the Dealer Manager
(and such Target Business was identified in a writing delivered to the Company
by the Dealer Manager at the time of introduction), the Company shall also issue
to the Dealer Manager five year warrants to acquire an amount of common stock of
the surviving company equal to five percent (5%) of the value of the
consideration paid for such Business Combination (the "Advisory Warrants"). The
exercise price of each Advisory Warrant shall be equal to the closing price of a
share of common stock of the surviving company on the last trading date
immediately prior to the closing of the Business Combination. If such security
is not publicly traded, then the exercise price shall be equal to the fair
market value of a share of common stock of the surviving company on the date
prior to the closing of the Business Combination. The Advisory Warrants shall
have customary antidilution provisions relating to mergers, reorganizations,
recapitalizations and other corporate reorganizations, piggyback registration
rights, and one demand registration right.
(c) If the Company completes a Business Combination with a Target
Business at any time from the Closing until the date which is two years
thereafter, for which the Dealer Manager provided advice to the Company during
the Engagement Period, as specified herein, the Dealer Manager shall be entitled
to receive a Advisory Fee in accordance with Section 8.3(a). If the Company
completes a Business Combination with a Target Business introduced to the
Company by the Dealer Manager, at any time as specified in the preceding
sentence, the Dealer Manager shall be entitled to receive the Advisory Fee and
the Advisory Warrants in accordance with Sections 8.3(a) and (b). The Dealer
Manager shall provide to the Company, in writing, a list of Target Businesses
covered by Section 8.3(c) at the end of the Engagement Period.
Section 8.4 Payment of Advisory Fees. The Advisory Fee shall be
payable by wire transfer and the Advisory Warrants shall be issued to the Dealer
Manager both at the closing of a
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Business Combination, except that any Advisory Fee in respect of any contingent
consideration shall be payable whenever such consideration is paid. All Advisory
Fees and expenses set forth herein shall be paid in New York Clearinghouse Funds
to the Dealer Manager.
Section 8.5 Expenses. The Company shall reimburse the Dealer Manager
for its actual out-of-pocket expenses including, but not limited to travel,
subject to prior approval by the Company, incurred in connection with any
services provided hereunder.
The Dealer Manager will not bear any of the Company's legal,
accounting, printing or other expenses in connection with any transaction
considered or consummated. Neither the Dealer Manager, nor the directors,
employees and agents of the Dealer Manager will be responsible for any fees or
commissions payable to any finder or to any other financial or other advisor
utilized or retained by the Company.
Section 8.6 Indemnification. With respect to any services provided by
the Dealer Manager hereunder during the Engagement Period, the Company agrees to
indemnify the Dealer Manager in accordance with the provisions of Appendix D
hereto, which is incorporated by reference and made a part hereof.
Section 8.7 Limitation on Use of Advice. Nothing contained herein shall
require the Company to enter into any transaction presented to it by the Dealer
Manager, which decision shall be at the Company's sole discretion.
Section 8.8 Right of First Refusal. During the period of eighteen (18)
months from the Closing Date, the Dealer Manager shall have a right of first
refusal to act as a placement agent and/or managing underwriter for any public
or private distribution of the Company's Capital Securities, as appropriate. The
Dealer Manager shall have twenty (20) days from the date on which it receives
from the Company a written financing proposal from a broker/dealer unaffiliated
with the Dealer Manager, to provide a comparable financing proposal in writing
to the Company. If the Dealer Manager does not provide a comparable financing
proposal under the terms hereof, the Company may pursue a financing transaction
with such unaffiliated broker/dealer. If the Dealer Manager does provide a
comparable proposal and the Company wishes to pursue such distribution of
securities with a broker/dealer unaffiliated with the Dealer Manager, the
Company may purchase this right of first refusal from the Dealer Manager for
$100,000, which may be paid in cash or securities, at the option of the Company.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Survival of Provisions. All representations, warranties and
agreements contained in this Agreement by each of the parties hereto, or
contained in certificates of officers of the Selling Shareholders or the Company
and the Bank submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of the
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Dealer Manager or controlling person, or by or on behalf of the Selling
Shareholders or the Company and the Bank, in each case, with respect to the
other parties to this Agreement, and shall survive delivery of the shares of
Common Stock.
Section 9.2 Termination.
(a) The Dealer Manager may terminate this Agreement at any time at or
prior to the Closing Date (i) if there has been, since the date of this
Agreement or since the respective dates as of which information is given in the
Confidential Private Placement Memorandum, any material adverse change in the
financial condition, results of operations or business affairs of the Company or
the Bank, or the Company and the Bank considered as one enterprise, whether or
not arising in the ordinary course of business, (ii) if there has occurred any
material adverse change in the financial markets in the United States or any
outbreak of hostilities or escalation thereof or other calamity or crisis the
effect of which, in the reasonable judgment of the Dealer Manager, are so
material and adverse as to make it impracticable to market the shares of Common
Stock or to enforce contracts for the sale of the shares of Common Stock, (iii)
if trading generally on either the American Stock Exchange or the New York Stock
Exchange has been suspended, or minimum or maximum prices for trading have been
fixed, or maximum ranges for prices for securities have been required, by either
of said exchanges or by order of the Commission or any other governmental
authority, or if a banking moratorium has been declared by either Federal or New
Jersey authorities, (iv) if there shall have been such material adverse change
in the condition or prospects of the Company and the Bank considered as one
enterprise or the prospective market for the Company's securities as in the
Dealer Manager's good faith opinion would make it inadvisable to proceed with
the offering, sale or delivery of the shares of Common Stock, or (v) if any of
the conditions specified in Sections 4.1 and 4.2 have not been met or waived by
it pursuant to the terms of this Agreement by 5:00 p.m., Eastern Time on May 26,
2000 (which may be extended up through July 15, 2000 pursuant to the terms of
the Letter of Intent). The Dealer Manager shall provide the Company and the
Selling Shareholders with 5 days prior written notice of termination pursuant to
this Section 9.2(a).
(b) The Selling Shareholders may terminate this Agreement if any of the
conditions specified in Sections 4.1 and 4.3 has not been met or waived by it
pursuant to the terms of this Agreement by 5:00 p.m., Eastern Time on May 26,
2000 (which may be extended through July 15, 2000 pursuant to the terms of the
Letter of Intent). The Selling Shareholders shall provide the Dealer Manager and
the Company with 5 days written notice of termination pursuant to this Section
9.2(b).
(c) The Company may terminate this Agreement if any of the conditions
specified in Sections 4.1 and 4.4 of this Agreement has not been met or waived
by it pursuant to the terms of this Agreement by 5:00 p.m., Eastern Time on May
26, 2000 (which may be extended through July 15, 2000 pursuant to the terms of
the Letter of Intent). The Company shall provide the Dealer Manager and the
Selling Shareholders with 5 days prior written notice of any termination
pursuant to this Section 9.2(c) hereof.
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(d) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except
that the provisions of Articles VI and VII hereof shall survive any termination
of this Agreement.
Section 9.3 Waiver; Amendments. No failure or delay on the part of any
party hereto in exercising any right, power or remedy hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to the
parties hereto at law or in equity. No waiver of or consent to any departure by
the parties hereto from any provision of this Agreement shall be effective
unless signed in writing by the party entitled to the benefit thereof. Except as
otherwise provided herein, no amendment, modification or termination of any
provision of this Agreement shall be effective unless signed in writing by or on
behalf of the parties hereto. Any amendment, supplement or modification of this
Agreement, any waiver of any provision of this Agreement, and any consent to any
departure from the terms of any provision of this Agreement, shall be effective
only in the specific instance and for the specific purpose for which made or
given. Except where notice is specifically required by this Agreement, no notice
to or demand on any party hereto in any case shall entitle another party hereto
to any other or further notice or demand in similar or other circumstances.
Section 9.4 Communications. All notices, demands and other
communications provided for or permitted hereunder shall be made in writing by
hand-delivery, registered first-class mail, telex, telecopier, or air courier
guaranteeing overnight delivery:
(i) if to the Selling Shareholders, to c/o Robert DeMane, Dollar
Bancorp, Inc., 893 Franklin Avenue, Newark, New Jersey 07107, and
thereafter at such other address notice of which is given in accordance
with this Section 9.4;
(ii) if to the Company, initially at 893 Franklin Avenue, Newark, New
Jersey 07107, Attention: President; and thereafter at such other address,
notice of which is given in accordance with this Section 9.4.; and
(iii) if to the Dealer Manager, initially at 5777 W. Century Blvd.,
Suite 1605, Los Angeles, California 90045, Attention: Hugh Kretschmer; and
thereafter at such other address notice of which is given in accordance
with this Section 9.4.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being sent by certified mail, return receipt requested, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; and
on the next Business Day if timely delivered to an air courier guaranteeing
overnight delivery.
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Section 9.5 Entire Agreement; Amendment. This Agreement and the Related
Agreements represent the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and supersede any and all
other oral or written agreements heretofore made. Specifically and not by way of
limitation, the terms of the Letter of Intent shall continue in full force and
effect to the extent that its terms are not inconsistent with the terms of this
Agreement. No waiver, amendment or other modification of this Agreement shall be
effective unless in writing and signed by the parties hereto.
Section 9.6 Governing Law and Time. This Agreement shall be governed by
and construed in accordance with the laws of the State of California applicable
to agreements made and to be performed in said State without regard to the
conflicts of laws provisions thereof. Unless otherwise noted, specified times of
day refer to Eastern time.
Section 9.7 Consent to Jurisdiction. The parties to this Agreement each
irrevocably consent to the jurisdiction of the courts of the State of California
and of any federal court located in such state in connection with any action or
proceeding arising out of or related to this Agreement or any Related Agreement,
any document or instrument delivered pursuant to or in connection with this
Agreement or any Related Agreement, or a breach of this Agreement, any Related
Agreement or any document or instrument delivered with respect to this Agreement
or any Related Agreement.
Section 9.8 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
Section 9.9 Headings and Gender. The Article and Section headings and
Table of Contents used or contained in this Agreement are for convenience of
reference only and shall not affect the construction of this Agreement. Use of a
particular gender herein shall be considered to represent the masculine,
feminine or neuter gender whenever appropriate.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
DOLLAR BANCORP, INC.
By: \s\ Robert DeMane
Name: Robert DeMane
Title: President and Chief
Executive Officer
DOLLAR SAVINGS BANK
By: \s\ Robert DeMane
Name: Robert DeMane
Title: President and Chief
Executive Officer
THE SELLING SHAREHOLDERS
By: \s\ Robert DeMane
Name: Robert DeMane
Title: Attorney-in-Fact
CONFIRMED AND ACCEPTED, as of the date first above written:
NATIONAL SECURITIES CORPORATION
By: \s\ Steven Rothstein
Name: Steven Rothstein
Title: Chairman of the Board
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APPENDIX A
DEALER MANAGER WARRANT
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NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY ITS ACCEPTANCE HEREOF,
AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS WARRANT MAY BE OFFERED, SOLD OR
OTHERWISE DISPOSED OF ONLY (1) TO THE COMPANY, (2) SO LONG AS THIS WARRANT IS
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER," AS DEFINED IN RULE 144A, THAT IS PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE SALE OR OTHER DISPOSITION IS BEING MADE IN RELIANCE ON RULE 144A,
(3) PURSUANT TO AN EXEMPTION FROM REGISTRATION IN ACCORDANCE WITH RULE 144 UNDER
THE SECURITIES ACT (IF AVAILABLE), (4) TO AN "ACCREDITED INVESTOR" AS DEFINED IN
RULE 501 UNDER THE SECURITIES ACT ("ACCREDITED INVESTOR"), THAT IS ACQUIRING
THIS WARRANT FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER ACCREDITED
INVESTOR FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT, IF A SIGNED CERTIFICATION LETTER (A FORM OF WHICH MAY BE
OBTAINED FROM THE COMPANY) IS DELIVERED BY THE TRANSFEREE TO THE COMPANY OR (5)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN
EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES, AND IN EACH CASE SUBJECT TO THE RIGHT OF THE COMPANY PRIOR TO ANY
SUCH OFFER, SALE OR DISPOSITION PURSUANT TO CLAUSE (2), (3) OR (4) TO REQUIRE
THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION
REASONABLY SATISFACTORY TO THE COMPANY.
Void After 5:00 p.m., Eastern Time,
on ________ __, 2005
No. 1
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DOLLAR BANCORP, INC.
Warrant to Purchase ______ Shares of Common Stock
(Subject to Adjustment)
THIS CERTIFIES THAT, FOR VALUE RECEIVED, National Securities
Corporation or its registered assigns (the "Holder"), is entitled to purchase
from Dollar Bancorp, Inc. (the "Company"), subject to the terms and conditions
set forth hereinafter, _______ fully paid and nonassessable shares of the Common
Stock, $0.01 par value per share, of the Company (the "Common Stock") at an
exercise price of $2.00 per share upon surrender of this Warrant to the Company
at the Company's principal office in Newark, New Jersey with the form of
election to purchase attached to this Warrant duly completed and signed,
together (except in the case of a cashless exercise, as set forth below) with
payment of the exercise price by wire transfer or other payment of immediately
available funds. The exercise price and the number of shares of Common Stock for
which this Warrant is exercisable are subject to change or adjustment upon the
occurrence of certain events as set forth below.
Section 1. Duration and Exercise of Warrants.
1.1 (a) This Warrant may be exercised on or after _________, 2000 and
will expire at 5:00 p.m., Eastern Time, on __________, 2005 (the "Expiration
Date"). On the Expiration Date, all rights evidenced by this Warrant shall cease
and this Warrant shall become void.
(b) Subject to the provisions of this Warrant, the registered
Holder of this Warrant shall have the right to purchase from the Company (and
the Company shall issue and sell to such registered Holder) the number of fully
paid and nonassessable shares of Common Stock set forth on the face of this
Warrant (or such number of shares of Common Stock as may result from adjustments
made from time to time as provided herein), at the price of $2.00 per share in
lawful money of the United States of America (such exercise price per share, as
adjusted from time to time as provided herein, being referred to herein as the
"Exercise Price"), upon (i) surrender of this Warrant to the Company at the
Company's principal office in Newark, New Jersey with the exercise form attached
hereto duly completed and signed by the registered Holder or Holders thereof,
and (ii) except in the case of a cashless exercise, as set forth in Section
1.1(c) below, payment by wire transfer or other payment of immediately available
funds, in lawful money of the United States of America, of the Exercise Price
for the shares of Common Stock in respect of which this Warrant is then
exercised (and any applicable transfer taxes pursuant to Section 2 hereof). Upon
surrender of this Warrant, and payment of the Exercise Price as provided above
(except in the case of a cashless exercise), the Company shall promptly issue
and cause to be delivered to or upon the written order of the registered Holder
of this Warrant and in such name or names as such registered holder may
designate, a certificate or certificates for the number of shares of Common
Stock so purchased upon the exercise of this Warrant, together with payment in
respect of any fraction of a share of Common Stock issuable upon such surrender
pursuant to Section 11 hereof.
(c) Notwithstanding the provisions governing the exercise of
this Warrant set forth in Section 1.1(b) above, the registered Holder of this
Warrant may exercise this Warrant without paying the applicable Exercise Price
upon surrender of this Warrant to the Company at the
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Company's principal office in Newark, New Jersey with the exercise form attached
hereto duly completed and signed by the registered Holder or Holders thereof. In
such event, the Holder will receive upon exercise the number of shares of Common
Stock otherwise issuable upon such exercise, less the number of shares of Common
Stock having an aggregate Current Market Price (as defined herein) on the date
of exercise equal to the Exercise Price multiplied by the number of shares of
Common Stock for which this Warrant is being exercised and/or by delivery to the
Company by the Holder of the number of shares of Common Stock having an
aggregate Current Market Price on the date of exercise equal to the Exercise
Price multiplied by the number of shares of Common Stock for which this Warrant
is being exercised.
For purposes of this Warrant, the term "Current Market Price" shall
mean (i) if the shares of Common Stock are traded on the Nasdaq National Market
("NNM") or on a national securities exchange, the per share closing price of the
shares of Common Stock on the date of exercise of this Warrant or (ii) if the
shares of Common Stock are traded in the over-the-counter market and not in the
NNM or a national securities exchange, the average of the per share closing bid
prices of the shares of Common Stock during the thirty (30) consecutive trading
days immediately preceding the date in question, as reported by the Nasdaq
SmallCap Market (or an equivalent generally accepted reporting service if
quotations are not reported on the Nasdaq SmallCap Market). The closing price
referred to in clause (i) above shall be the last reported sale price or, in
case no such reported sale takes place on such day, the average of the reported
closing bid and asked prices, in either case in the NNM or on the principal
stock exchange on which the shares of Common Stock are then listed. For purposes
of clause (ii) above, if trading in the shares of Common Stock is not reported
by the Nasdaq SmallCap Market, the bid price referred to in said clause shall be
the lowest bid price as reported in the Nasdaq Electronic Bulletin Board or, if
not reported thereon, as reported in the "pink sheets" published by Nasdaq, and
if the shares of Common Stock are not so reported, shall be determined by the
price of a share of Common Stock determined by the Company's Board of Directors
in good faith.
(d) The exercise of this Warrant shall be deemed to have been
effected immediately prior to the close of business on the Business Day (as
defined in Section 17 hereof) on which the Holder surrenders this Warrant to the
Company and payment of the Exercise Price (and any applicable transfer taxes
pursuant to Section 2 hereof) is made, and at such time the person in whose name
any certificate for shares of Common Stock shall be issuable upon such exercise
shall be deemed to be the record holder of such shares of Common Stock for all
purposes.
1.2 In the event that less than all of the shares of Common Stock
represented by this Warrant are exercised on or prior to the Expiration Date, a
new Warrant, duly executed by the Company, will be issued for the remaining
number of shares of Common Stock exercisable pursuant to the Warrant so
surrendered, and the Company shall deliver the required new Warrant pursuant to
the provisions of this Section 1.
1.3 The number of shares of Common Stock to be received upon the
exercise of this Warrant and the Exercise Price are subject to adjustment from
time to time as hereinafter set forth.
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Section 2. Payment of Taxes.
The Company will pay all stamp transfer and other similar taxes payable
in connection with the original issuance of this Warrant and the shares of
Common Stock issuable upon exercise thereof, provided, however, that the Company
shall not be required to (i) pay any such tax which may be payable in respect of
any transfer involving the transfer and delivery of this Warrant or the issuance
or delivery of certificates for shares of Common Stock issuable upon exercise
thereof in a name other than that of the registered Holder of this Warrant or
(ii) issue or deliver any certificate for shares of Common Stock upon the
exercise of this Warrant until any such tax required to be paid under clause (i)
shall have been paid, all such tax being payable by the holder of this Warrant
at the time of surrender.
Section 3. Mutilated or Missing Warrants.
In case this Warrant shall be mutilated, lost, stolen or destroyed, the
Company will issue and deliver in exchange and substitution for and upon
cancellation of, the mutilated Warrant, or in substitution for the lost, stolen
or destroyed Warrant, a new Warrant of like tenor evidencing the number of
shares of Common Stock purchasable upon exercise of the Warrant so mutilated,
lost, stolen or destroyed, but only upon receipt of evidence satisfactory to the
Company of such loss, theft or destruction of such Warrant and an indemnity, if
requested, reasonably satisfactory to it. Any such new Warrant shall constitute
an original contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by
anyone.
Section 4. Reservation of Warrant Shares.
The Company shall at all times reserve for issuance and delivery upon
exercise of this Warrant such number of shares of Common Stock or other shares
of capital stock of the Company as from time to time shall be issuable upon
exercise of this Warrant. All such shares shall be duly authorized and, when
issued upon such exercise, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances and free and clear of all preemptive rights. After 5:00 p.m.,
Eastern Time, on the Expiration Date, no shares of Common Stock shall be subject
to reservation in respect of this Warrant.
Section 5. Restrictions on Transfer; Registration Rights.
Neither this Warrant nor the shares of Common Stock issuable upon
exercise thereof may be sold, transferred or otherwise disposed of, except in
accordance with and subject to the provisions of the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations promulgated
thereunder. The Holder shall have the right to register, in connection with any
public offering by the Company (other than a registration statement filed by the
Company on Form S-4 or Form S-8 or any respective successor forms thereto) all
of the shares of Common Stock issued pursuant to this Warrant ("Registrable
Securities"). In the event the Company proposes to register any of its
securities in connection with a public offering, it will give written notice to
the Holder, at least thirty (30) days prior to the filing of a registration
statement, of its intention to do so. Upon the written request of the Holder
given within fifteen (15) days after receipt of any such notice of the Holder's
desire to have its Registrable Securities included in such registration
statement, the Company shall afford such Holder the opportunity to have such
Holder's Registrable Securities
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registered under such registration. Notwithstanding the foregoing, the Company
shall have the right at any time after it shall have given written notice
(irrespective of whether a written request for inclusion of any such Registrable
Securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof. The registration rights provided hereunder shall
expire at such time as all of the Holder's Registrable Securities (other than
Registrable Securities held by affiliates of the Company) are saleable without
volume limitations pursuant to Rule 144 of the Securities Act.
Section 6. Rights and Liability of Warrant Holder.
The Holder of this Warrant shall not, by virtue thereof, be (i)
entitled to any rights of a stockholder of the Company, either at law or in
equity, and the rights of such holder are limited to those expressed herein, or
(ii) subject to any liability as a stockholder of the Company.
Section 7. Adjustments of Exercise Price and Number of Shares of Common
Stock.
The Exercise Price and the number and kind of shares of Common Stock
issuable upon the exercise of this Warrant will be subject to change or
adjustment from time to time as set forth in this Section 7. In the event of any
change in the Common Stock by reason of a stock dividend, stock split (including
a reverse stock split), split-up, recapitalization, combination, exchange of
shares or similar transaction, the type and number of shares or securities
subject to this Warrant and the Exercise Price thereof shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transactions so that the Holder of this Warrant shall receive, upon
exercise of this Warrant, the number and class of shares or other securities or
property that the Holder of this Warrant would have received in respect of the
Common Stock if this Warrant had been exercised immediately prior to such event,
or the record date therefor, as applicable.
Section 8. Reorganizations and Asset Sales.
If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the Holder of this Warrant shall thereafter have the right
to purchase and receive, upon the basis and upon the terms and conditions
specified in this Warrant and in lieu of the shares of Common Stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, such shares of stock, securities or assets as may be issued
or payable with respect to or in exchange for a number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the Holder
of this Warrant to the end that the provisions hereof (including without
limitation provisions for adjustments of the Exercise Price and of the number of
shares purchasable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof. The Company shall not
effect any such consolidation, merger or sale, unless prior to the consummation
thereof the successor
5
<PAGE>
corporation (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing such assets shall assume, by written
instrument executed and mailed by first class mail, postage prepaid, to the
Holder hereof at the last address of such Holder appearing on the register
maintained by the Company, the obligation to deliver to such Holder such shares
of stock, securities or assets as, in accordance with the foregoing provisions,
such Holder may be entitled to purchase.
Section 9. Notice of Adjustment.
Whenever the number of shares of Common Stock or other stock or
property issuable upon the exercise of this Warrant is adjusted, as herein
provided, the Company shall promptly mail by first class mail, postage prepaid,
to the Holder at the last address of such Holder appearing on the register
maintained by the Company, notice of such adjustment or adjustments. In
addition, the Company at its sole expense shall within 90 calendar days
following the end of each fiscal year of the Company during which this Warrant
remains outstanding and an adjustment has occurred, and promptly upon the
request of the Holder of this Warrant in connection with the exercise thereof,
cause to be delivered to the Holder a certificate of the chief financial officer
of the Company setting forth the number of shares of Common Stock or other stock
or property issuable upon the exercise of this Warrant after such adjustment,
setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made.
Section 10. Statement of Warrants.
This Warrant may continue to express the same number and kind of shares
which may be purchased upon exercise hereof as are stated in the Warrant
initially issued or any substitute Warrant issued therefor, notwithstanding any
adjustment in the Exercise Price and/or in the number or kind of shares issuable
upon exercise of this Warrant. In the event of any such adjustment, the Company
will, at its expense, promptly upon the Holder's surrender of this Warrant to
the Company, execute a new Warrant or Warrants stating the Exercise Price and
the number and kind of shares issuable upon exercise of this Warrant.
Section 11. Fractional Interest.
The Company shall not be required to issue fractional shares of Common
Stock on the exercise of this Warrant. If more than one Warrant shall be
presented for exercise at the same time by the Holder, the number of full shares
of Common Stock which shall be issuable upon such exercise shall be computed on
the basis of the aggregate number of shares of Common Stock acquirable on
exercise of the Warrants so presented. If any fraction of a share of Common
Stock would, except for the provisions of this Section 11, be issuable on the
exercise of any Warrant (or specified portion thereof), the Company shall pay an
amount in cash calculated by it to be equal to the then current market price per
share multiplied by such fraction computed to the nearest whole cent. The Holder
by his acceptance of this Warrant expressly waives any and all rights to receive
any fraction of a share of Common Stock or a stock certificate representing a
fraction of a share of Common Stock.
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Section 12. Entire Agreement.
This Warrant constitutes the full and entire understanding and
agreement among the parties with regard to the subject matter hereof and no
party shall be liable or bound to any other party in any manner by any
representations, warranties, covenants or agreements except as specifically set
forth herein or therein.
Section 13. Successors and Assigns.
13.1 All covenants and provisions of this Warrant by or for the benefit
of the Company or the holder of this Warrant shall bind and inure to the benefit
of their respective successors, assigns, heirs and personal representatives.
13.2 Subject to the requirements of Section 5 of this Warrant, this
Warrant is assignable, in whole or in part, without charge to the holder hereof
upon surrender of this Warrant with a properly executed assignment at the
principal office of the Company. Upon any partial assignment, the Company will
at its expense issue and deliver to the holder hereof a new Warrant of like
tenor, in the name of the holder hereof, which shall be exercisable for such
number of shares of Common Stock (or any shares of stock or other securities at
the time issuable upon exercise of this Warrant) which were not so assigned.
Except as provided in this Section 13.2, this Warrant may not be assigned or
transferred.
Section 14. Termination.
This Warrant shall terminate at 5:00 p.m., Eastern Time, on the
Expiration Date or upon such earlier date on which all of this Warrant has been
exercised.
Section 15. Headings.
The headings of sections of this Warrant have been inserted for
convenience of reference only, are not to be considered a part hereof and shall
in no way modify or restrict any of the terms or provisions hereof.
Section 16. Amendments.
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the Company and the Holder
of this Warrant.
Section 17. Notices.
All notices, demands and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered first-class
mail, telex, telecopier, or air courier guaranteeing overnight delivery:
(a) if to the Holder of this Warrant, at the address set forth
on the register of the Warrants maintained by the Company, or at such
other address as the holder of this Warrant shall have furnished to the
Company in writing;
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(b) if to the Company, initially at 893 Franklin Avenue,
Newark, New Jersey 07107, and thereafter at such other address, notice
of which is given in accordance with the provisions of this Section 17.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being sent by certified mail, return receipt requested, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; and
on the next Business Day if timely delivered to an air courier guaranteeing
overnight delivery. For purposes of this Warrant, a "Business Day" means any day
except a Saturday, Sunday or other day on which commercial banks in the State of
California are authorized by law to close.
Section 18. Benefits of This Warrant.
Nothing in this Warrant shall be construed to give to any person or
corporation, other than the Company and the registered holder of this Warrant,
any legal or equitable right, remedy or claim under this Warrant, it being
intended that this Warrant shall be for the sole and exclusive benefit of the
Company and the registered holder thereof.
Section 19. Governing Law.
This Warrant shall be governed by and construed in accordance with the
laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officer.
Dated: ________ __, 2000 DOLLAR BANCORP, INC.
By:
Name: Robert DeMane
Title: President and Chief Executive Officer
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ELECTION TO PURCHASE
Dated: ________
The undersigned hereby irrevocably exercises this Warrant to purchase
_______ shares of Common Stock and either (i) makes payment of $_______ in
payment of the Exercise Price thereof or (ii) complies with the cashless
exercise procedure set forth herein, in either case on the terms and conditions
specified in this Warrant, surrenders this Warrant and all right, title and
interest herein to the Company and directs that the shares of Common Stock
deliverable upon the exercise of this Warrant be registered in the name and at
the address specified below and delivered thereto.
Name:________________________________________________________________
(Please Print)
Address:_____________________________________________________________
City, State and Zip Code:____________________________________________
If such number of shares of Common Stock is less than the aggregate number of
shares of Common Stock purchasable hereunder, the undersigned requests that a
new Warrant representing the balance of such shares of Common Stock be
registered in the name and at the address specified below and delivered thereto.
Name:________________________________________________________________
(Please Print)
Address:_____________________________________________________________
City, State and Zip Code:____________________________________________
Taxpayer Identification or Social Security Number:___________________
Signature:______________________________
Note: The above signature must correspond with the name as written upon the face
of this Warrant in every particular, without alteration or enlargement or any
change whatsoever.
9
<PAGE>
APPENDIX C
FORM OF OPINION OF COUNSEL TO COMPANY AND BANK
(a) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware and has
full power and authority to own or lease all of its properties and assets and to
carry on its business as now conducted and is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which its ownership or
leasing of property or the conduct of its business requires such qualification,
except where the failure to be so licensed, qualified or in good standing would
have a Material Adverse Effect;
(b) The Bank is the only direct or indirect Subsidiary of the Company,
all the capital stock of which is owned by the Company. The Bank is a
federally-chartered savings bank that has been duly incorporated and is validly
existing as a corporation under the laws of the United States with full power
and authority to own or lease all of its properties and assets and to carry on
its business as now conducted and is duly licensed or qualified to do business
and is in good standing in each jurisdiction in which its ownership or leasing
of property or the conduct of its business requires such qualification, except
where the failure to be so licensed, qualified or in good standing would have a
Material Adverse Effect;
(c) The Dealer Manager Agreement, the Purchase and Sale Agreement and
each of the applicable Related Agreements have been duly authorized, executed
and delivered by the Company and the Bank; the Company and the Bank have the
corporate power and authority to perform each of their respective obligations
under the Dealer Manager Agreement, the Purchase and Sale Agreement and each of
the applicable Related Agreements; and the Dealer Manager Agreement, the
Purchase and Sale Agreement and each of the applicable Related Agreements
constitute valid and binding obligations of the Company and the Bank enforceable
against the Company and the Bank in accordance with their terms, except as
rights to indemnity and contribution thereunder may be limited under applicable
law, and subject to bankruptcy, fraudulent conveyance, insolvency, moratorium,
reorganization or other laws heretofore or hereafter enacted relating to or
affecting the rights of creditors generally, and by equitable principles
limiting the right to obtain specific performance or other similar equitable
relief (regardless of whether such enforceability is considered in a proceeding
in equity or at law);
(d) The execution and delivery by the Company and the Bank of, and the
full and timely performance by the Company and the Bank of each of their
respective obligations under the Dealer Manager Agreement, the Purchase and Sale
Agreement and each of the applicable Related Agreements do not conflict with or
constitute a breach of, or a default under (i) the Certificate of Incorporation
or Federal Stock Charter, as the case may be, or the Bylaws, of the Company or
the Bank (ii) any obligations, agreement, indenture, bond, debenture, note,
instrument or other evidence of indebtedness to which the Company or the Bank is
a party or as to which any of their respective assets are subject, or (iii) any
law, ordinance, order, license, rule or other regulation or demand of any court
or governmental agency, arbitration panel or authority applicable to the Company
or the Bank, except, in the case of clauses (ii) and (iii) above, for such
conflicts, breaches or defaults which would not, individually or in the
aggregate, have a Material Adverse Effect. The opinion set forth in clause (iii)
of the preceding sentence are limited to the Delaware General Corporation Law,
C-1
<PAGE>
Federal and State banking and securities laws, ordinances, orders, licenses,
rules or regulations, and are made in reliance on the representations and
warranties of the Purchasers contained in Section 3.3 of the Purchase and Sale
Agreement.
(e) Except for compliance with applicable Federal and State securities
laws in connection with the Dealer Manager Agreement, no consent, approval,
order or other authorization of any governmental, administrative or regulatory
body or agency is legally required by or on behalf of the Company or the Bank in
connection with the execution, delivery and performance of the Dealer Manager
Agreement and each of the Related Agreements to which the Company or the Bank is
a party. The opinion set forth in the preceding sentence, insofar as it relates
to Federal and State securities and banking laws and regulations, are made in
reliance on the representations and warranties of the Purchasers contained in
Section 3.3 of the Purchase and Sale Agreement;
(f) As of the date of the Dealer Manager Agreement, there were
_________ shares of Common Stock of the Company issued and outstanding and no
shares of Preferred Stock outstanding. As of the date hereof, as a result of a
stock split effected immediately prior to the Closing, there are __________
shares of Common Stock issued and outstanding, 2,000,000 of which shares are
being transferred and sold by the Selling Shareholders to the Purchasers in
accordance with the terms of the Purchase and Sale Agreement and the Dealer
Manager Agreement. As of the date hereof, all outstanding shares of Common Stock
have been duly authorized and validly issued and are fully paid and
nonassessable and none of the outstanding shares of Common Stock has been issued
in violation of the pre-emptive rights of any Person. Except with respect to the
Dealer Manager Warrant, there are no Stock Equivalents authorized, issued or
outstanding with respect to the Capital Securities of the Company as of the date
hereof.
(g) The Dealer Manager Warrant issued to the Dealer Manager in
connection with the Closing and the shares of Common Stock to be issued upon
exercise of the Dealer Manager Warrant have each been authorized by all
necessary corporate action on the part of the Company. When the Warrant is
delivered to the Dealer Manager at the Closing, the Dealer Manager Warrant will
be duly authorized, validly issued, fully paid and nonassessable and shall
constitute a valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms. When the Common Stock is issued
pursuant to the exercise of the Dealer Manager Warrant against payment therefore
as provided in the Dealer Manager Warrant, such Common Stock will be duly
authorized, validly issued, fully paid and nonassessable, and the issuance of
the Common Stock will not be in violation of the pre-emptive rights of any
Person.
(h) There are no actions, suits, investigations or legal proceedings
pending against, or to our knowledge threatened against, the Company or the Bank
or their respective properties before any court or governmental body or agency
which would reasonably be expected to have a Material Adverse Effect or which in
any manner challenges the legality, validity or enforceability of the Dealer
Manager Agreement, any of the Related Agreements or the Common Stock, or which
would reasonably be expected to materially impair the ability or obligation of
the Company to perform fully on a timely basis its obligations under the Dealer
Manager Agreement, or the Company to perform fully on a timely basis their
obligations under any Related Agreement to which it is a party.
(i) To our knowledge, each of the Company and the Bank has all permits,
licenses, certificates of authority, orders and approvals of, and has made all
filings, applications and
C-2
<PAGE>
registrations with, Federal, State, local and foreign governmental or regulatory
bodies that are necessary in order to permit it to carry on its business as it
is presently being conducted and the absence of which could have a Material
Adverse Effect; to our knowledge, all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect; and to our
knowledge, no suspension or cancellation of any of the same is threatened;
(j) To our knowledge, neither the Company nor the Selling Shareholders
has, directly or indirectly, solicited any offer to buy or offered to sell in
the United States or to any United States citizen or resident, any security
which is or would be integrated with the sale of the Common Stock in a manner
that would require the Common Stock to be registered under the Securities Act;
(k) To our knowledge, neither the Company nor the Selling Shareholders
has taken, directly or indirectly, any action designed to, or that might be
reasonably expected to, cause or result in stabilization or manipulation of the
price of the Common Stock;
(l) To our knowledge, neither the Company, any of its affiliates (as
such term is defined in Rule 501(b) under the Securities Act, "Affiliates"), the
Selling Shareholders nor any person acting on its behalf (other than the Dealer
Manager, as to whom no opinion is given) has engaged or will engage, in
connection with the offering of the Common Stock, in any form of general
solicitation or general advertising within the meaning of Rule 502(c) under the
Securities Act;
(m) It is not necessary in connection with the offer, sale and delivery
of the Common Stock in the manner contemplated by the Dealer Manager Agreement
and the Confidential Private Placement Memorandum to register the Common Stock
under the Securities Act, as amended;
(n) At the date of its issuance and as of the date hereof, the
Confidential Private Placement Memorandum complied in all material respects with
the applicable requirements of the Securities Act; and
(o) No information has come to our attention that would lead us to
believe that the Confidential Private Placement Memorandum (except as the
financial statements and schedules, notes to financial statements, financial
tables, and other financial information and statistical data contained therein,
as to which we express no view), as of its date, contained or, as of the date
hereof contains, any untrue statement of a material fact or omitted or omits to
state a material fact required to be stated therein, or necessary to make the
statements made therein in light of the circumstances under which they are made,
not misleading.
C-3
<PAGE>
APPENDIX D
INDEMNIFICATION FOR ADVISORY SERVICES
Recognizing that transactions of the type contemplated by Article VIII
of the Agreement sometimes result in litigation and that the Dealer Manager's
role is advisory, the Company agrees to indemnify and hold harmless the Dealer
Manager, its affiliates and their respective officers, directors, employees,
agent and controlling persons (collectively, the "Indemnified Parties"), from
and against any losses, claims, damages and liabilities, joint or several,
related to or arising in any manner out of any transaction, proposal or any
other matter (collectively, the "Matters") contemplated by Article VIII of the
Agreement, and will promptly reimburse the Indemnified Parties for all expenses
(including reasonable fees and expenses of legal counsel) as incurred in
connection with the investigation of, preparation for, or defense of any pending
or threatened claim related to or arising in any manner out of any Matter
arising from the engagement of the Dealer Manager under Article VIII of the
Agreement, or any action or proceeding arising therefrom (collectively,
"Proceedings"), whether or not such Indemnified Party is a formal party to any
such Proceeding. Notwithstanding the foregoing, the Company shall not be liable
in respect of any losses, claims, damages, liabilities or expenses that a court
of competent jurisdiction shall have determined by final judgment resulted
solely from the gross negligence or willful misconduct of an Indemnified Party.
The Company further agrees that it will not, without the prior written consent
of the Dealer Manager, settle, compromise or consent to the entry of any
judgment in any pending or threatened Proceeding in respect of which
indemnification may be sought hereunder (whether or not the Dealer Manager or
any Indemnified Party is an actual or potential party to such Proceeding),
unless such settlement, compromise or consent includes an unconditional release
of the Dealer Manager and each other Indemnified Party hereunder from all
liability arising out of such Proceeding.
The Company agrees that if any indemnification or reimbursement sought
hereunder were for any reason not to be available to any Indemnified Party or
insufficient to hold it harmless as and to the extent contemplated hereunder,
then the Company shall contribute to the amount paid or payable by such
Indemnified Party in respect of losses, claims, damages and liabilities in such
proportion as is appropriate to reflect the relative benefits to the Company and
its stockholders on the one hand, and the Dealer Manager on the other, in
connection with the Matters to which such indemnification or reimbursement
relates or, if such allocation is not permitted by applicable law, not only such
relative benefits but also the relative faults of such parties as well as any
other equitable considerations. It is hereby agreed that the relative benefits
to the Company and/or its stockholders and to the Dealer Manager with respect to
the Dealer Manager's engagement pursuant to Article VIII of the Agreement shall
be deemed to be in the same proportion as (i) the total value paid or received
or to be paid or received by the Company and/or its stockholders pursuant to the
Matters (whether or not consummated) for which the Dealer Manager is engaged to
render services bears to (ii) the fees paid to the Dealer Manager in connection
with such engagement. In no event shall the Indemnified Parties contribute or
otherwise be liable for an amount in excess of the aggregate amount of fees
actually received by the Dealer Manager pursuant to such engagement (excluding
amounts received by the Dealer Manager as reimbursement of the expenses).
The Company further agrees that no Indemnified Party shall have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Company for or in connection with the Dealer Manager's engagement pursuant to
Article VIII of the Agreement except for losses, claims, damages,
D-1
<PAGE>
liabilities or expenses that a court of competent jurisdiction shall have
determined by final judgment resulted solely from the gross negligence or
willful misconduct of such Indemnified Party. The indemnity, reimbursement and
contribution obligations of the Company shall be in addition to any liability
which the Company may otherwise have and shall be binding upon and inure to the
benefit of any successors, assigns, heirs and personal representatives of the
Company or an Indemnified Party.
The indemnity, reimbursement and contribution provisions set forth
herein shall remain operative and in full force and effect regardless of (i) any
withdrawal, termination or consummation of or failure to initiate or consummate
any Matter referred to herein, (ii) any investigation made by or on behalf of
any party hereto or any person controlling (within the meaning of Section 15 of
the Securities Act, as amended, or Section 20 of the Exchange Act) any party
hereto, (iii) any termination or the completion or expiration of the Engagement
Period and (iv) whether or not the Dealer Manager shall, or shall not be called
upon to, render any formal or informal advice in the course of such engagement.
D-2
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
SELECTED FINANCIAL INFORMATION AND OTHER DATA
Set forth below are selected financial and other data of Dollar
Bancorp, Inc. (the "Company"), or prior to October 20, 1999, Dollar Savings Bank
(the "Bank"). The selected financial and other data does not purport to be
complete and is qualified in its entirety by reference to the detailed
information and Consolidated Financial Statements and Notes thereto presented
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------
2000 1999 1998
---------------- ------------- ------------
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C>
Total assets $ 10,223 $ 9,464 $ 9,201
Loans receivable, net 5,973 6,231 6,368
Mortgage backed securities 21 29 35
Deposits 8,611 7,902 7,675
Stockholders' equity 1,485 1,410 1,268
</TABLE>
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------
2000 1999 1998
-------------- ------------- ------------
(In Thousands)
Selected Operations Data:
<S> <C> <C> <C>
Total interest income $ 735 $ 757 $ 773
Total interest expense 246 240 225
----------- ------------- -----------
Net interest income 489 517 548
Provision for loan losses 19 83 -
----------- ------------- -----------
Net interest income after provision for loan losses 470 434 548
Non-interest income 43 59 67
Non-interest expense 438 351 461
----------- ------------- -----------
Income before income taxes 75 142 154
Income tax provision - - -
----------- ------------- -----------
Net income $ 75 $ 142 $ 154
========== ============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------------
2000 1999 1998
-------------- ------------- -----------
Selected Financial Ratios and Other Data:
Performance Ratios:
<S> <C> <C> <C>
Return on assets (ratio of net income to average total assets)........ 0.74% 1.48% 1.67%
Return on equity (ratio of net income to average equity).............. 5.19% 10.54% 16.52%
Net interest rate spread during the period............................ 5.16% 5.76% 6.09%
Net interest margin (1)............................................... 5.36% 5.99% 6.33%
Ratio of non-interest expense to average total assets................. 4.35% 3.67% 5.00%
Ratio of avg interest-earning assets to avg int-bearing liabilities 107.45% 108.34% 109.62%
Asset Quality Ratios:
Nonperforming assets to total assets at end of period................. 9.12% 4.34% 4.13%
Allowance for loan losses to non-performing loans..................... 53.42% 105.11% 91.58%
Allowance for loan losses to total loans outstanding.................. 5.44% 6.47% 5.17%
Capital Ratios:
Stockholders' equity to total assets at end of period................. 14.53% 14.90% 13.78%
Average stockholders' equity to average assets........................ 14.36% 14.06% 10.10%
Other Data:
Number of full-service offices........................................ 1 1 1
</TABLE>
(1) Net interest income divided by average interest earning assets
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The earnings of the Company depend in part on its level of net interest
income, which is the difference between interest earned on the Company's
interest-earning assets, consisting primarily of loans receivable and, to a
lesser extent, interest-bearing deposits at other institutions, and the interest
paid on interest-bearing liabilities, which consist of savings deposits. Net
interest income is a function of the Company'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, as well as a function of
the average balance of interest-earning assets as compared to interest-bearing
liabilities. The Company's earnings also are affected by its level of
noninterest income, including loan fees and service charges, and noninterest
expense, including salaries and employee benefits, occupancy expense, charges to
income associated with the declining property values, equipment costs, losses on
the sale of nonperforming loans and real estate owned, deposit insurance
premiums and other noninterest expenses (consisting of professional fees,
examination fees, telephone, postage, advertising, supplies and insurance
premiums). Earnings of the Company also are affected significantly by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities, which events
are beyond the control of the Company.
Financial Condition
Assets. Total assets increased $759,000, or 8.0%, to $10.2 million at
March 31, 2000 from $9.5 million at March 31, 1999. The increase in total assets
is primarily due to a $758,000 increase in cash and amounts due from depository
institutions. The increase is due to an increase in deposits of $709,000.
Liabilities. Total liabilities increased by $684,000, or 8.5%, to $8.7
million at March 31, 2000 from $8.1 million at March 31, 1999. Deposits
increased by $709,000 from $7.9 million at March 31, 1999 to $8.6 million at
March 31, 2000. Other liabilities decreased during the 2000 fiscal year from
$95,000 to $67,000.
Stockholders' equity. Stockholders' equity increased $75,000, or 5.3%,
to $1.5 million at March 31, 2000 from $1.4 million at March 31, 1999. The
increase is due to net income for the 2000 fiscal year of $75,000.
<PAGE>
Net Interest Income Analysis. The following table presents 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, expressed both in dollars and
rates. No tax equivalent adjustments were made. All average balances are monthly
average balance. Non-accruings loans have been included in the table as loans
carrying a zero yield.
<TABLE>
<CAPTION>
At March 31, 2000 Years Ended March 31,
----------------- ----------------------------------------------------------------
2000 1999
----------------- -------------------------------- ------------------------------
Average Interest Average Interest
Actual Yield/ Outstanding Earned/ Outstanding Earned/
Balance Cost Balance Paid Yield/Cost Balance Paid Yield/Cost
------- --------- ----------- -------- ---------- --------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $ 5,973 9.07 % $ 5,816 $ 542 9.32 % $ 6,163 $ 618 10.03 %
Mortgage-backed securities 21 9.52 24 2 8.33 32 3 9.38
Other interest-earning 3,222 5.93 3,276 191 5.83 2,441 136 5.57
----- ----- --- ----- ---
Total interest-earning assets (1) 9,216 7.98 9,116 735 8.06 8,636 757 8.77
Non-interest earning assets 1,007 951 942
----- --- ---
Total assets $ 10,223 $ 10,067 $ 9,578
====== ====== =====
Interest-bearing liabilities:
Savings deposits $ 5,318 1.94 $ 5,187 103 1.99 $ 4,684 92 1.96
Certificate accounts 3,293 4.34 3297 143 4.34 3,287 148 4.50
----- ---- --- ----- ---
Total interest-bearing liabilities 8,611 2.86 8,484 246 2.90 7,971 240 3.01
--- ---
Non-interst-bearings liabilities 127 137 260
--- --- ---
Total liabilities 8,738 8,621 8,231
Stockholder's Equity 1,485 1,446 1,347
----- ----- -----
Total liabilities and stockholder's equity $ 10,223 $ 10,067 $ 9,578
====== ======== =====
Net interest income $ 489 $ 489 $ 517
=== === ===
Net interest rate spread 5.12 % 5.16 % 5.76 %
===== ====
Net yield on average interest-earning assets 5.36 % 5.99 %
===== ====
Average interest-earning assets to average
interest-bearing liabilities 107.03 % 107.45 % 108.34 %
====== ====== ======
</TABLE>
(1)Calculated net of deferred loan fees and loss reserves.
<PAGE>
Rate/Volume Analysis. The following table presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes related to outstanding balances and those due to the changes
in interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate); (ii)
changes in rate (i.e., changes in rate multiplied by old volume); and (iii)
changes in rate-volume (changes in rate multiplied by the change in volume).
<TABLE>
<CAPTION>
Year Ended March 31, Year Ended March 31,
2000 vs. 1999 1999 vs. 1998
------------------------------------------- -----------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
------------------------------------------- -----------------------------------------------
Total Total
Increase Increase
Volume Rate Rate/Volume (Decrease) Volume Rate Rate/Volume (Decrease)
--------- ----- ----------- ---------- --------- ----- ----------- ----------
(In Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $ (35) $ (44) $ 3 $ (76) $ (29) $ (12) $ (1) $ (42)
Mortgage backed-securities (1) - - (1) (1) 1 - -
Other(1) 47 6 2 55 47 (21) - 26
--------- ------- ------- -------- -------- -------- -------- -------
Total interest earning assets: $ 11 $ (38) $ 5 $ (22) $ 17 $ (32) $ (1) $ (16)
========= ======= ======= ======== ========= ======== ======== =======
Interest-bearing liabilities:
Savings deposits $ 10 $ 1 $ - $ 11 $ (13) $ 2 $ - $ (11)
Certificates accounts - (5) - (5) 37 (11) - 26
Borrowings - - - - - - - -
Total interest-bearing liabilities $ 10 $ (4) $ - $ 6 $ 24 $ (9) $ - $ 15
======== ====== ======= ======== ======== ======= ======== =======
Net change in interest income $ 1 $ (34) $ 5 $ (28) $ (7) $ (23) $ (1) $ (31)
======== ====== ======= ======== ======== ======= ======== ========
</TABLE>
(1) Includes dividends on Federal Home Loan Bank stock and interest on
overnight deposits
<PAGE>
Comparison of Operating Results for the Years Ended March 31, 2000 and 1999
Net Income. The Company experienced a decrease in net income of $67,000
for the year ended March 31, 2000 to net income of $75,000 from net income of
142,000 for the year ended March 31, 1999. The decrease in net income resulted
primarily from an increase in other expenses, including fees and expenses
incurred for the formation of the Company. Interest income decreased slightly
due to a slight decrease in loans receivable and a slight increase in
nonperforming loans, and interest expense increased $6,000 due to an increase in
deposits.
Interest Income. Total interest income decreased $22,000, or 2.9%, to
$735,000 for the year ended March 31, 2000 from $757,000 for the year ended
March 31,1999. The decrease in interest income was attributable to a decrease in
the average yield on interest earning assets to 8.06% from 8.77%. Interest
income from loans receivable decreased $76,000, or 12.3%, to $542,000 from
$618,000. The decrease in interest income from loans receivable was due to a
decrease in the average yield to 9.32% from 10.03%. Interest income from other
interest bearing assets (consisting of Federal Home Loan Bank ("FHLB") overnight
deposits and certificates of deposit in other financial institutions) increased
$55,000, or 40.4% to $191,000 from $136,000. The increase in interest income
from other interest earning assets is attributable to a $835,000, or 34.2%,
increase in the average balance of other interest earning assets to $3.3 million
from $2.4 million and an increase in the average yield of such assets to 5.83%
from 5.57%. The average balance of mortgage-backed securities decreased $8,000,
or 25.0%, to $24,000 from $32,000, while the average yield on mortgage-backed
securities decreased to 8.33% from 9.38%.
Interest Expense. Total interest expense increased $6,000, or 2.5%, to
$246,000 for the year ended March 31, 2000 from $240,000 for the year ended
March 31, 1999. Interest paid on certificate accounts decreased $5,000 to
$143,000 from $148,000. The average balance of certificate accounts increased by
$10,000 to $3,297,000 from $3,287,000. The average cost of certificates of
deposit decreased from 4.50% to 4.34%. Interest paid on savings deposits, which
increased $11,000, or 12.0%, to $103,000 from $92,000 was partially offset by
the decrease in interest paid on certificates of deposit. The increase in
interest paid on savings deposits is primarily attributed to the increase in the
average outstanding balance in savings deposits of $503,000, or 10.7%, to
$5,187,000 for fiscal 2000 from $4,684,000 for fiscal 1999. The average cost of
savings deposits remained relatively constant at 1.99% in fiscal 2000 compared
to 1.96% in fiscal 1999.
Provision for Loan Losses. The Company maintains an allowance for loan
losses based upon management's periodic evaluation of known or inherent risks in
the loan portfolio, the Company's past loss experience, level of delinquencies,
adverse situations that may affect a borrower's ability to repay a loan, the
estimated value of the underlying collateral and market conditions. The
allowance for loan losses was $351,000 or 5.4%, of total loans at March 31, 2000
and $432,000, or 6.5%, of total loans at March 31, 1999. Loan loss provisions
are charged against earnings. Nonperforming loans increased to $657,000 at March
31, 2000 from $411,000 at March 31, 1999. The increase in nonperfoming loans is
primarily attributable to a single family residence on which the Bank held a
loan which had a remaining balance of $278,000. Subsequent to March 31, 2000 the
property was sold and the loan was paid in full. Loan loss provisions are based
upon management's estimate of the fair value of the loan collateral, as
applicable, and the Company's actual loan loss experience, as well as standards
applied by the Office of Thrift Supervision ("OTS") and Federal Deposit
Insurance Coproration ("FDIC"). For the year ended March 31, 2000 the Company
established additional loan loss provisions of $19,000 and established $84,000
additional loan loss provisions for the year ended March 31, 1999. In the year
ended March 31, 2000, the Bank foreclosed on another single family residence on
which the Bank had carried had a loss provision of $100,000. In fiscal 2000, the
Company's nonperforming assets as a percentage of total assets was 9.1% as
compared to 4.3% for fiscal 1999.
Management believes that the allowance for loan losses is at a level
that is adequate to provide for estimated losses, however, there can be no
assurance that further additions will not be made to the loss allowance or that
such losses will not exceed the estimated amount.
Net Interest Income. Net interest income decreased $28,000, or 5.4%, to
$489,000 for fiscal 2000 from $517,000 for fiscal 1999. The net yield of the
average interest-earning assets decreased to 5.36% from 5.99%. Average interest
earning assets decreased to 107.45% of average interest bearing liabilities
during fiscal 2000 from 108.34% for fiscal 1999.
Non-interest Income. Non-interest income decreased by $16,000, or
27.1%, to $43,000 for the year ended March 31, 2000 from $59,000 for the year
ended March 31, 1999. The decrease in noninterest income is primarily due to a
$22,000 decrease in loan fees primarily related to loan referral fees received
from a mortgage broker.
<PAGE>
Non-interest Expense. Non-interest expense increased $87,000, or 24.8%,
to $438,000 for the year ended March 31, 2000 from $351,000 for the year ended
March 31, 1999. Net occupancy expense of premises decreased $11,000 or 45.8% to
$13,000 from $24,000. The decrease in net occupancy expense of premises is
primarily due to a decrease in property taxes due to a tax appeal totaling
$18,000 which includes a rebate from prior years of $5,000. Equipment costs
increased slightly $1,000, or 16.7% to $7,000 from $6,000. Other non-interest
expense (consisting of professional fees, examination fees, telephone, postage,
advertising, supplies and insurance premiums) increased $84,000 to $191,000 for
the year ended March 31, 2000 from $107,000 in the year ended March 31, 1999.
The increase in other non interest expense is primarily due to an increase in
legal fees of $82,000.
Income Taxes. There was no income tax expense for fiscal 2000 and fiscal
1999. This is due to a net operating loss carryover from previous years.
Market Risk/Interest Rate Risk and Asset/Liability Management
The ability to maximize net interest income is largely dependent upon
achieving a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities that either price or mature within a given period
of time. The difference, or the interest rate repricing "gap," provides an
indication of the extent to which an institution's interest rate spread will be
affected by changes in interest rates over a period of time. A gap is considered
positive when the amount of interest-earning assets maturing, or repricing over
a specified period of time, exceeds the amount of interest-bearing liabilities
maturing or repricing within that period and is considered negative when the
amount of interest-bearing liabilities maturing or repricing over a specified
period of time exceeds the amount of interest-earning assets maturing or
repricing within that period. Generally, during a period of rising interest
rates, a negative gap within a given period of time would adversely affect net
interest income, while a positive gap within a given period of time would result
in an increase in net interest income; during a period of declining interest
rates, a negative gap within a giving period of time would result in an increase
in net interest income, while a positive gap within a given period of time would
have the opposite effect. A sustained rise in interest rates could have a
negative impact on the Company's future net interest income.
The Company, like other financial institution holding company, is
subject to interest rate risk to the extent that its interest-bearing
liabilities with short and intermediate-term maturities reprice more rapidly, or
on a difference basis, that its interest-bearing assets. Management of the
Company believes it is critical to manage the relationship between interest
rates and the effect on the Company's net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities. Management
of the Company's assets and liabilities is done within the context of the
marketplace, but also within limits established by the Board of Directors on the
amount of change in NPV which is acceptable given certain interest rate changes.
The Company has taken certain measures to reduce interest rate risk and
protect it from the negative effect of increases in interest rates. The
Company's current lending strategy is to emphasize the origination of five year
balloon mortgage loans and to limit the term of one- to four-family residential
loans to 10 years or less. During fiscal 2000, of the $1.0 million in loan
originations, $515,000 were one year residential construction loans. The Company
has originated commercial real estate and multi-family loans, which are
typically of short duration and provide higher rates of interest than one- to
four-family loans. At March 31, 1999, the Company's one year cumulative interest
sensitivity gap as a percentage of total assets was 18.87%.
Low cost deposits also limit interest rate risk and are considered a
more stable source of funds than certificates of deposit or outside borrowings.
The Company generally will not offer depositors certificates of deposit with
terms exceeding two years.
Finally, the Company maintains a significant percentage of its assets
in cash and cash equivalents.
<PAGE>
Net Portfolio Value
In order to encourage association to reduce their interest rate risk,
the OTS adopted a rule incorporating an interest rate risk ("IRR") component
into the risk-based capital rules. The IRR component is a dollar amount that
will be deducted from total capital for the purpose of calculating an
institution's risk-based capital requirement and is measured in terms of the
sensitivity of its NPV to changes in interest rates. NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities,
and off-balance sheet contracts. An institution's IRR is measured as the change
to its NPV as a result of a hypothetical 200 basis point change in market
interest rates. A resulting change in NPV of more than 2% of the estimated
market value of its assets will require the institution to deduct from its
capital 50% of that excess change. The rules provide that the OTS will calculate
the IRR component quarterly for each institution. The Bank, based on asset size
and risk-based capital, has been informed by the OTS that it is exempt from this
rule. Nevertheless, the following table presents the Bank's NPV at March 31,
2000, as calculated by the OTS, based on information provided to the OTS by the
Bank.
<TABLE>
<CAPTION>
Change in
Interest Rates March 31, 2000
in Basis Points Net Portfolio Value
(Rate Shock) $ Amount $ Change % Change
------------ -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
300 2,128 102 5 %
200 2,103 72 4 %
100 2,071 46 2 %
Static 2,025 - -
(100) 1,965 -61 -3 %
(200) 1,920 -105 -5 %
(300) 2,006 -19 -1 %
</TABLE>
Certain shortcomings are inherent in the method of analysis presented
in both the computation of NPV and in the analysis presented in the prior tables
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market interest rates. Additionally, adjustable-rate mortgages have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. The proportion of adjustable-rate loans could be reduced in future
periods if market interest rates would decrease and remain at lower levels for a
sustained period, due to increased refinancing activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of a sustained interest rate increase.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and principal and
interest payments on loans. In the event that the Bank should require funds
beyond its ability to generate them internally, additional sources of funds are
available through the use of FHLB advances. In addition, the Bank maintains a
significant level of its assets in cash and cash equivalents which is a readily
available source of funds. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and early loan repayments
are more influenced by interest rates, general economic conditions and
competition.
Federal regulations require the Bank to maintain levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows and is currently 4% of net withdrawable savings
deposits and borrowings payable on demand in one year or less during the
preceding calendar month. Liquid assets for purposes of this ratio include cash,
certain time deposits, U.S. Government, government agency and other securities
and obligations generally having remaining maturities of less than five years.
The Bank's most liquid assets are cash and cash equivalents. The levels of these
assets are dependent on the Bank's operating, financing, lending and investing
activities during any given period. At March 31, 2000 and 1999 liquidity
eligible assets totaled $3.6 million and $2.8 million, respectively. At those
dates, the Bank's liquidity ratios were 41.5% and 35.7% respectively, all in
excess of the 4% minimum regulatory requirement.
<PAGE>
The Bank uses its liquid resources principally to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to fund existing and future loan commitments, to maintain liquidity and to meet
operating expenses. At March 31, 2000, the Bank had no outstanding commitments
to extend credit.
Management believes that loan repayments and other sources of funds
will be adequate to meet the Bank's foreseeable liquidity needs.
At March 31, 2000, the Bank had $3.3 million in certificates of deposit
due within one year and $5.3. million in savings accounts. Based on past
experience, management expects that most of the deposits will be retained or
replaced by new deposits.
The primary investment activities of the Bank are the origination of
one-to four-family, commercial real estate, and loans secured by deposits.
During the years ended March 31, 2000 and 1999, the Bank originated loans
totaling $1.0 million and $1.3 million, respectively. These activities were
funded primarily by deposits and principal repayments on loans.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In addition, certain provisions of this statement
will permit, at the date of initial adoption of SFAS No. 133, the transfer of
any held-to-maturity security into either the available-for-sale security or
into the trading category and the transfer of any available-for-sale security
into the trading category. Transfers from the held-to-maturity portfolio at the
date of initial adoption will not call into question the entity's intent to hold
other debt securities to maturity in the future. In June 1999, the FASB issued
SFAS No. 137, an amendment to FASB Statement No. 133, which defers the effective
date to periods beginning after June 15, 2000. The Company does not expect the
adoption of SFAS to have a material impact on its financial statements.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with GAAP, which generally require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Nearly all the assets and
liabilities of the Bank are financial, unlike most industrial companies. As a
result, the Company's performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary expectations. The
Company's ability to match the interest sensitivity of its financial assets to
the interest sensitivity of its financial liabilities in its asset/liability
management may tend to minimize the effect of change in interest rates on the
Company's performance. Changes in interest rates do not necessarily move to the
same extent as changes in the price of goods and services. In the current
increasing interest rate environment, liquidity and the maturity structure of
the Company's assets and liabilities and critical to the maintenance of
acceptable performance levels.
COMMON STOCK AND RELATED MATTERS
Common Stock. There is no public trading market for the Company's
Common Stock. As there are no market makers in the Company's Common Stock, there
is no bid information. The last known trade in the Common Stock was for 3,300
shares at a price of $37.00 per share which occurred on May 31, 2000.
As of March 31, 2000, the Company had 76,000 shares of Common Stock
outstanding. As of such date the Company had 22 stockholders of record. This
does not reflect the number of persons whose stock is in nominee or "street"
name accounts through brokers.
<PAGE>
Dividends. The Company has never paid dividends on the Common Stock.
The future payment of dividends will be subject to determination and declaration
by the Board of Directors in its discretion, which will take into account the
Company's financial condition and results of operations, tax consideration,
industry standards, economic conditions, regulatory restrictions, general
practices and other factors.
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. A "well
capitalized" institution can, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year in an amount up to 100
percent of its net income during the calendar year, plus its retained net income
for the preceding two years. As of March 31, 2000 the Bank was a
"well-capitalized" institution.
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held at 3:00 p.m. on Friday, July 21,
2000, at the main office of Dollar Savings Bank, 893 Franklin Avenue, Newark,
New Jersey 07107.
Officers and Directors
Robert DeMane, President, Chief Executive Officer and Director
David J. Breitkopf, Chairman of the Board
Susan Velardi, Vice President, Secretary and Director
Ira Geller, Director
Karin Meyer, Director
Alex Velto. Director
Special Counsel
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, DC 20015
Independent Auditors
Fontanella and Babitts
534 Union Boulevard
Totowa, New Jersey 07512
Annual Report on Form 10-KSB
A copy of the Company's Form 10-KSB for the fiscal year ended March 31, 2000
will be furnished without charge to stockholders as of record June 27, 2000,
upon written request to Secretary, Dollar Bancorp, Inc., 893 Franklin Avenue,
Newark, New Jersey 07107, or by calling (973) 483-0001.
Corporate Center
893 Franklin Avenue
Newark, New Jersey 07107
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
(With Independent Auditors' Report Thereon)
March 31, 2000
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
(With Independent Auditors' Report Thereon)
March 31, 2000
----------------------------
<TABLE>
<CAPTION>
INDEX
Page
<S> <C>
Independent Auditors' Report 1
Consolidated Statements of Financial Condition
as of March 31, 2000 and 1999 2
Consolidated Statements of Income for
the Years Ended March 31, 2000 and 1999 3
Consolidated Statements of Stockholders' Equity
as of March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for
the Years Ended March 31, 2000 and 1999 5 - 6
Notes to Financial Statements 7 - 21
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Fontanella and Babitts
Certified Public Accountants 534 Union Boulevard
Totowa Boro, New Jersey 07512
Tel: (973) 595-5300
Fax: (973) 595-5890
To The Board of Directors
Dollar Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated statements of financial condition
of Dollar Bancorp, Inc. and Subsidiary (the "Corporation") as of March 31, 2000
and 1999, and the related statements of income, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dollar Bancorp, Inc. and
Subsidiary, as of March 31, 2000 and 1999, and the results of their operations
and cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Fontanella and Babitts
May 17, 2000
-1-
<PAGE>
<TABLE>
<CAPTION>
DOLLAR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31,
Assets 2000 1999
------ ----------- -------
<S> <C> <C>
Cash and amounts due from depository
institutions $ 409,871 $ 313,575
Interest-bearing deposits in other
banks 3,165,806 2,504,860
----------- -----------
Total cash and cash equivalents (Note 1) 3,575,677 2,818,435
Mortgage-backed securities held to maturity,
approximate fair value of $21,000 (2000) and
$31,000 (1999) (Notes 1 and 2) 20,879 28,863
Loans receivable, net (Notes 1 and 3) 5,972,866 6,231,435
Premises and equipment, net (Notes 1 and 4) 287,852 297,135
Real estate acquired in settlement of
loans, net (Note 1) 275,175 -
Federal Home Loan Bank of New York stock,
at cost 56,500 56,500
Refundable income taxes (Notes 1 and 7) 2,273 3,290
Prepaid income tax (Notes 1 and 7) 9,442 6,601
Other assets 22,612 22,067
----------- -----------
Total assets $10,223,276 $ 9,464,326
=========== ===========
Liabilities and stockholders' equity
Liabilities
Deposits (Note 5) $ 8,610,553 $ 7,902,237
Advance payments by borrowers for taxes and
insurance 60,261 57,556
Other liabilities 67,498 94,571
----------- -----------
Total liabilities 8,738,312 8,054,364
----------- -----------
Commitments and contingencies (Note 8) - -
Stockholders' equity (Notes 6, 7 and 10)
--------------------
Preferred stock - par value $.01; 100,000 shares
authorized; no shares issued or outstanding - -
Common stock - par value $.01 (2000) $1.00 (1999);
shares authorized 900,000 (2000) 76,000 (1999);
shares issued 76,000 760 76,000
Additional paid in capital 629,382 554,142
Retained earnings - substantially
restricted 854,822 779,820
----------- -----------
Total stockholders' equity 1,484,964 1,409,962
----------- -----------
Total liabilities and stockholders' equity $10,223,276 $ 9,464,326
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
DOLLAR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
March 31,
2000 1999
<S> <C> <C>
Interest income:
Loans $ 541,923 $ 618,042
Mortgage-backed securities 2,038 2,813
Other 191,006 136,188
---------- ----------
Total interest income 734,967 757,043
---------- ----------
Interest expense:
Deposits:
Savings 103,263 91,598
Time 142,457 148,199
---------- ----------
Total interest expense 245,720 239,797
---------- ----------
Net interest income 489,247 517,246
Provision for loan losses (Notes 1 and 3) 19,412 83,588
---------- ----------
Net interest income after provision for loan losses 469,835 433,658
---------- ----------
Non-interest income:
Loan fees and service charges 23,337 44,894
Other 16,167 13,919
Income from real estate operations 3,634 -
---------- ----------
Total non-interest income 43,138 58,813
---------- ----------
Non-interest expenses:
Salaries and employee benefits 223,211 209,639
Net occupancy expense of premises 12,608 24,441
Equipment 6,574 5,617
Federal insurance premium 4,227 4,659
Other 191,351 106,593
---------- ----------
Total non-interest expenses 437,971 350,949
---------- ----------
Income before income taxes 75,002 141,522
Income taxes (Notes 1 and 7) - -
---------- ----------
Net income $ 75,002 $ 141,522
========== ==========
Basic and diluted earnings per share $ .99 $ 1.86
========== ==========
Weighted average number of shares outstanding 76,000 76,000
========== ==========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
DOLLAR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Paid in Retained
Stock Capital Earnings Total
------- --------- ---------- --------
<S> <C> <C> <C> <C>
Balance at March 31, 1998 $76,000 $ 554,142 $ 638,298 $1,268,440
Net income - - 141,522 141,522
------- --------- ---------- ----------
Balance at March 31, 1999 76,000 554,142 779,820 1,409,962
Formation of Holding Company
(Note 10) (75,240) 75,240 -
Net income - - 75,002 75,002
------- --------- ---------- ----------
Balance at March 31, 2000 $ 760 $ 629,382 $ 854,822 $1,484,964
======= ========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
DOLLAR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
March 31,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 75,002 $ 141,522
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Amortization of deferred loan fees (4,198) (9,535)
Depreciation of premises and equipment 12,881 13,569
Provision for losses on loans 13,012 83,588
(Increase) decrease in other assets (545) 3,997
Decrease (increase) in refundable income taxes 1,017 (5,413)
Deferred income taxes (2,841) -
(Decrease) in other liabilities (27,073) (97,725)
(Decrease) in accrued interest
payable on deposits (2,638) (7,657)
---------- ----------
Net cash provided by operating activities 64,617 122,346
---------- ----------
Cash flows from investing activities:
Net (increase) decrease in loans receivable (25,420) 62,217
Principal repayments on mortgage-backed securities 7,984 6,283
Proceeds from sales and other repayments of real
estate acquired in settlement of loans - 16,520
Purchase of equipment (3,598) -
---------- ----------
Net cash (used in) provided by investing activities (21,034) 85,020
---------- ----------
Cash flows from financing activities:
Net increase in deposits 710,954 235,131
Increase (decrease) in advance payments by borrowers
for taxes and insurance 2,705 (7,829)
---------- ----------
Net cash provided by financing activities 713,659 227,302
---------- ----------
Net increase in cash and cash equivalents 757,242 434,668
Cash and cash equivalents, beginning 2,818,435 2,383,767
---------- ----------
Cash and cash equivalents, ending $3,575,677 $2,818,435
========== ==========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
DOLLAR BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
March 31,
2000 1999
Supplemental disclosure of cash flow information
<S> <C> <C>
Cash paid during the year for:
Income taxes $ 1,824 $ 5,413
========== ==========
Interest $ 248,358 $ 247,454
========== ==========
Supplemental schedule of noncash investing activities
Transfer of loan receivable to real estate
acquired in settlement of loans $ 275,175 $ -
========== ==========
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of Dollar Bancorp,
Inc. (the "Corporation"), and the Corporation's wholly owned subsidiary, Dollar
Savings Bank, (the "Savings Bank") and have been prepared in conformity with
generally accepted accounting principles. All significant intercompany accounts
and transactions have been eliminated in consolidation.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the 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 in the near-term relate to the determination of the allowance for loan
losses and the valuation of real estate acquired in settlement of loans.
Management believes that the allowance for loan losses is adequate and that real
estate acquired in settlement of loans is appropriately valued. While Management
uses available information to recognize losses on loans and real estate acquired
in settlement of loans, future additions to the allowance for loan losses or
further writedowns of real estate acquired in settlement of loans may be
necessary based on changes in economic conditions in the Savings Bank's market
area.
Investment and mortgage-backed 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, shall be classified as
available-for-sale securities and reported at fair value, with unrealized
holding gains or losses reported in a separate component of stockholders'
equity.
All mortgage-backed securities are classified as held-to-maturity, because the
Savings Bank has the ability and it is management's intention, to hold all such
securities to maturity.
Gain or loss on sales of securities is based upon the specific identification
method.
Loans receivable, net
Loans are stated at the amount of unpaid principal plus accrued interest less an
allowance for loan losses and deferred loan fees. Loans that are sixty days or
more past due are placed on non-accrual status. Interest is calculated by use of
the simple interest method.
-7-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
-----------------------------------------------
Loan origination fees
The Savings Bank accounts for loan origination fees and costs in accordance with
Statement of Financial Accounting Standards No. 91, "Accounting for Non-
Refundable Fees and Costs Associated with Originating or Acquiring Loans and
Indirect Costs of Leases" ("SFAS 91"). SFAS 91 requires that the Savings Bank
defer loan origination fees and certain direct loan origination costs and
amortize such amounts as an adjustment of yield over the contractual life of the
loan.
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 the 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 allowance 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, type and estimated fair value of collateral
and financial condition of the borrowers. Specific loan loss allowances are
established for identified loans based on a review of such information. 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 loan loss allowances are established, actual losses are
dependent upon future events, and as such, further additions to the level of the
allowance for loan losses may be necessary.
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. The amount of loan impairment is measured based on the present value
of expected future cash flows discounted at the loans'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. 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 interest receivable and then to principal.
-8-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
-----------------------------------------------
Premises and equipment
Premises and equipment are comprised of land, at cost, and building and
furniture, fixtures and equipment, at cost, less accumulated depreciation.
Depreciation charges are computed on the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Building and improvements 5 to 40 years
Furniture, fixtures and equipment 5 to 10 years
</TABLE>
Real estate acquired in settlement of loans
Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded
at the lower of cost or fair value at date of acquisition and thereafter carried
at the lower of such initially recorded amount or fair value less estimated
selling costs. Costs incurred in developing or preparing properties for sale are
capitalized. Income and expense related to the holding and operating of
properties are recorded in operations. Gains and losses from sales of such
properties are recognized as incurred.
Income taxes
Federal income taxes and state taxes have been provided on the basis of reported
income. Deferred income taxes are provided for certain items in income and
expense which enter into the determination of income for financial reporting
purposes in different periods than for income tax purposes.
Concentration of credit risk and 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 borrowings and
other funds, to make loans secured by real estate and, to a lesser extent,
consumer loans in the Northern New Jersey area. The potential for interest- rate
risk exists as a result of the shorter duration of the Savings Bank's
interest-sensitive liabilities compared to the generally longer duration of
interest-sensitive assets. In a rising interest 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 assets and liabilities in order to measure its level of interest-rate
risk and to plan for future volatility.
Statements of cash flows
For the purposes of reporting cash flows, cash and cash equivalents include cash
and amounts due from depository institutions and interest-bearing deposits in
other banks with an original maturity of three months or less.
-9-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
-----------------------------------------------
Disclosures about fair value of financial instruments
The following methods and assumptions were used by the Savings Bank in
estimating the fair value of its financial instruments:
Cash and cash equivalents
The carrying amounts reported in the financial statements for cash and
cash equivalents approximates their fair values.
Mortgage-backed securities
Fair value is determined by reference to quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans receivable
The fair value of loans is estimated by discounting the 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 carrying amounts reported in the financial statements for savings
accounts approximates their fair values. For fixed-maturity certificates
of deposit, fair value is estimated using the rates currently offered for
deposits of similar remaining maturities.
Commitments to extend credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and committed
rates.
Reclassification
Certain amounts, for the year ended March 31, 1999, have been reclassified to
conform to the current year's presentation.
-10-
<PAGE>
<TABLE>
<CAPTION>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
March 31, 2000
Carrying Gross Unrealized Fair
Value Gains Losses Value
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 17,438 $ 453 $ 81 $17,810
Federal Home Loan Mortgage Corp. 3,441 99 - 3,540
-------- ------- -------- -------
$ 20,879 $ 552 $ 81 $21,350
======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
Carrying Gross Unrealized Fair
Value Gains Losses Value
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 24,691 $ 1,516 $ - $26,207
Federal Home Loan Mortgage Corp. 4,172 228 - 4,400
-------- ------- -------- -------
$ 28,863 $ 1,744 $ - $30,607
======== ======= ======== =======
</TABLE>
There were no sales of mortgage-backed securities during the years ended March
31, 2000 and 1999.
3. LOANS RECEIVABLE, NET
<TABLE>
<CAPTION>
March 31,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Real estate mortgages:
One to four family $ 3,966,721 $ 4,550,788
Five or more family 660,981 687,824
Commercial 1,244,512 1,384,829
Construction 515,487 -
----------- -----------
6,387,701 6,623,441
Consumer:
Passbook or certificate 61,525 48,171
----------- -----------
Total loans 6,449,226 6,671,612
----------- -----------
Less: Deferred loan fees 14,380 8,284
Allowance for loan losses 351,305 431,893
Loans in process 110,675 -
----------- -----------
476,360 440,177
$ 5,972,866 $ 6,231,435
</TABLE>
-11-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS RECEIVABLE, NET (Cont'd)
--------------------------
<TABLE>
<CAPTION>
An analysis of the allowance for loan losses follows:
Year Ended
March 31,
2000 1999
<S> <C> <C>
Balance, beginning $431,893 $348,305
Provision charged to operations 19,412 83,588
Charge-offs (100,000) -
-------- --------
Balance, ending $351,305 $431,893
======== ========
</TABLE>
Nonaccrual loans totaled approximately $657,000 and $411,000 at March 31, 2000
and 1999, respectively. Interest income that would have been recorded under the
original terms of such loans totaled approximately $69,000 and $40,000,
respectively, for the years then ended. During the years ended March 31, 2000
and 1999, interest income actually recognized on such loans totaled
approximately $38,000 and $26,000, respectively.
<TABLE>
<CAPTION>
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
March 31,
2000 1999
<S> <C> <C>
Recorded investment in impaired loans:
With recorded allowances $ 656,553 $ 411,005
Without recorded allowances - -
---------- ----------
Total impaired loans 656,553 411,005
Related allowance for loan losses 21,394 12,295
---------- ----------
Net impaired loans $ 635,159 $ 398,710
========== ==========
</TABLE>
4. PREMISES AND EQUIPMENT, NET
<TABLE>
<CAPTION>
March 31,
2000 1999
<S> <C> <C>
Land $ 44,000 $ 44,000
Building and improvements 156,000 156,000
Furnishings and equipment 130,845 127,247
Property held for future expansion 121,700 121,700
-------- --------
452,545 448,947
Less accumulated depreciation 164,693 151,812
-------- --------
$287,852 $297,135
</TABLE>
-12-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEPOSITS
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
2000 1999
-------------------- --------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Savings accounts:
Regular and club:
2.00% $5,317,891 61.76 $4,484,115 56.74
Time deposits:
Market rate:
91 day:
3.30% 85,560 .99 - -
2.75% - 3.00% - - 93,701 1.19
6 month:
4.00% - 4.40% 953,647 11.08 - -
3.60% - 4.50% - - 1,058,466 13.39
12 month:
4.00% - 4.40% 1,043,785 12.12 - -
4.00% - 5.00% - - 1,051,612 13.31
24 month:
4.50% - 5.15% 5,461 .06 - -
4.30% - 5.15% - - 17,483 .22
Jumbo:
Within 90 days:
5.49% - 6.00% 1,204,209 13.99 - -
4.50% - 5.00% - - 1,196,860 15.15
---------- ------- ---------- -------
$8,610,553 100.00 $7,902,237 100.00
========== ======= ========== =======
</TABLE>
The average rate of interest, net of penalty income, was 2.90% and 3.01% for the
years ended March 31, 2000 and 1999, respectively. This average rate is
calculated by dividing the total interest paid or credited to accounts, net of
penalty income, by the average deposit balances outstanding for the period.
Included in deposits at March 31, 2000 and 1999, are deposits from two
directors, individually or in trust for others, totaling approximately
$2,248,000 and $2,161,000, respectively.
The aggregate amount of deposit accounts of $100,000 or more totaled $1,316,000
and $1,273,000 at March 31, 2000 and 1999, respectively.
6. 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's financial statements. 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
-13-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. REGULATORY CAPITAL (Cont'd)
-----------------------
off-balance-sheet items, as calculated under regulatory accounting practices.
The Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of tangible and core capital (as defined in the regulations) to
total assets, and of total capital (as defined) to risk-weighted assets (as
defined). Management believes, as of March 31, 2000, that the Savings Bank meets
all capital adequacy requirements to which it is subject.
The Savings Bank's actual capital amounts and ratios are also presented in the
table below. There is no deduction from capital for interest-rate risk.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000:
Risk-based capital $ 1,551 30.68% $ 404 8.00% $ 506 10.00%
Core capital 1,485 14.51% 409 4.00% 614 6.00%
Tangible capital 1,485 14.51% 154 1.50% 512 5.00%
As of March 31, 1999:
Risk-based capital $ 1,471 30.22% $ 389 8.00% $ 487 10.00%
Core capital 1,410 14.88% 379 4.00% 568 6.00%
Tangible capital 1,410 14.88% 142 1.50% 474 5.00%
</TABLE>
7. INCOME TAXES
The Savings Bank qualifies as a savings institution under the provisions of the
Internal Revenue Code, and was therefore, prior to January 1, 1996, permitted to
deduct from taxable income, an allowance for bad debts based upon eight percent
of taxable income before such deduction, less certain adjustments. Retained
earnings, at March 31, 2000, include approximately $403,000 of such bad debt,
which, in accordance with FASB Statement No. 109, "Accounting for Income Taxes,"
is considered a permanent difference between the book and income tax basis of
loans receivable, and for which income taxes have not been provided. If such
amount is used for purposes other than for bad debt losses, including
distributions in liquidation, it will be subject to income tax at the then
current rate.
-14-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (Cont'd)
-----------------
<TABLE>
<CAPTION>
The components of income taxes are summarized as follows:
Year Ended
March 31,
2000 1999
<S> <C> <C>
Current tax expense:
Federal income $ - $ -
State income 2,841 -
------- ----
2,841 -
Deferred tax expense:
Federal income - -
State income (2,841) -
------- ----
(2,841) -
$ - $ -
======= ====
</TABLE>
<TABLE>
<CAPTION>
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax asset, at March 31, 2000 and 1999, are as follows:
March 31,
2000 1999
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $139,940 $126,536
Deferred interest income - 9,770
Depreciation, including write down
of premises 24,404 31,174
Net operating loss carryforward 41,262 62,859
Other items, principally accrual
to cash adjustments 15,157 21,564
Valuation allowance (204,068) (238,400)
-------- --------
16,695 13,503
Deferred tax liabilities:
Other items, principally accrual
to cash adjustments 7,253 6,902
-------- --------
Net deferred tax asset $ 9,442 $ 6,601
======== ========
</TABLE>
-15-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (Cont'd)
-----------------
<TABLE>
<CAPTION>
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 (34%) to income before income taxes:
Year Ended
March 31,
2000 1999
<S> <C> <C>
Federal income tax $ 25,501 $ 48,117
Increases (reductions) in taxes resulting
from:
Change in federal valuation allowance (31,888) (63,677)
Other items, net 6,387 15,560
--------- ---------
Effective income tax $ - $ -
========= =========
</TABLE>
The Savings Bank has available, at March 31, 2000, unused operating loss
carryforwards of approximately $121,000, which may be applied against future
federal taxable income expiring in the year 2011.
8. 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.
These financial instruments are commitments to originate mortgage loans. The
contract amount of the commitment reflects the extent of involvement the Savings
Bank has in the financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by the
other party to the commitment is represented by the contract amount of the
commitment. The Savings Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Commitments to originate mortgage loans are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Savings Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained by
the Savings Bank upon extension of credit is based on management's credit
evaluation of the counter-party. Collateral held may include one-to-four family
residential properties, five or more unit residential rental properties and
income-producing commercial properties.
The Savings Bank had no commitments to extend credit at March 31, 2000 and 1999.
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.
-16-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (Cont'd)
----------------------------------
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 adverse effect on the
financial position of the Savings Bank.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
March 31,
-----------------------------------
2000 1999
----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets (in thousands)
----------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,576 $ 3,576 $ 2,818 $ 2,818
Mortgage-backed securities
held to maturity 21 21 29 31
Loans receivable 5,973 6,124 6,231 6,507
Financial liabilities
Deposits $ 8,611 $ 8,606 $ 7,902 $ 7,906
</TABLE>
The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. Fair value
estimates are based on judgements 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. Further, the foregoing estimates may not reflect the actual
amount that could be realized if all or substantially all of the financial
instruments were offered for sale.
In addition, the fair value estimates were based on existing on-and-off balance
sheet financial instruments without attempting to value the 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 real estate owned, 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. The lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
-17-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. REORGANIZATION AND STOCK CONVERSION
On June 7, 1997, the Savings Bank converted from a New Jersey state chartered
mutual savings and loan association to a federally chartered mutual savings
bank.
On October 10, 1997, the Savings Bank converted from a federally chartered
mutual savings bank to a federally chartered stock savings bank through the sale
of 76,000 shares of common stock (par value $1.00). Total proceeds of $760,000
were reduced by conversion expenses of $129,858, for net proceeds of $630,142.
At the time of conversion, the Savings Bank established a liquidation account in
an amount equal to its total equity as of the date of the latest statement of
condition appearing in the final prospectus used in connection with the
conversion. The liquidation account will be maintained for the benefit of
eligible account holders or supplemental eligible account holders who continue
to maintain their accounts at the Savings Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible account
holders or supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore an
eligible account holder's or supplemental eligible account holder's interest in
the liquidation account. In the unlikely event of a liquidation of the Savings
Bank, (a circumstance not envisioned or expected by management), each eligible
account holder or supplemental eligible account holder would be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts of all eligible account
holders or supplemental eligible account holders then holding qualifying
deposits in the Savings Bank.
Office of Thrift Supervision (OTS) regulations impose limitations on all capital
distributions, such as cash dividends, payments to repurchase or otherwise
acquire shares, payments to stockholders of another institution in a cash-out
merger and other distributions charged against capital.
At a special meeting of stockholders held September 30, 1999, stockholders of
the Savings Bank approved the reorganization of the Savings Bank into the
holding company structure, whereby the Savings Bank becomes a wholly-owned
subsidiary of the Corporation, a Delaware corporation. Each outstanding share of
the Savings Bank's common stock, par value $1.00 per share, was automatically
converted into one share of the Corporation's common stock, par value $.01 per
share. The reorganization was completed on October 20, 1999.
-18-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In addition, certain provisions of this statement will permit, at
the date of initial adoption of SFAS No. 133, the transfer of any
held-to-maturity security into either the available-for-sale or trading category
and the transfer of any available-for-sale security into the trading category.
Transfers from the held-to-maturity portfolio at the date of initial adoption
will not call into question the entity's intent to hold other debt securities to
maturity in the future. In June 1999, the FASB issued SFAS No. 137, an amendment
of FASB Statement No. 133, which defers the effective date to periods beginning
after June 15, 2000. The Savings Bank does not expect the adoption of SFAS 133
to have a material impact on its financial statements.
12. PARENT ONLY FINANCIAL INFORMATION
Dollar Bancorp, Inc. operates its wholly owned subsidiary, Dollar Savings
Bank. The earnings of the subsidiary are recognized by the holding company
using the equity method of accounting. Accordingly, earnings of the
subsidiary are recorded as increases in the investment in the subsidiary. The
following are the condensed financial statements for Dollar Bancorp, Inc.
(Parent company only).
<TABLE>
<CAPTION>
STATEMENT OF CONDITION
March 31, 2000
<S> <C>
Assets:
Investment in subsidiary $1,484,964
----------
Total assets $1,484,964
==========
Liabilities $ -
Stockholders' equity 1,484,964
----------
Total liabilities and stockholders' equity $1,484,964
==========
</TABLE>
-19-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
--------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF INCOME
From Inception
October 20, 1999
to March 31, 2000
<S> <C>
Equity in undistributed earnings
of subsidiary $42,916
-------
Net income $42,916
=======
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
From Inception
October 20, 1999
to March 31, 2000
<S> <C>
Cash flows from operating activities:
Net income $42,916
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary
(42,916)
Net cash provided by operating activities -
----
Net increase (decrease)in cash and cash equivalents -
Cash and cash equivalents - beginning -
----
Cash and cash equivalents - ending $ -
====
</TABLE>
-20-
<PAGE>
DOLLAR BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
-----------------------------------------
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------
June 30, September 30, December 31, March 31,
1999 1999 1999 2000
-------- ------------ ----------- ----------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Total interest income $ 171 $ 181 $ 192 $ 191
Total interest expense 53 56 65 72
-------- ------------ ----------- ----------
Net interest income 118 125 127 119
Provision for loan losses - - - 19
Non-interest income 8 7 13 15
Non-interest expenses 119 107 110 102
Income taxes - - - -
-------- ------------ ----------- ------
Net income $ 7 $ 25 $ 30 $ 13
======== ============ =========== ==========
Basic and diluted earnings per share $ .10 $ .32 $ .39 $ .18
Weighted average number of
common shares outstanding 76 76 76 76
</TABLE>
-21-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name State of Incorporation
<S> <C>
Dollar Bancorp, Inc. Delaware
|
| 100%
|
Dollar Savings Bank Federal
</TABLE>
