-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JnWciEjf/f6lVTTkZWcenEUNNuM2FsCp+a0ibzf8GfnwyUQF+++RW/UungeAtYK5 w//wHAzHXBstkWS6QJr9Yw== 0000928385-96-001261.txt : 19961001 0000928385-96-001261.hdr.sgml : 19961001 ACCESSION NUMBER: 0000928385-96-001261 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19960927 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCE FINANCIAL BANCORP CENTRAL INDEX KEY: 0001023398 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-13021 FILM NUMBER: 96636626 BUSINESS ADDRESS: STREET 1: 1015 COMMERCE STREET CITY: WELLSBURG STATE: WV ZIP: 26070 BUSINESS PHONE: 3047373531 MAIL ADDRESS: STREET 1: 1015 COMMERCE STREET CITY: WELLSBURG STATE: WV ZIP: 26070 S-1 1 REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on September 27, 1996 - -------------------------------------------------------------------------- Registration No. 333- - ----------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------------- ADVANCE FINANCIAL BANCORP --------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter)
Delaware 6035 Requested - --------------------- ------------------ ----------------------- (State or Other Jurisdiction (Primary Standard Industry (I.R.S. Employer of Incorporation or Organization) Classification Code Number) Identification No.)
1015 Commerce Street, Wellsburg, West Virginia 26070 (304) 737-3531 - -------------------------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant"s Principal Executive Offices) Mr. Stephen M. Gagliardi President Advance Financial Bancorp 1015 Commerce Street, Wellsburg, West Virginia 26070 (304) 737-3531 - -------------------------------------------------------------------------------- (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Please send copies of all communications to: Samuel J. Malizia, Esq. Gregory J. Rubis, Esq. Felicia C. Battista, Esq. MALIZIA, SPIDI, SLOANE & FISCH, P.C. 1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.[_]
CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------------------ Title of Each Class of Amount to be Proposed Proposed Maximum Aggregate Offering Amount of Securities Being Registered Registered Offering Price Price(1) Registration Fee - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, $0.10 Par Value 1,084,450 $10.00 $10,844,500 $3,739.48 Interests of participants in the 401(k) Plan 57,274 $10.00 $ 572,740 $ 0.00 (2) - ------------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee. (2) Includes 57,274 shares that may be acquired by the 401(k) Plan of the registrant, based on the assumption that the assets of the 401(k) Plan are used to purchase such shares. The $572,740 of participations to be registered are based on the assets of the 401(k) Plan. Pursuant to Rule 475(h)(2) under the Securities Act of 1933, no additional fee is required with respect to the interests of participants of the 401(k) Plan. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. PROSPECTUS ADVANCE FINANCIAL BANCORP (PROPOSED HOLDING COMPANY FOR ADVANCE FINANCIAL SAVINGS BANK) ANTICIPATED MAXIMUM OF 943,000 SHARES OF COMMON STOCK $10.00 PURCHASE PRICE PER SHARE Advance Financial Bancorp, a Delaware corporation (the "Company"), is offering between 697,000 and 943,000 shares (subject to adjustment up to 1,084,450 shares) of its common stock, par value $0.10 per share (the "Common Stock"), in a subscription offering in connection with the conversion of Advance Financial Savings Bank, f.s.b. (the "Bank") from a federally chartered mutual savings bank to a federally chartered stock savings bank to be known as Advance Financial Savings Bank and the issuance of all of the Bank's outstanding capital stock to the Company pursuant to the Bank's Plan of Conversion (the "Plan"). The Company may offer shares not subscribed for in the subscription offering in a public offering, as described below. The simultaneous conversion of the Bank to stock form, the issuance of the Bank's outstanding common stock to the Company, and the Company's offer and sale of Common Stock are referred to herein as the "Conversion." References herein to the Bank refer to the Bank in mutual form and in stock form as the context may indicate. Non-transferable rights to subscribe for the Common Stock have been granted, in order of priority, to the Bank's deposit account holders with deposits of at least $50 as of August 31, 1995 ("Eligible Account Holders"), tax-qualified employee plans of the Bank, other deposit account holders with deposits of at least $50 as of September 30, 1996 ("Supplemental Eligible Account Holders"), and certain other depositors and certain borrowers of the Bank as of the voting record date, __________ ___, 1996, for a special meeting of members called to vote on the Conversion ("Other Members") in a subscription offering (the "Subscription Offering"). PURSUANT TO OFFICE OF THRIFT SUPERVISION ("OTS") REGULATIONS, THESE SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. PERSONS VIOLATING THIS PROHIBITION AGAINST TRANSFER MAY LOSE THEIR RIGHT TO PURCHASE STOCK IN THE CONVERSION AND BE SUBJECT TO OTHER POSSIBLE SANCTIONS. Subject to the prior rights of holders of subscription rights and market conditions at or near the completion of the Subscription Offering, the Company may also offer the shares of Common Stock for sale through Charles Webb & Company ("Webb"), a division of Keefe, Bruyette & Woods, Inc. ("KBW") in a public offering to selected persons to whom this Prospectus is delivered (the "Public Offering" and when referred to together with the Subscription Offering, the "Offerings"). Depending on market conditions and availability of shares, the shares of Common Stock may be offered for sale in the Public Offering on a best-efforts basis by Webb. THE BANK AND THE COMPANY RESERVE THE RIGHT, IN THEIR ABSOLUTE DISCRETION, TO ACCEPT OR REJECT, IN WHOLE OR IN PART, ANY OR ALL ORDERS IN THE PUBLIC OFFERING AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING COMPLETION OF THE PUBLIC OFFERING. See "The Conversion - Marketing Arrangements." (Continued on next page) ____________________________ FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS," BEGINNING ON PAGE 1 OF THIS PROSPECTUS. THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE, OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FOR INFORMATION ABOUT SUBSCRIBING, PLEASE CALL THE CONVERSION INFORMATION CENTER AT (304)_________,__________. ==================================================================================================================================== Purchase Estimated Underwriting Commissions and Estimated Price(1) Expenses(2) Net Proceeds(2) - ------------------------------------------------------------------------------------------------------------------------------------ Per Share $ 10.00 $ 0.55(3) $ 9.45(3) - ------------------------------------------------------------------------------------------------------------------------------------ Total Minimum (1) $ 6,970,000 $ 433,000 $ 6,537,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Midpoint (1) $ 8,200,000 $ 450,000 $ 7,750,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Maximum(1) $ 9,430,000 $ 467,000 $ 8,963,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Maximum, as adjusted (4) $10,844,500 $ 486,500 $10,358,000 ====================================================================================================================================
(1) Determined in accordance with an independent appraisal, dated as of September 6, 1996 by Keller & Company, Inc. ("Keller"). The estimated pro forma market value of the Common Stock ranges from $6,970,000 to $9,430,000 ("Estimated Valuation Range" or "EVR") or between 697,000 and 943,000 shares of Common Stock at the purchase price of $10.00 per share in the Offerings. See "The Conversion - Stock Pricing." (2) Includes financial advisory and marketing fees to be paid to Webb that are estimated to be $76,000, $93,000, $110,000, and $129,500, at the minimum, midpoint, maximum, and maximum as adjusted, respectively, of the EVR. A portion of such fees and expenses may be deemed to be underwriting fees and Webb may be deemed to be an underwriter. Also includes printing, postage, legal, appraisal, accounting, and filing fees. Actual net proceeds and expenses may vary from estimated amounts. (3) Assumes the sale of the midpoint number of shares. If the minimum, maximum, or 15% above the maximum number of shares are sold, estimated expenses per share would be $0.62, $0.50, or $0.45, respectively, resulting in estimated net proceeds per share of $9.38, $9.50, or $9.55, respectively. (4) Gives effect to an increase in the number of shares which could occur without a resolicitation of subscribers or any right of cancellation due to an increase in the Estimated Valuation Range of up to 15% above the maximum of the Estimated Valuation Range (for an issuance of up to 1,084,450 shares) to reflect changes in market and financial conditions following commencement of the Offerings or to fill in part or in whole the order of the ESOP. See "The Conversion - Stock Pricing." CHARLES WEBB & COMPANY A DIVISION OF KEEFE, BRUYETTE & WOODS, INC. THE DATE OF THIS PROSPECTUS IS __________ ____, 1996 The Bank's Employee Stock Ownership Plan ("ESOP") intends to subscribe for up to 8% of the total number of shares of Common Stock issued in the Conversion. However, the ESOP may acquire some or all of its shares in the open market after the Conversion. Shares sold above the maximum of the Estimated Valuation Range may be sold to the ESOP to fill its subscription. With the exception of the ESOP, no person may purchase more than 10,000 shares ($100,000) of Common Stock and no person, together with associates and persons acting in concert with such person, may purchase in the aggregate more than 15,000 shares ($150,000) of Common Stock sold in the Conversion. The minimum purchase is 25 shares. However, the Bank and the Company in their sole discretion may increase or decrease the purchase limitation without notice to members or subscribers. See "The Conversion - Limitations on Purchases of Shares." Webb has been engaged to consult with and advise the Bank and the Company in connection with the Conversion and with the sale of shares of the Common Stock in the Offerings. Webb has agreed to use its best efforts to assist the Company and the Bank in the sale of the Common Stock in the Subscription Offering. In addition, Webb has agreed to manage the Public Offering, if any. Webb will not have any obligation to purchase or accept any shares of Common Stock in the Conversion. Webb will be indemnified against certain liabilities, including liabilities that may arise under the Securities Act of 1933, as amended. See "Pro Forma Data," "The Conversion - Plan of Distribution" and "- Marketing Arrangements." To subscribe for shares of Common Stock in the Subscription Offering, the Company must receive an executed order form and certification form (the order form and certification form are referred to together as the "Order Form"), together with full payment of $10.00 per share (or appropriate instructions authorizing a withdrawal from a deposit account at the Bank) for all shares for which subscription is made, at the Bank's office, by 4:00 p.m., Eastern Standard Time, on __________ ___, 1996, unless the Subscription Offering is extended, at the discretion of the Board of Directors, up to an additional 45 days with the approval of the OTS, if necessary, but without additional notice to subscribers (the "Expiration Date"). Subscriptions paid by cash, check, bank draft, or money order will be placed in a segregated account at the Bank and will earn interest at the Bank's passbook rate from the date of receipt until completion or termination of the Conversion. Payments authorized by withdrawal from deposit accounts at the Bank will continue to earn interest at the contractual rate until the Conversion is completed or terminated; these funds will be otherwise unavailable to the depositor until such time. Authorized withdrawals from certificate accounts at the Bank for the purchase of Common Stock will be permitted without the imposition of early withdrawal penalties or loss of interest. To order Common Stock in the Public Offering, if any, an executed stock order and account withdrawal authorization (if applicable) and certification must be received by Webb prior to the termination of the Public Offering. The date by which orders must be received in the Public Offering, if any, will be set by the Company at the time of such offering provided that, if the Subscription Offering or Public Offering is extended beyond __________ ___, 1997, each person who has submitted an order will have the right to modify or rescind his or her order. In the event of such an extension, funds submitted by persons to order shares will be returned promptly with interest to each person unless he or she affirmatively indicates otherwise. See "The Conversion - Public Offering." The Company has received preliminary approval to have the Common Stock listed on the Nasdaq SmallCap Market under the symbol "_______." Prior to the Offerings there has not been a public market for the Common Stock, and there can be no assurance that an active and liquid trading market for the Common Stock will develop or that resales of the Common Stock can be made at or above $10.00 per share (the "Purchase Price"). See "Market for the Common Stock." ADVANCE FINANCIAL SAVINGS BANK, F.S.B. ============================================================================ [MAP] ============================================================================ THE CONVERSION IS CONTINGENT UPON THE RECEIPT OF ALL REQUIRED REGULATORY APPROVALS, APPROVAL OF THE PLAN BY THE MEMBERS OF THE BANK, AND THE SALE OF AT LEAST THE MINIMUM NUMBER OF SHARES OFFERED PURSUANT TO THE PLAN. - -------------------------------------------------------------------------------- SUMMARY The following summary does not purport to be complete, and is qualified in its entirety by more detailed information and the Consolidated Financial Statements of the Bank and the Notes thereto appearing elsewhere in this prospectus. Advance Financial Bancorp: The Company was organized under Delaware law in September 1996 at the direction of the Board of Directors of the Bank to acquire all of the capital stock that the Bank will issue upon its conversion from the mutual to stock form of ownership. The Company has not engaged in any significant business to date. Management believes that the holding company structure will provide flexibility for possible diversification or expansion of business activities, although there are no current arrangements, understandings, or agreements regarding any such opportunities. Subject to limitations on repurchases, the holding company structure will also enable the Company to repurchase its own stock without adverse tax consequences. See "Advance Financial Bancorp" and "Business of the Company." Advance Financial Savings Bank, f.s.b.: The Bank, a federally chartered mutual savings bank, operates a traditional savings association business, attracting deposit accounts from the general public and using those deposits, together with other funds, primarily to originate and invest in loans secured by single-family residential real estate. At June 30, 1996, the Bank had total assets of $91.9 million, total deposits of $80.8 million, and equity of $6.2 million. See "Advance Financial Savings Bank, f.s.b." and "Business of the Bank." The Plan and Approval by Members: The Board of Directors of the Bank unanimously adopted the Plan on September 3, 1996. Pursuant to the Plan, the Bank will convert from a federal mutual savings bank into a federal stock savings bank and will become a wholly owned subsidiary of the Company which will issue Common Stock in the Offerings. The Plan must be approved by the affirmative vote of the majority of total votes eligible to be cast by the Bank's members. See "The Conversion." The Offerings and the Purchase Price: Between 697,000 and 943,000 shares of Common Stock are being offered at $10.00 per share in the Offerings. The maximum number of shares sold in the Offerings may be increased to up to 1,084,450 shares without a resolicitation of subscribers in the event of an increase in the pro forma market value of the Bank to an amount not more than 15% above the maximum of the EVR. See "The Conversion - Stock Pricing" and "-Number of Shares to be Issued in the Conversion." Distribution of Common Stock and Purchase Priorities: The shares of Common Stock will first be offered in the Subscription Offering according to the following priorities: (i) Eligible Account Holders; (ii) the ESOP; (iii) Supplemental Eligible Account Holders; and (iv) Other Members. The Company may offer shares of Common Stock for sale through Webb in a Public Offering. See - -------------------------------------------------------------------------------- (i) - -------------------------------------------------------------------------------- "The Conversion - Public Offering." Any shares of Common Stock sold in excess of the maximum of the EVR may be first sold to the ESOP prior to satisfying unfilled orders from Eligible Account Holders. See "The Conversion -Subscription Rights and the Subscription Offering" and "- Public Offering." Transferability of Right to Purchase in the Offerings: DEPOSITORS AND CERTAIN BORROWERS MAY NOT TRANSFER OR ENTER INTO AN AGREEMENT TO TRANSFER THE RIGHT TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE SUBSCRIPTION OFFERING. Persons violating this prohibition against transfer may lose their right to purchase stock in the Conversion and may be subject to other possible sanctions. See "The Conversion- Subscription Rights and the Subscription Offering -Restrictions on Transfer of Subscription Rights and Shares." Purchase Limitations: The purchase limit for a person with subscription rights is the greater of (i) 10,000 shares ($100,000), (ii) one-tenth of one percent of the total offering, or (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Common Stock to be issued by a fraction of which the numerator is the amount of the qualifying deposit of such person and the denominator is the total amount of qualifying deposits of all such persons in that same subscription right category, but in no event shall this number be greater than the 10,000 share maximum purchase limit. The maximum number of shares of Common Stock that may be subscribed for or purchased in the Offerings by any person (or persons through a single account) together with any associate or group of persons acting in concert may not exceed 15,000 shares ($150,000), except for the ESOP, which intends to subscribe for up to 8% of the Common Stock issued. No assurances may be given that the number of shares purchased by the ESOP will not change. The Bank may, in its sole discretion, without further notice to or solicitation of prospective purchasers, increase such maximum purchase limitation to up to 5.0% of the total number of shares offered or decrease the maximum purchase limitation to as low as 1.0% of the maximum number of shares offered. No person may purchase fewer than 25 shares in the Offering. See "The Conversion -Limitations on Purchases of Shares." The Common Stock: Each share of Common Stock will have the same relative rights as, and will be identical in all respects with, each other share of Common Stock in the Offerings. All of the issued and outstanding voting stock of the Bank will be held by the Company. THE COMMON STOCK OF THE COMPANY REPRESENTS NONWITHDRAWABLE CAPITAL, IS NOT AN ACCOUNT OF AN INSURABLE TYPE, AND IS NOT INSURED BY THE OTS, THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF"), OR ANY OTHER GOVERNMENT AGENCY OR FUND. Upon payment of the Purchase Price for the Common Stock, all such shares will be fully paid and nonassessable. See "Description of Capital Stock." - -------------------------------------------------------------------------------- (ii) - -------------------------------------------------------------------------------- Dividends: The Board of Directors of the Company currently intends to establish a cash dividend policy following the Conversion at a rate to be determined. Dividends will be subject to determination and declaration by the Board of Directors, which will take into account a number of factors, including the financial condition of the Company and regulatory restrictions on the payment of dividends by the Bank to the Company, on which dividends the Company eventually may be primarily dependent. There can be no assurance that dividends will be paid on the Common Stock or that, if paid, such dividends will not be reduced or eliminated in future periods. See "Dividends." Expiration Date of Subscription Offering: The Subscription Offering will terminate at 4:00 p.m., Eastern Time, on __________ ____, 1996 unless the Subscription Offering is extended, at the discretion of the Board of Directors, up to an additional 45 days with the approval of the OTS, if necessary, but without additional notice to subscribers. See "The Conversion -Subscription Rights and the Subscription Offering." Conditions to Closing of the Offerings: Consummation of the Offerings is subject to (i) consummation of the Conversion, which is conditioned on, among other things, approval of the Plan by the members of the Bank and the OTS, (ii) the receipt by the OTS of an update to the Bank's appraisal of its pro forma market value and authorization by the OTS to sell Common Stock within the range set forth in the update to that appraisal, and (iii) the sale of a minimum of 697,000 shares of Common Stock. See "The Conversion - Conditions and Termination." There can be no assurances that all of these conditions will be met. Use of Proceeds: Net proceeds from the sale of the Common Stock are estimated to be between approximately $6.54 million and $8.96 million depending on the number of shares of Common Stock sold and the estimated expenses of the Offerings. The Company intends to use approximately 50% of the net proceeds from the Offerings to purchase 100% of the to be outstanding common stock of the Bank and retain the remainder as its initial capitalization. The portion of the net proceeds retained by the Company will initially be invested in U.S. government and federal agency securities, high-grade, short term marketable securities, deposits of, or loans to, the Bank, or a combination thereof and ultimately may be used to support the future expansion of operations. Additionally, the Company intends to fund the ESOP purchases through a loan to the ESOP from net proceeds retained by the Company. The portion of the net proceeds from the Offerings exchanged by the Company for all of the outstanding capital stock of the Bank will be used for general corporate purposes and will increase the Bank's total capital to support expanded lending, internal growth and possible external growth through acquisitions of branch offices, expansion into new lending markets, and other acquisitions. Net proceeds received by the Bank may also be used to make contributions to repay the ESOP - -------------------------------------------------------------------------------- (iii) - -------------------------------------------------------------------------------- loans and will initially be invested in high-grade, short term investment securities. See "Use of Proceeds." Management Purchases: Directors, officers, and their associates, collectively intend to subscribe for approximately 70,000 shares of Common Stock at the Purchase Price. See "The Conversion - Shares to be Purchased by Management Pursuant to Subscription Rights." Potential Management Benefits: ESOP. The ESOP is expected to purchase up to 8% of ---- the shares of Common Stock sold in the Conversion, which will be awarded to employees without payment by such persons of cash consideration. See "Management of the Bank - Other Benefits -Employee Stock Ownership Plan." Restricted Stock Plan. Within one year following --------------------- the completion of the Conversion, subject to stockholder and Board of Director approvals and OTS review, the Bank intends to adopt a restricted stock plan (the "RSP") which would acquire an amount of Common Stock equal to 4.0% of the shares sold in the Conversion. Assuming a $10.00 per share grant price and the issuance of Common Stock at the midpoint of the EVR, the value to participants could total approximately $328,000 in the aggregate. No officer may receive more than 25%, and directors who are not employees may not receive more than 5% individually or 30% in the aggregate, of shares purchased by the RSP. See "Pro Forma Data" and "Management of the Bank - Proposed Future Stock Benefit Plans - Restricted Stock Plan" and "- Restrictions on Benefit Plans." Stock Option Plan. Within one year following the ----------------- completion of the Conversion, subject to stockholder and Board of Director approval and OTS review, the Bank intends to establish a Stock Option Plan (the "Option Plan"), whereby options may be granted to purchase additional authorized but unissued shares of Common Stock that equal in the aggregate up to 10% of the stock sold in the Conversion. Alternatively, such Common Stock may be purchased in the open market by the Company. See "Pro Forma Data" and "Management of the Bank - Proposed Future Stock Benefit Plans - Stock Option Plan." Independent Valuation: Keller & Company, Inc. ("Keller"), an independent appraisal firm, has determined that the estimated pro forma market value of the Bank was within an EVR from $6,970,000 to $9,430,000 with a midpoint of $8,200,000 as of September 6, 1996. The independent valuation will be updated immediately prior to the consummation of the Offerings. See "The Conversion -Stock Pricing" and "- Number of Shares to be Issued in the Conversion." Risk Factors: See "Risk Factors" for a discussion of the following factors which should be considered by prospective investors: potential impact of changes in interest rates; disparity in insurance premiums and special assessment; lack of growth in the Bank"s market areas; expansion of loan portfolio; adjustable-rate mortgage loans; anti- - -------------------------------------------------------------------------------- (iv) - -------------------------------------------------------------------------------- takeover provisions; voting control; possible dilutive effect of RSP and stock options and effect of purchases by the RSP and ESOP; regulatory oversight; possible adverse income tax consequences of the distribution of subscription rights; return on equity after Conversion; and lack of liquidity for the Common Stock. Market for Common Stock: Neither the Company nor the Bank has ever issued capital stock. Consequently, there is no established market for the Common Stock at this time. The Company has received conditional approval from Nasdaq for approval to have Common Stock quoted on the Nasdaq SmallCap Market under the symbol ("____"). However, no assurances can be given that such approval will be forthcoming or that an active and liquid market for the Common Stock will develop or be maintained. Accordingly, prospective purchasers of the Common Stock should consider the potentially illiquid nature of an investment in the Common Stock and recognize that the absence of an established market might make it difficult to buy or sell the Common Stock. Given the relatively small size of the offering, it is not expected that an active and liquid trading market for the Common Stock will develop or that, if developed, it will continue, nor is there any assurance that persons purchasing shares will be able to sell at a price equal to or above the Purchase Price. KBW has indicated that, upon completion of the Conversion, it intends to act as a market maker for the Common Stock, subject to compliance with applicable laws and regulations, although it is not obligated to do so. See "Risk Factors --Lack of Liquidity for the Common Stock" and "Market for the Common Stock." - -------------------------------------------------------------------------------- (v) - -------------------------------------------------------------------------------- SELECTED FINANCIAL AND OTHER DATA Set forth below are summaries of historical financial and other data regarding the Bank. This information is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and Notes to the Consolidated Financial Statements of the Bank presented elsewhere in this Prospectus. SELECTED FINANCIAL DATA The following table sets forth certain information concerning the financial position of the Bank at the dates indicated:
At June 30, --------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in Thousands) Total assets................... $91,852 $83,746 $78,924 $66,261 $64,358 Loans receivable, net(1)....... 78,941 73,057 65,891 54,654 50,002 Mortgage-backed securities..... 537 908 1,129 2,321 3,052 Investments(2)................. 5,428 4,323 2,842 4,621 7,581 Cash and cash equivalents...... 4,017 3,139 7,117 2,749 1,700 Savings deposits............... 80,771 74,698 67,230 59,292 59,145 Retained Earnings.............. 6,200 5,783 5,259 4,221 3,412 Number of: Full service offices(3)........ 2 2 2 2 2 Real estate loans outstanding.. 1,732 1,673 1,640 1,504 1,450 Deposit accounts............... 11,656 10,832 9,994 9,525 9,657
____________________________________ (1) Includes loans held for sale. (2) Includes FHLB stock. (3) In September 1996, the Bank received regulatory approval to open a branch in Wintersville, Ohio. SUMMARY OF OPERATIONS The following table summarizes the Bank's results of operations for each of the periods indicated:
Year Ended June 30, ------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (In Thousands) Interest income............. $ 6,610 $ 5,927 $ 5,382 $ 5,284 $ 5,340 Interest expense............ 3,801 3,144 2,459 2,696 3,437 Net interest income......... 2,809 2,783 2,923 2,588 1,903 Provision for loan losses... 263 48 57 23 37 Net income.................. 417 715 856 729 436
- -------------------------------------------------------------------------------- (vi) - -------------------------------------------------------------------------------- KEY OPERATING RATIOS The table below sets forth certain performance and financial ratios of the Bank for the periods indicated.
At or For the Year Ended June 30, ----------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- PERFORMANCE RATIOS: Return on average assets (net income divided by average total assets)................................ 0.48% 0.89% 1.22% 1.09% 0.69% Return on average equity (net income divided by average equity)...................................... 6.77 12.84 18.05 19.48 13.81 Net interest rate spread.......................................... 3.13 3.38 4.18 3.74 2.95 Net yield on average interest earning assets.......................................................... 3.36 3.59 4.33 3.96 3.15 Average interest-earning assets to average interest-bearing liabilities............................ 104.95 105.09 104.12 105.39 103.56 Net interest income after provision for possible loan losses, to total other expenses................... 1.19 1.44 1.63 1.54 1.23 Efficiency Ratio(1)............................................... 69.18 62.71 55.94 59.13 68.25 ASSET QUALITY RATIOS: Non-performing loans to total loans............................... 0.55 0.33 0.65 0.30 0.61 Allowance for loan losses to non-performing assets........................................... 73.53 32.14 34.87 35.10 28.81 Allowance for loan losses to total loans........................................................... 0.40 0.26 0.25 0.21 0.23 Non-performing assets to total assets.......................................................... 0.48 0.69 0.63 0.41 0.64 CAPITAL RATIOS: Equity to assets at period end.................................... 6.75 6.90 6.66 6.37 5.30 Average equity to average assets ratio............................ 7.10 6.96 6.76 5.58 4.96
____________________ (1) Operating expenses as a percent of net interest income plus non interest income. - -------------------------------------------------------------------------------- (vii) RISK FACTORS Before investing in shares of the Common Stock offered hereby, prospective investors should carefully consider the matters presented below in addition to those discussed elsewhere in this prospectus. POTENTIAL IMPACT OF CHANGES IN INTEREST RATES The Bank's profitability, like that of most financial institutions, is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest earning assets, such as loans and securities, and its interest expense on interest bearing liabilities, such as deposits and other borrowings. Generally, during periods of increasing interest rates, the Bank's interest rate sensitive liabilities would reprice faster than its interest rate sensitive assets, causing a decline in the Bank's interest rate spread and margin. This would result in an increase in the Bank's cost of funds that would not be immediately offset by an increase in its yield on earning assets. An increase in the cost of funds without an equivalent increase in the yield on interest earning assets would tend to reduce net interest income. As a result of the increase in interest rates during these periods, the Bank's net interest rate spread decreased between the fiscal years ended June 30, 1994 and June 30, 1996 from 4.18% to 3.13%. For additional discussion of this interest rate risk, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Portfolio Value." For additional information on the Bank's management of its interest bearing liabilities and interest earning assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management." DISPARITY IN INSURANCE PREMIUMS AND SPECIAL ASSESSMENT Deposits of the Bank are currently insured by the SAIF as administered by the FDIC. As a member of the SAIF, the Bank pays an insurance premium to the FDIC equal to a minimum of 0.23% of its total deposits. The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures commercial bank deposits. Effective September 30, 1995, the FDIC lowered the insurance premium for members of the BIF to a range of between 0.04% and 0.31% of deposits, with the result that most commercial banks would pay the lowest rate of 0.04%. However, effective January 1, 1996, the annual insurance premium for most BIF members was lowered to $2,000. These reductions in insurance premiums for BIF members have placed SAIF members at a competitive disadvantage to BIF members and, for the reasons set forth below, have had an adverse effect on the results of operations and financial condition of the Bank. The disparity in insurance premiums between those required for the Bank and BIF members could allow BIF members to attract and retain deposits at higher interest rates and at a lower effective cost than the Bank. This could put competitive pressure on the Bank to raise its interest rates paid on deposits, thus increasing its cost of funds and possibly reducing net interest income. Although the Bank has other sources of funds, these other sources may have higher costs than those of deposits. See "Regulation -Insurance of Deposit Accounts." Several alternatives to mitigate the effect of the BIF/SAIF insurance premium disparity have been proposed by the U.S. Congress, federal regulators, industry lobbyists, and the executive branch of the government. One such proposal would require all SAIF-member institutions, including the Bank, to pay a one-time fee of approximately 85 basis points (100 basis points equals 1%) on the amount of deposits held by the member institution to recapitalize the SAIF. If this proposal is enacted into law, the effect would be to immediately reduce the capital of the SAIF-member institutions by the amount of the fee, net of any tax deduction that may be available, and such amount would be immediately charged to earnings. Based on $72.3 million in deposits outstanding at the Bank at March 31, 1995 (the date most recently considered in the SAIF recapitalization legislation), this fee would be approximately $600,000. 1 Management of the Bank is unable to predict whether this proposal or any similar proposal will be enacted or whether ongoing SAIF premiums will be reduced to a level equal to that of BIF premiums. LACK OF GROWTH IN THE BANK"S MARKET AREAS Economic growth in the Bank's market areas remains dependent upon the local economy. The deposit and loan activity of the Bank is affected by economic conditions in its market areas. During the early to mid 1980"s this area experienced an economic recession due to significant downsizing in the steel industry. The economies of the Bank's market areas have remained stable for several years, however, the population has experienced modest declines during recent years. Although the Bank has been able to increase its market share in originating first mortgage loans on residential property within its primary market areas, total first mortgage loan originations in the Bank's market areas have been declining. See "Business of the Bank -Competition" and "- Market Areas." EXPANSION OF LOAN PORTFOLIO The Bank currently originates consumer, including automobile, loans and commercial loans and intends to further diversify its loan portfolio by moderately increasing the amount of consumer and commercial lending in its primary market area. Consumer and commercial loans are generally considered to involve a higher degree of credit risk than one- to four-family residential mortgage loans. This higher degree of credit risk may result in the Bank experiencing an increased provision for possible loan losses over that experienced in the Bank's most recent fiscal year. See "Business of the Bank-- Lending Activities." ADJUSTABLE-RATE MORTGAGE LOANS The Bank primarily originates longer term, adjustable-rate, one- to four- family mortgage loans within its market areas. The interest rates on these loans typically adjust every one, three or five years. The Bank requires borrowers for these loans to qualify at the initial rate. The Bank also offers these loans with initial rates below the fully indexed rate. In the event interest rates on these loans increase, related monthly mortgage payments for borrowers will increase. Should this occur, the Bank may experience higher default rates from borrowers unable to meet higher payments. See "Business of the Bank -- One- to Four-Family Residential Loans" and "-- Loan Underwriting Risks." ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Certificate of Incorporation and Bylaws, particularly a provision limiting voting rights, as well as the Delaware General Corporation Law and certain federal regulations, assist the Company in maintaining its status as an independent, publicly owned corporation and serve to render a hostile takeover more difficult. These provisions provide for, among other things, supermajority voting, staggered terms for the Board of Directors, noncumulative voting for directors, limits on the calling of special meetings, and restrictions on certain business combinations. In particular, the Company"s Certificate of Incorporation provides that beneficial owners of more than 10% of the Company's outstanding Common Stock may not vote the shares owned in excess of the 10% limit for a period of five years from the completion of the Conversion of the Bank, and no person may, directly or indirectly, offer to acquire or acquire the beneficial ownership of more than 10% of any class of any equity security of the Company. The impact of these provisions on a beneficial holder of more than 10% of the Common Stock is to (1) require divestiture of the amount of stock held in excess of 10% (if within five years of the Conversion more than 10% of the Common Stock is beneficially owned by a person) and (2) at any time, limit the vote on the Common Stock held by the beneficial owner to 10% or possibly reduce the amount that may be voted below the 10% level. Unless the grantor of a revocable proxy is 2 an affiliate or an associate of a 10% holder or there is an arrangement, agreement, or understanding with such 10% holder, these provisions would not restrict (1) the ability of a 10% holder of revocable proxies to exercise revocable proxies for which the 10% holder is neither a beneficial nor record owner, or (2) the ability of a beneficial owner of less than 10% of the Common Stock to solicit revocable proxies during a public proxy solicitation for a particular meeting of stockholders and vote such proxies. However, these provisions may discourage potential proxy contests. Additional restrictions apply after five years from the completion of the Conversion. The Bank and the Company believe these provisions will benefit stockholders. Nonetheless, these provisions, although they do not preclude a takeover, may have the effect of discouraging a future takeover attempt not approved by the Company's Board of Directors, but pursuant to which stockholders might receive a substantial premium for their shares over then-current market prices. As a result, stockholders who might desire to participate in such a transaction might not have the opportunity to do so. Such provisions will also render the removal of the Company's Board of Directors and of management more difficult and, therefore, may serve to perpetuate current management. The Boards of Directors of the Bank and the Company, however, have concluded that the potential benefits outweigh the possible disadvantages because they believe that such provisions encourage potential acquirors to negotiate directly with the Boards of Directors. The Boards of Directors believe that they are in the best position to act on behalf of all stockholders. Further, the Board of Directors of the Company has the ability to waive certain restrictions on acquisition, provided that the acquisition is approved by a majority of the disinterested Board of Directors in advance. The Bank has also entered into employment agreements with the chief executive officer and other executive officers and severance agreements with certain key employees. These agreements could result in higher expenses for an acquiror, thereby making an acquisition less attractive to potential acquirors. See "Certain Restrictions on Acquisition of the Company." VOTING CONTROL The directors and executive officers of the Bank intend to purchase, at the same price per share as the shares sold to other investors in the Conversion, approximately 70,000 shares or 8.5% of the shares to be sold in the Conversion (based upon an offering at the midpoint of the EVR). Assuming that stockholders approve the Option Plan and RSP, that the stock options to be granted are exercised by recipients, and that the RSP purchases and awards 4% of the shares sold in the Conversion, the aggregate beneficial ownership of such directors and officers would increase after the Conversion to 184,800 shares, or 20.5% (based on an offering at the midpoint of the EVR). In addition, such officers may acquire beneficial ownership of additional shares of Common Stock through future ESOP allocations, which amounts cannot be determined at this time. It is expected that certain directors of the Bank will serve as the trustees to the ESOP ("ESOP Trustees") and as members of an ESOP Committee. The ESOP Trustees must vote all allocated shares held in the ESOP as directed by participating employees. Unallocated shares (approximately 65,600 shares at the midpoint of the EVR immediately after Conversion and until allocated) and allocated shares for which no timely direction is received will be voted by the ESOP Trustees as directed by the Board of Directors or the ESOP Committee, subject to the ESOP Trustees' fiduciary duties. In addition, shares sold above the maximum of the EVR may be sold to the ESOP to fill its subscription (the ESOP currently intends to purchase up to 8% of the Common Stock) prior to satisfying unfilled orders of Eligible Account Holders, or the ESOP may purchase shares in the open market. 3 The proposed purchases of the Common Stock by the Board of Directors, management, and the ESOP, as well as the potential acquisition of the Common Stock through the Option Plan and RSP, could render it difficult to obtain majority support for stockholder proposals opposed by the Company's Board of Directors and management. Moreover, such voting control could enable the Board of Directors of the Company and management to block the approval of transactions requiring the approval of 80% of the stockholders under the Company's Certificate of Incorporation. See "Management of the Bank - Other Benefits" and "- Proposed Future Stock Benefit Plans," "Description of Capital Stock," and "Certain Restrictions on Acquisition of the Company." POSSIBLE DILUTIVE EFFECT OF RSP AND STOCK OPTIONS AND EFFECT OF PURCHASES BY THE RSP AND ESOP Within one year following the completion of the Conversion, subject to the approval of (1) the Boards of Directors of the Company and the Bank and (2) stockholders of the Company, the RSP expects to acquire 4% of the total number of shares sold in the Offerings through the issuance of authorized but unissued shares or by open market purchases. The issuance of authorized but unissued shares to the RSP in an amount equal to 4% of the outstanding shares of Common Stock of the Company would dilute existing stockholder interests by approximately 3.9%. The RSP and the ESOP may acquire shares of Common Stock in the open market. In the event the RSP acquires additional shares of Common Stock in the open market, the funds available for investment by the Company and the Bank will be reduced by the amount used to acquire such shares. In the event the ESOP acquires shares of Common Stock in the open market and the purchase price is different than $10 per share, the funds available for investment will be affected by the difference between $10 and the purchase price. See "Pro Forma Data" and "Management of the Bank - Proposed Future Stock Benefit Plans - Restricted Stock Plan." In addition, the Bank intends to establish a stock option plan after the Conversion, whereby options may be granted to purchase additional authorized but unissued shares of Common Stock that equal in the aggregate up to 10% of the Common Stock sold in the Conversion. Assuming that options for 10% of the shares sold are granted and exercised and funded through previously authorized but unissued stock, existing stockholders' interests would be diluted by approximately 9.1%. See "Management of the Bank - Proposed Future Stock Benefit Plans - Stock Option Plan." Benefit plans such as the RSP and the Option Plan that are implemented within the first year after the Conversion are subject to OTS regulation. Accounting practices require an employer such as the Company to record compensation expense in an amount equal to the fair value of shares committed to be released from plans such as the ESOP. If shares of Common Stock appreciate in price over time, compensation expense related to the ESOP may be materially increased as a result, although the extent of such an increase in expense cannot be accurately quantified at this time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting Pronouncements." REGULATORY OVERSIGHT The Bank is subject to extensive regulation, supervision, and examination by the OTS as its chartering authority and primary federal regulator, and by the FDIC, which insures its deposits up to applicable limits. The Bank is a member of the FHLB of Pittsburgh and is subject to certain limited regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). As the savings and loan holding company of the Bank, the Company is also subject to regulation and oversight by the OTS. Such regulation and supervision governs the activities in which an institution may engage and is intended primarily for the protection of the FDIC insurance funds and depositors and not for the protection of stockholders. Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities. Any change in the regulatory structure or the applicable statutes or regulations could have a material impact on the Company and the Bank, their operations and the Conversion. See "Regulation." 4 A bill has been introduced to the House Banking Committee that would consolidate the OTS with the Office of the Comptroller of the Currency ("OCC"). The resulting agency would regulate all federally chartered commercial banks and thrift institutions. In the event that the OTS is consolidated with the OCC, it is possible that the thrift charter could be eliminated, requiring thrifts to convert to commercial bank charters. Bank holding companies are more limited in their investment authority than are savings and loan holding companies. Under current law and regulation, a unitary savings and loan holding company, such as the Company, which has only one thrift subsidiary that meets the qualified thrift lender ("QTL") test, such as the Bank, has essentially unlimited investment authority. See "Regulation - Company Regulation." Legislation has also been proposed which, if enacted, would limit the non-banking related activities of savings and loan holding companies to those activities permitted for bank holding companies. POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION RIGHTS The Bank has received an opinion from Keller that subscription rights granted to Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members have no value. However, this opinion is not binding on the Internal Revenue Service ("IRS"). If the subscription rights are deemed to have an ascertainable value, receipt of such rights would be taxable (either as capital gain or ordinary income) probably only to those who exercise the subscription rights in an amount equal to such value. Additionally, the Bank could recognize a gain for tax purposes on such distribution. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. See "The Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank - Tax Effects." RETURN ON EQUITY AFTER CONVERSION As a result of the Conversion, the Company, on a consolidated basis with the Bank, will have equity that is substantially more than the equity of the Bank prior to the Conversion. Accordingly, the increase in equity coupled with the limited loan opportunities in the Bank's market areas is likely to adversely affect the Company's ability to attain a return on average equity (net income divided by average equity) at historical levels, absent a corresponding increase in net income. The Company and the Bank initially intend to invest the net proceeds in short to medium term investments which generally have lower yields then residential mortgage loans. There can be no assurance that the Company will be able to increase net income in future periods in amounts commensurate with the increase in equity resulting from the Conversion. See, also, "Pro Forma Data." LACK OF LIQUIDITY FOR THE COMMON STOCK Neither the Bank nor the Company has ever issued capital stock. Consequently, there is not, at this time, any market for the Common Stock. The Company has received conditional approval to have the Common Stock quoted on the Nasdaq SmallCap Market under the symbol "_____." The Company will seek to encourage and assist at least two market makers to make a market in the Common Stock. KBW has indicated its intent to make a market in the Common Stock upon the completion of the Conversion, subject to compliance with applicable laws and regulations, but is under no obligation to do so. While the Company anticipates that prior to the completion of the Conversion it will obtain a commitment from at least one other broker-dealer to make a market in the Common Stock, there can be no assurance that there will be two or more market makers for the Common Stock. One of the conditions for Nasdaq quotation is that at least two market makers make, or agree to make, a market in the stock. 5 Due to the relatively small size of the Offerings, an active and liquid market for the Common Stock may not develop or be maintained. Accordingly, prospective purchasers should consider the potentially illiquid nature of an investment in the Common Stock and recognize that the absence of an established market might make it difficult to buy or sell the Common Stock. See "Market for the Common Stock." ADVANCE FINANCIAL BANCORP The Company is a Delaware corporation organized in September 1996 at the direction of the Bank to acquire all of the capital stock that the Bank will issue upon its conversion from the mutual to stock form of ownership. The Company has not engaged in any significant business to date. The OTS has approved the Company's application to become a savings and loan holding company and the Company will retain approximately 50% of the net proceeds from the issuance of Common Stock as its initial capitalization (ranging from approximately $6.54 million assuming the sale of 697,000 shares at the minimum of the EVR to $8.96 million assuming the sale of 943,000 shares at the maximum of the EVR). The Company will use the balance of the net proceeds to purchase all of the common stock of the Bank to be issued upon Conversion. Part of the proceeds retained by the Company will be used to fund the loan to the ESOP. Prior to the Conversion, the Company will not transact any material business. Upon consummation of the Conversion, the Company will have no significant assets other than that portion of the net proceeds of the Offerings retained by the Company (less the loan to the ESOP) and the shares of the Bank's capital stock acquired in the Conversion, and will have no significant liabilities. Cash flow to the Company will be dependent upon earnings from the investment of the portion of net proceeds retained by it in the Conversion and any dividends received from the Bank. See "Use of Proceeds." Management believes that the holding company structure will provide flexibility for possible diversification of business activities through existing or newly-formed subsidiaries, or through acquisitions of or mergers with both savings institutions and commercial banks, as well as other financial services related companies. Although there are no current arrangements, understandings, or agreements regarding any such opportunities, the Company will be in a position after the Conversion, subject to regulatory limitations and the Company"s financial condition, to take advantage of any such acquisition and expansion opportunities that may arise. However, some of these activities could be deemed to entail a greater risk than the activities permissible for federally chartered savings associations such as the Bank. The initial activities of the Company are anticipated to be funded by the portion of the net proceeds retained by the Company and earnings thereon. The office of the Company is located at 1015 Commerce Street, Wellsburg, West Virginia 26070 and its telephone number is (304) 737-3531. ADVANCE FINANCIAL SAVINGS BANK, F.S.B. The Bank is a federally chartered mutual savings bank headquartered in Wellsburg, West Virginia. The Bank was chartered in 1935 under the name Advance Federal Savings and Loan Association of West Virginia. The Bank obtained its current name in 1989. The Bank's deposits have been federally insured since 1935 under the SAIF as administered by the FDIC and its predecessor, the Federal Savings and Loan Insurance Corporation, and the Bank became a member of the FHLB System in 1935. At June 30, 1996, the Bank had total assets of $91.9 million, deposits of $80.8 million, and equity of $6.2 million or 6.7% of total assets. 6 The Bank is a community oriented savings institution offering financial services to meet the needs of the communities it serves. The Bank conducts its business from its main office located in Wellsburg, West Virginia, and one branch office located in Follansbee, West Virginia. In addition, in September 1996, the Bank received approval from the OTS to open a new branch office in Wintersville, Ohio. The principal sources of funds for the Bank's lending activities are deposits and the amortization and repayment of loans and sales, maturities, and calls of securities. The principal source of income is interest on loans and the principal expense is interest paid on deposits. The main office of the Bank is located at 1015 Commerce Street, Wellsburg, West Virginia 26070 and the telephone number of that office is (304) 737-3531. USE OF PROCEEDS The Company will purchase all of the capital stock of the Bank to be issued upon Conversion in exchange for 50% of the net proceeds of the Offerings, with the remaining net proceeds to be retained by the Company as initial capital. The Company has received the approval of the OTS to retain 50% of the net proceeds. The net proceeds retained by the Company will be initially invested in loans to the Bank, U.S. Government and federal agency securities, interest earning deposits, high-grade short term marketable securities, or a combination thereof. The portion of the net proceeds retained by the Company may ultimately be used to support the future expansion of operations through acquisitions of other financial service institutions, such as other savings institutions and commercial banks, acquisitions of branches of financial service institutions, although no such transactions are currently contemplated, diversification into other related businesses, or for other business and investment purposes including the payment of regular and special dividends on, and repurchase of, the Common Stock. The Company also intends to make a loan directly to the ESOP to enable the ESOP to purchase Common Stock in the Conversion. If the Company is not permitted to make the ESOP loan, the ESOP may borrow funds from an unaffiliated lender with such loan being guaranteed by the Company. Based upon the issuance of 697,000 shares or 943,000 shares at the minimum and maximum of the EVR, respectively, the Company would retain $6.54 million or $8.96 million, respectively, of the net proceeds from the Offerings, out of which the loan to the ESOP to purchase 8% of the Common Stock would be $558,000 or $754,000, respectively, and the Bank would receive additional capital of $5.70 million or $7.83 million, respectively. The amount of the ESOP loan would be reflected as a reduction to the capital of both the Company and the Bank, whether such loan is obtained from the Company or instead from a third party and guaranteed by the Company. See "Pro Forma Data." In the event the ESOP does not purchase Common Stock in the Conversion, the ESOP may purchase shares of Common Stock in the open market after the Conversion. In the event the purchase price of the Common Stock is different than $10.00 per share, the amount of proceeds required for the purchase by the ESOP and the resulting effect on capital will be affected. The portion of the net proceeds not retained by the Company will be added to the Bank's general funds to be used for general corporate purposes, including, but not limited to, investment in mortgage and other loans, U.S. Government and federal agency securities, state and municipal obligations, federal funds, certificates of deposit, mortgage-backed securities, and other investments. The amount of proceeds added to the Bank's capital will further strengthen the Bank's capital position. This capital provides an additional source of funding for longer term assets. Following the Conversion, the amount of proceeds will be evaluated as part of the Bank's ongoing review of its asset/liability mix and may impact the structure of the assets and liabilities of the Bank and the Company. Neither the Bank nor the Company has any specific plans, arrangements, or understandings regarding any acquisitions or diversification of activities at this time, nor have criteria been established to identify potential candidates for acquisition. 7 Should the Company subsequently adopt a restricted stock plan, a portion of the proceeds may be used to fund the purchase by the plan of Common Stock in an amount up to 4% of the shares sold in the Conversion. The actual cost of such purchase will depend on the number of shares sold in the Conversion and the market price at the time of purchase. Based upon the midpoint of the EVR and on a $10.00 per share purchase price, the cost would be approximately $328,000. It is expected that a restricted stock plan will be adopted by the Board of Directors within one year of the Conversion. THE NET PROCEEDS MAY VARY BECAUSE TOTAL EXPENSES OF THE CONVERSION MAY BE MORE OR LESS THAN THOSE ESTIMATED. The net proceeds will also vary if the number of shares to be issued in the Conversion are adjusted to reflect a change in the estimated pro forma market value of the Bank. Payments for shares made through withdrawals from existing Bank deposit accounts will not result in the receipt of new funds for investment by the Bank but will result in a reduction of the Bank's deposits and interest expense as funds are transferred from interest bearing certificates or other deposit accounts. DIVIDENDS Upon Conversion, the Board of Directors of the Company will have the authority to declare dividends on the Common Stock, subject to statutory and regulatory requirements. The Board of Directors of the Company currently intends to establish a cash dividend policy following Conversion at a rate to be determined. Dividends will be subject to determination and declaration by the Board of Directors, which will take into account a number of factors, including the financial condition of the Company and the Bank, and regulatory restrictions on the payment of dividends by the Bank to the Company, on which dividends the Company eventually may be primarily dependent for its source of income. There can be no assurance that dividends will in fact be paid on the Common Stock or that, if paid, such dividends will not be reduced or eliminated in future periods. In addition to or in lieu of recurring or regular dividends, the Company may pay nonrecurring or special dividends. The Company may pay stock dividends in lieu of, or in addition to, cash dividends. It is anticipated that the principal source of income to the Company will initially consist of the earnings on the capital retained by the Company in the Conversion. Future declarations of cash dividends by the Company will depend in part upon dividend payments by the Bank to the Company, which payments are subject to various restrictions. See "Historical and Pro Forma Capital Compliance," "The Conversion -Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank - Liquidation Account," and "Regulation - Dividend and Other Capital Distribution Limitations." Unlike the Bank, the Company is not subject to OTS regulatory restrictions on the payment of dividends to its stockholders although the source of such dividends will be, in part, dependent upon dividends from the Bank. The Company is subject, however, to the requirements of Delaware law, which generally limit dividends to amounts that will not affect the ability of the Company, after the dividend has been distributed, to pay its debts in the ordinary course of business. In addition to the foregoing, earnings of the Bank appropriated for bad debt reserves and deducted for federal income tax purposes cannot be used by the Bank to pay cash dividends to the Company without the payment of federal income taxes by the Bank at the then current income tax rate on the amount deemed distributed, which would include the amount of any federal income taxes attributable to the distribution. See "Taxation - Federal Taxation" and Note 11 to the Consolidated Financial Statements included elsewhere herein. The Company does not contemplate any voluntary distribution by the Bank that would result in a recapture of the Bank's bad debt reserve or create the above-mentioned federal tax liabilities. 8 MARKET FOR THE COMMON STOCK Neither the Company nor the Bank has ever issued capital stock. Consequently, there is no established market for the Common Stock at this time. The Company has received conditional approval to have the Common Stock quoted on the Nasdaq SmallCap Market under the symbol "_____." One of the conditions for quotation on the Nasdaq SmallCap Market is that at least two market makers make, or agree to make, a market in the Common Stock. Making a market involves maintaining bid and ask quotations and being able, as principal, to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. KBW has indicated that, upon completion of the Conversion, it intends to act as a market maker for the Common Stock, but is under no obligation to do so, and will seek to obtain at least one additional market maker. The Company will seek to encourage and assist two market makers to make a market in the Common Stock. While the Company anticipates that prior to the completion of the Conversion it will obtain a commitment from at least one other broker-dealer to make a market in the Common Stock, there can be no assurance that there will be two or more market makers. In the event the Common Stock is not listed on the Nasdaq SmallCap Market, for example, because a second market maker cannot be secured or retained, the Common Stock is expected to be quoted and traded on the OTC Bulletin Board or the National Quotation Bureau, Inc. "Pink Sheets." The development of a liquid public market depends on the existence of willing buyers and sellers, the presence of whom are not within the control of the Company, the Bank, Webb, or any other market maker. Due to the size of the Offerings, it is unlikely that a stockholder base sufficient to create an active trading market will develop and be maintained. Therefore, purchasers of the Common Stock should have a long term investment intent and should recognize that the absence of an active trading market may make it difficult to sell the Common Stock. There can be no assurance that persons purchasing shares will be able to sell them promptly or at a price equal to or above the Purchase Price. The Company will register its Common Stock under the Securities Exchange Act of 1934, as amended ("Exchange Act") at the completion of the Conversion and will be subject to the reporting requirements of the Exchange Act for at least three years following the Conversion. See "Registration Requirements." 9 CAPITALIZATION The following table presents, as of June 30, 1996, the historical capitalization of the Bank and the pro forma consolidated capitalization of the Company after giving effect to the Conversion and other assumptions set forth below and under "Pro Forma Data," based upon the sale of shares at the minimum, midpoint, maximum, and 15% above the maximum of the EVR at a price of $10.00 per share:
Pro Forma Consolidated Capitalization Based on the Sale of ---------------------------------------------- Historical 697,000 820,000 943,000 1,084,450 Capitalization Shares at Shares at Shares at Shares At at June 30, $10.00 $10.00 $10.00 $10.00 1996 Per Share Per Share Per Share Per Share -------------- --------- --------- --------- --------- (In Thousands) Deposits(1).................................. $ 80,771 $ 80,771 $ 80,771 $ 80,771 $ 80,771 Other Borrowings............................. 4,376 4,376 4,376 4,376 4,376 ------- ------- ------- ------- -------- Total deposits and other borrowed funds.... $ 85,147 $ 85,147 $ 85,147 $ 85,147 $ 85,147 ======= ======= ======= ======= ======== Shareholders' Equity: Preferred Stock, 500,000 shares authorized;. -- -- -- -- -- none to be issued......................... Common Stock, $.10 par value, 2,000,000 shares authorized; total shares to be..... $ -- $ 70 $ 82 $ 94 $ 108 issued as reflected....................... Additional paid in capital................... -- 6,467 7,668 8,869 10,249 Retained earnings, substantially restricted.................................. 6,200 6,200 6,200 6,200 6,200 Less: Common stock acquired by ESOP................ -- (558) (656) (754) (868) Common stock acquired by RSP................. -- (279) (328) (377) (434) ------- ------- ------- ------- -------- Total stockholders" equity................... $ 6,200 $ 11,900 $ 12,966 $ 14,031 $ 15,256 ======= ======= ======= ======= ========
__________________________ (1) Excludes accrued interest payable on deposits. Withdrawals from savings accounts for the purchase of stock have not been reflected in these adjustments. Any withdrawals will reduce pro forma capitalization by the amount of such withdrawals. (2) Does not reflect the increase in the number of shares of Common Stock after the Conversion in the event of implementation of the Option Plan or RSP. See "Management of the Bank - Proposed Future Stock Benefit Plans - Stock Option Plan" and "- Restricted Stock Plan." (3) Assumes that 8% and 4% of the shares issued in the Conversion will be purchased by the ESOP and RSP, respectively. No shares will be purchased by the RSP in the Conversion. It is assumed on a pro forma basis that the RSP will be adopted by the Board of Directors, approved by stockholders of the Company, and reviewed by the OTS. It is assumed that the RSP will purchase Common Stock in the open market within one year of the Conversion in order to give an indication of its effect on capitalization. The pro forma presentation does not show the impact of (a) results of operations after the Conversion, (b) changing market prices of shares of Common Stock after the Conversion, or (c) a smaller than 4% purchase by the RSP. Assumes that the funds used to acquire the ESOP shares will be borrowed from the Company for a ten year term at the prime rate as published in The Wall Street Journal. For an estimate of the impact of the ESOP on earnings, see "Pro Forma Data." The Bank intends to make contributions to the ESOP sufficient to service and ultimately retire its debt. The amount to be acquired by the ESOP and RSP is reflected as a reduction of stockholders' equity. The issuance of authorized but unissued shares for the RSP in an amount equal to 4% of the outstanding shares of Common Stock will have the effect of diluting existing stockholders' interests by 3.9%. There can be no assurance that stockholder approval of the RSP will be obtained. See "Management of the Bank - Proposed Future Stock Benefit Plans - Restricted Stock Plan." (4) The equity of the Bank will be substantially restricted after the Conversion. See "Dividends," "Regulation - Dividends and Other Capital Distribution Limitations," "The Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank -Liquidation Account" and Note 12 and 17 to the Consolidated Financial Statements. 10 PRO FORMA DATA The actual net proceeds from the sale of the Common Stock cannot be determined until the Conversion is completed. However, net proceeds are currently estimated to be between $6.5 million and $10.4 million at the minimum and maximum, as adjusted, of the EVR, based upon the following assumptions: (i) 8% of the stock issued in the Conversion will be sold to the ESOP and $1.4 million will be sold to officers, directors, employees and members of their immediate families; (ii) Webb will receive a commission of 1.5% of the Common Stock sold in the Conversion, excluding the sale of shares to the ESOP, and to officers, directors and employees and members of their immediate families; (iii) other Conversion expenses, excluding the commission paid to Webb, will be approximately $357,000; and (iv) 4% of the shares issued in the Conversion will be sold to the RSP. Because management of the Bank presently intends to adopt the RSP within the first year following the Conversion, a purchase by the RSP in the Conversion has been included with the pro forma data to give an indication of the effect of a 4% purchase by the RSP, at a $10.00 per share purchase price in the market, even though the RSP does not currently exist and is prohibited by OTS regulation from purchasing in the Conversion. The pro forma presentation does not show the effect of (a) results of operations after the Conversion, (b) changing market prices of shares of Common Stock after the Conversion, or (c) less than a 4% purchase by the RSP. The following table sets forth for the periods and as of the dates indicated, the historical net earnings and equity of the Bank prior to the Conversion and the pro forma consolidated net earnings and stockholders' equity of the Company following the Conversion. Unaudited pro forma consolidated net earnings and stockholders' equity have been calculated for the fiscal year ended June 30, 1996, as if the Common Stock to be issued in the Conversion had been sold at July 1, 1995, and the estimated net proceeds had been invested by the Company and the Bank at 5.78% for the fiscal year ended June 30, 1996, which rate is equal to the one year U.S. Treasury bill rate in effect during the first two weeks of September 1996. The one year U.S. Treasury bill rate, rather than an arithmetic average of the average yield on interest earning assets and average rate paid on deposits, has been used to estimate income on net proceeds because it is believed that the one year U.S. Treasury bill rate is a more accurate estimate of the rate that would be obtained on an initial investment of net proceeds from the Offerings. In calculating pro forma income, an effective state and federal income tax rate of 34.00% for both the Bank and the Company has been assumed for the respective periods, resulting in an after tax yield of 3.81% for the fiscal year ended June 30, 1996. Withdrawals from deposit accounts for the purchase of the Common Stock are not reflected in the pro forma adjustments. The computations are based upon the assumptions that 697,000 shares (minimum of EVR), 820,000 shares (midpoint of EVR), 943,000 shares (maximum of EVR) or 1,084,450 shares (maximum, as adjusted, of the EVR) are sold at a price of $10.00 per share. As discussed under "Use of Proceeds," the Company expects to retain 50% of the net Conversion proceeds, part of which will be used to lend money to the ESOP to purchase the Common Stock issued in the Conversion. The ESOP presently plans to purchase up to 8% of the Common Stock issued in the Conversion. The following table assumes that the yield on the net proceeds of the Conversion retained by the Company will be the same as the yield on the net proceeds of the Conversion transferred to the Bank. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of Common Stock. Per share amounts have been computed as if the Common Stock had been outstanding at the beginning of the periods or at the dates shown. Pro forma stockholders' equity and pro forma stockholders' equity per share have not been adjusted to reflect the earnings on the estimated net proceeds. 11 The stockholders' equity information is not intended to represent the fair market value of the common stock, or the current value of the Bank's assets or liabilities, or the amounts, if any, that would be available for distribution to stockholders in the event of liquidation. For additional information regarding the liquidation account, see "The Conversion - Effects of the Conversion to Stock Form on Depositors and Borrowers of the Bank - Liquidation Account" and Note 17 to the Consolidated Financial Statements. The pro forma income derived from the assumptions set forth above should not be considered indicative of the actual results of operations of the Bank or the Company for any period. Such pro forma data may be materially affected by a change in the price per share or number of shares to be issued in the Conversion and by other factors. For information regarding investment of the proceeds see "Use of Proceeds" and "The Conversion - Stock Pricing" and "-Number of Shares to be Issued in the Conversion." 12
At or For the Year Ended June 30, 1996 ---------------------------------------------------------- 697,000 820,000 943,000 1,084,450 Shares at Shares at Shares at Shares at $ 10.00 $ 10.00 $ 10.00 $ 10.00 per share per share per share per share --------- --------- --------- ---------- (Dollars in Thousands, except per share amounts) Gross proceeds....................................................... 6,970 8,200 9,430 10,845 Less: Offering expenses.................................................. 357 357 357 357 Marketing fees..................................................... 76 93 110 130 --------- --------- ---------- --------- Estimated net proceeds............................................. 6,537 7,750 8,963 10,358 ========= ========= ========== ========= Net income: Historical......................................................... 417 417 417 417 Pro forma net income on net proceeds............................... 217 258 298 345 Pro forma ESOP adjustment(1)....................................... (37) (43) (50) (57) Pro forma RSP adjustment (1)....................................... (37) (43) (50) (57) Pro forma net income............................................... 561 588 616 648 --------- --------- ---------- --------- Net income per share (3): Historical......................................................... 0.64 0.55 0.48 0.41 Pro forma net income on net proceeds............................... 0.33 0.34 0.34 0.34 Pro forma ESOP adjustment (1)...................................... (0.06) (0.06) (0.06) (0.06) Pro forma RSP adjustment (1)....................................... (0.06) (0.06) (0.06) (0.06) Pro forma net income............................................... 0.87 0.77 0.70 0.64 --------- --------- ---------- --------- Weighted average shares used in the calculation...................... 646,816 760,960 875,104 1,006,370 Stockholders' equity/retained earnings: Historical(2)...................................................... 6,200 6,200 6,200 6,200 Estimated net proceeds............................................. 6,537 7,750 8,963 10,358 Less Common Stock acquired by ESOP(1).............................. (558) (656) (754) (868) Less Common Stock acquired by RSP (1).............................. (279) (328) (377) (434) ----- ----- ----- ----- Pro forma stockholders' equity..................................... 11,900 12,966 14,031 15,256 ========= ========= ========== ========= Stockholders' equity per share: (3) Historical(2)...................................................... 8.90 7.56 6.57 5.72 Estimated net proceeds............................................. 9.38 9.45 9.50 9.55 Less Common Stock acquired by ESOP (1)............................. (0.80) (0.80) (0.80) (0.80) Less Common Stock acquired by RSP(1)............................... (0.40) (0.40) (0.40) (0.40) ----- ------ ------ ------ Pro forma stockholders' equity..................................... 17.07 15.81 14.88 14.07 ----- ----- ----- ----- Offering price as a percentage of pro forma stockholders' equity per share................................................... 58.57% 63.24% 67.21% 71.08% Offering price as a multiple of pro forma earnings per share.......................................................... 11.54 12.94 14.21 15.54
_________________ (1) Assumes 8% of the shares sold in the Conversion are purchased by the ESOP under all circumstances, and that the funds used to purchase such shares are borrowed from the Company. The approximate amount expected to be borrowed by the ESOP is not reflected as a liability but is reflected as a reduction of capital. Although repayment of such debt will be secured solely by the shares purchased by the ESOP, the Bank expects to make discretionary contributions to the ESOP in an amount at least equal to the principal and interest payments on the ESOP debt. Pro forma net earnings have been adjusted to give effect to such contributions based upon a fully amortizing debt with a ten year term. Because the Company will be providing the ESOP loan, only principal payments on the ESOP loan are reflected as employee compensation and benefits expense. For purposes of this table, the Purchase Price of $10.00 was utilized to calculate the 13 ESOP expense. The Bank intends to record compensation expense related to the ESOP in accordance with Statement of Position ("SOP") 93-6. As a result, to the extent the value of the Common Stock appreciates over time, compensation expense related to the ESOP will increase. SOP 93-6 also changes the earnings per share computations for leveraged ESOPs to include as outstanding only shares that have been committed to be released to participants. For purposes of the preceding tables, it was assumed that a ratable portion of the ESOP shares purchased in the Conversion were committed to be released during the period ended June 30, 1996. If it is assumed that all of the ESOP shares were included in the calculation of earnings per share for the period ended at June 30, 1996, earnings per share would have been $0.80, $0.72, $0.65 and $0.60 at June 30, 1996, respectively, based on the sale of shares at the minimum, midpoint, maximum and the maximum, as adjusted, of the EVR. See "Management of the Bank -Other Benefits - Employee Stock Ownership Plan." (2) Assumes a number of shares of Common Stock equal to 4% of the Common Stock sold in the Conversion will be purchased by the RSP in the open market in the year following the Conversion. The dollar amount of the Common Stock to be purchased by the RSP is based on the Purchase Price and represents unearned compensation and is reflected as a reduction of capital. Such amount does not reflect possible increases or decreases in the value of such stock relative to the Purchase Price. As the Bank accrues compensation expense to reflect the five year vesting period of such shares pursuant to the RSP, the charge against capital will be reduced accordingly. Implementation of the RSP within one year of Conversion would require regulatory and stockholder approval at a meeting of the Company's stockholders to be held no earlier than six months after the Conversion. For purposes of this table, it is assumed that the RSP will be adopted by the Boards of Directors of the Company and the Bank, reviewed by the OTS, and approved the Company's stockholders, and that the RSP will purchase the shares of Common Stock in the open market within the year following the Conversion. If the shares to be purchased by the RSP are assumed at July 1, 1995, to be newly issued shares purchased from the Company by the RSP at the Purchase Price, at the minimum, midpoint, maximum and maximum, as adjusted, of the EVR, pro forma stockholders' equity per share would have been $16.42, $15.20, $14.31, and $13.53 at June 30, 1996, respectively, and pro forma earnings per share would have been $0.83, $0.74, $0.68, and $0.62 for the year ended June 30, 1996, respectively. As a result of the RSP, stockholders' interests will be diluted by approximately 3.9%. See "Management of the Bank - Proposed Future Stock Benefit Plans -Restricted Stock Plan" and "Risk Factors -Possible Dilutive Effect of RSP and Stock Options and Effect of Purchases by the RSP and ESOP." (3) Assumes that following the consummation of the Conversion, the Company will adopt the Option Plan, which if implemented within one year of Conversion would be subject to regulatory review and Board of Director and stockholder approval, and that such plan would be considered and voted upon at a meeting of the Company's stockholders to be held no earlier than six months after the Conversion. Under the Option Plan, employees and directors could be granted options to purchase an aggregate amount of Common Stock equal to 10% of the shares issued in the Conversion at an exercise price equal to the market price of the Common Stock on the date of grant. In the event the shares issued under the Option Plan were awarded, the interests of existing stockholders would be diluted. At the minimum, midpoint, maximum and the maximum, as adjusted, of the EVR, if all shares under the Option Plan were newly issued at the beginning of the respective periods and the exercise price for the option shares were equal to the Purchase Price, the number of outstanding shares of Common Stock would increase to 711,498, 837,056, 962,614, and 1,107,007, respectively, pro forma stockholders' equity per share would have been $15.52, $14.37, $13.53, and $12.79 at June 30, 1996, respectively, and pro forma earnings per share would have been $0.79, $0.70, $0.64, and $0.58 at June 30, 1996, respectively. 14 (4) Consolidated stockholders' equity represents the excess of the carrying value of the assets of the Company over its liabilities. The calculations are based upon the number of shares issued in the Conversion, without giving effect to SOP 93-6. The amounts shown do not reflect the federal income tax consequences of the potential restoration to income of the tax bad debt reserves for income tax purposes, which would be required in the event of liquidation. The amounts shown also do not reflect the amounts required to be distributed in the event of liquidation to eligible depositors from the liquidation account which will be established upon the consummation of the Conversion. Pro forma stockholders' equity information is not intended to represent the fair market value of the Common Stock, the current value of the Bank's assets or liabilities or the amounts, if any, that would be available for distribution to stockholders in the event of liquidation. Such pro forma data may be materially affected by a change in the number of shares to be sold in the Conversion and by other factors. 15 HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE The following table presents the Bank's historical and pro forma capital position relative to its capital requirements as of June 30, 1996. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see "Use of Proceeds," "Capitalization," and "Pro Forma Data." The definitions of the terms used in the table are those provided in the capital regulations issued by the OTS. For a discussion of the capital standards applicable to the Bank, see "Regulation - Regulatory Capital Requirements."
Pro Forma as of June 30, 1996(1) --------------------------------------------------------- Historical at $6,970,000 $8,200,000 June 30, 1996 Offering Offering --------------------------- --------------------------- --------------------------- Percent Percent Percent Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) ------ --------- ------ --------- ------ --------- (Dollars in Thousands) GAAP Capital............... 6,200 6.75% 8,632 9.16% 9,091 9.60% TANGIBLE CAPITAL: Actual or Pro Forma........ 6,209 6.75% 8,641 9.15% 9,100 9.59% Required................... 1,380 1.50% 1,417 1.50% 1,424 1.50% ----- ----- ----- ----- ----- ----- Excess................... 4,829 5.25% 7,224 7.65% 7,676 8.09% ===== ===== ===== ===== ===== ===== CORE CAPITAL:(3) Actual or Pro Forma........ 6,209 6.75% 8,641 9.15% 9,100 9.59% Required................... 2,761 3.00% 2,834 3.00% 2,847 3.00% ----- ----- ----- ----- ----- ----- Excess................... 3,448 3.75% 5,807 6.15% 6,253 6.59% ===== ===== ===== ===== ===== ===== TOTAL RISK-BASED CAPITAL:(4) Actual or Pro Forma........ 6,534 11.72% 8,966 15.94% 9,425 16.73% Required................... 4,461 8.00% 4,500 8.00% 4,508 8.00% ----- ----- ----- ----- ----- ----- Excess................... 2,073 3.72% 4,465 7.94% 4,917 8.73% ===== ===== ===== ===== ===== ===== $9,430,000 $10,844,500 Offering Offering --------------------------- --------------------------- Percent Percent Amount of Assets(2) Amount of Assets(2) ------ --------- ------ --------- GAAP Capital............... 9,550 10.03% 10,077 10.53% TANGIBLE CAPITAL: Actual or Pro Forma........ 9,559 10.02% 10,086 10.52% Required................... 1,431 1.50% 1,439 1.50% ----- ----- ----- ----- Excess................... 8,128 8.52% 8,648 9.02% ===== ===== ===== ===== CORE CAPITAL:(3) Actual or Pro Forma........ 9,559 10.02% 10,086 10.52% Required................... 2,861 3.00% 2,877 3.00% ----- ----- ----- ----- Excess................... 6,698 7.02% 7,209 7.52% ===== ===== ===== ===== TOTAL RISK-BASED CAPITAL:(4) Actual or Pro Forma........ 9,884 17.51% 10,411 18.41% Required................... 4,515 8.00% 4,523 8.00% ----- ----- ----- ------ Excess................... 5,369 9.51% 5,888 10.41% ===== ===== ===== ======
_____________ (1) Institutions must value available for sale debt securities at amortized cost rather than at fair value, for purposes of calculating regulatory capital. Institutions are still required to comply with SFAS No. 115 for financial reporting purposes. The pro forma data has been adjusted to reflect reductions in capital that would result from an assumed 8% purchase by the ESOP and 4% purchase by the RSP as of June 30, 1996. It is assumed that the Company will retain 50% of net conversion proceeds. See "Use of Proceeds." (2) GAAP, adjusted, or risk-weighted assets as appropriate. (3) The unrealized loss on securities available for sale of $9,000, has been added to GAAP Capital to arrive at Tangible and Core Capital. (4) Proposed regulations of the OTS could increase the core capital requirement to a ratio between 4% and 5%, based upon an association's regulatory examination rating. See "Regulation - Regulatory Capital Requirements." Risk-Based Capital includes Tangible Capital plus $325,000 of the Bank's allowance for loan losses. Risk-weighted assets as of June 30, 1996 totaled approximately $55.8 million. Net proceeds available for investment by the Bank are assumed to be invested in interest earning assets that have a 20% risk-weighting. 16 ADVANCE FINANCIAL SAVINGS BANK, F.S.B. CONSOLIDATED STATEMENT OF INCOME
Years Ended June 30, -------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Restated INTEREST AND DIVIDEND INCOME Loans $6,152,898 $5,449,416 $4,895,699 Investment securities 216,783 187,916 231,011 Interest-bearing deposits with other institutions 137,850 170,660 98,060 Mortgage-backed securities 68,875 89,733 129,257 Dividends on Federal Home Loan Bank Stock 33,883 29,013 28,273 ---------- ---------- ---------- Total interest and dividend income 6,610,289 5,926,738 5,382,300 ---------- ---------- ---------- INTEREST EXPENSE Deposits 3,627,782 2,978,698 2,248,137 Advances from Federal Home Loan Bank 173,624 165,233 211,302 ---------- ---------- ---------- Total interest expense 3,801,406 3,143,931 2,459,439 ---------- ---------- ---------- NET INTEREST INCOME 2,808,883 2,782,807 2,922,861 Provision for loan losses 262,942 48,208 56,511 ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,545,941 2,734,599 2,866,350 ---------- ---------- ---------- NONINTEREST INCOME Service charges on deposit accounts 194,080 178,297 169,383 Gain on sale of loans 20,364 -- -- Other income 79,490 57,915 60,753 ---------- ---------- ---------- Total noninterest income 293,934 236,212 230,136 ---------- ---------- ---------- NONINTEREST EXPENSE Compensation and employee benefits 885,522 779,285 670,479 Occupancy and equipment 263,986 225,117 222,805 Deposit insurance premiums 170,525 153,784 136,360 Professional fees 95,177 92,938 96,951 Advertising 74,812 65,140 89,275 Data processing charges 144,390 129,975 113,606 Other expenses 512,121 446,963 434,398 ---------- ---------- ---------- Total noninterest expense 2,146,533 1,893,202 1,763,874 ---------- ---------- ---------- Income before income taxes and cumulative effect of 693,342 1,077,609 1,332,612 accounting change Income taxes 275,976 362,901 420,421 ---------- ---------- ---------- Income before cumulative effect of accounting change 417,366 714,708 912,191 Cumulative effect of accounting change for income taxes -- -- (56,476) ---------- ---------- ---------- NET INCOME $ 417,366 $ 714,708 $ 855,715 ========== ========== ==========
See accompanying notes to consolidated financial statements. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company has only recently been formed and, accordingly, has no results of operations at this time. As a result, the following discussion principally reflects the operations of the Bank. The Bank's results of operations are primarily dependent on its net interest income, which is the difference between the interest income earned on its assets, primarily loans and investments, and the interest expense on its liabilities, primarily deposits and borrowings. Net interest income may be affected significantly by general economic and competitive conditions and policies of regulatory agencies, particularly those with respect to market interest rates. The results of operations are also significantly influenced by the level of non-interest expenses, such as employee salaries and benefits, non-interest income, such as fees on deposit-related services, and the Bank's provision for loan losses. The Bank has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services. Management's strategy has been to clarify its corporate focus, make certain that resources are in place to achieve goals and objectives, and review progress toward these goals and objectives. Management has sought to originate adjustable-rate mortgage loans and has, more recently, sought to sell most of the fixed-rate mortgage loans it originates into the secondary market. The Bank has also sought to increase its origination of shorter term loans. CURRENT OPERATING STRATEGY The Bank operates in accordance with the following strategy that is also discussed under "-- General" and "-- Asset/Liability Management:" . Originate Adjustable-rate Mortgage Loans. The Bank believes that it has ---------------------------------------- thus far been successful in originating adjustable-rate mortgage loans during periods when fixed-rate loans are preferred by many consumers. The vast majority of the Bank's one- to four-family mortgage loans are adjustable rate loans and the Bank's one- to four-family mortgage loan portfolio has increased from $38.1 million at June 30, 1992 to $56.0 million at June 30, 1996. Adjustable-rate mortgage loans enable the Bank to better manage its interest rate risk. . Sell Fixed-rate Mortgage Loans. Although the Bank has been successful in ------------------------------- originating adjustable-rate, rather than fixed rate mortgage loans, it has continued to originate fixed-rate mortgage loans for those consumers who desire these loans. The Bank has recently begun selling into the secondary market the vast majority of the fixed-rate loans that it originates as a means of reducing its sensitivity to changes in interest rates. . Originate Shorter Term Loans and Obtain Longer Term Deposits. During the ------------------------------------------------------------ past several years, the Bank has increased its origination of shorter term loans such as consumer loans, non-residential real estate loans, and commercial loans and has also increased its portfolio of longer term certificates of deposit. Increases in these types of loans and deposits have reduced the Bank's sensitivity to changes in interest rates. Further, the increase in these types of loans has enhanced the yield on a portion of the Bank's loan portfolio. . Emphasize Personal Service. For more than 60 years, the Bank has met the --------------------------- financial needs of the communities it serves. Management believes that the Bank has been able to grow during the past five years in a competitive market because it continues to provide highly personalized service 18 to its customers. In addition, the Bank intends to continue serving its market areas as a community bank and believes that doing so will continue to differentiate it from many of its competitors. . Maintain Asset Quality. Management believes that asset quality is a key to ----------------------- long-term financial success. During the past five fiscal years, total non- performing assets as a percentage of total assets has remained between 0.41% and 0.69%. These percentages have remained within this range despite increases in the Bank's portfolio of non-residential real estate loans, automobile loans and commercial loans as well as growth in the overall loan portfolio. ASSET/LIABILITY MANAGEMENT The Bank's net interest income is sensitive to changes in interest rates, as the rates paid on its interest-bearing liabilities generally change faster than the rates earned on its interest-earning assets. As a result, net interest income will frequently decline in periods of rising interest rates and increase in periods of decreasing interest rates. To mitigate the impact of changing interest rates on its net interest income, the Bank manages its interest rate sensitivity and asset/liability products through its asset/liability management committee. The asset/liability management committee meets as necessary to determine the rates of interest for loans and deposits. Rates on deposits are primarily based on the Bank's need for funds and on a review of rates offered by other financial institutions in the Bank's market areas. Interest rates on loans are primarily based on the interest rates offered by other financial institutions in the Bank's primary market areas as well as the Bank's cost of funds. In an effort to reduce interest rate risk and protect itself from the negative effects of rapid or prolonged changes in interest rates, the Bank has instituted certain asset and liability management measures, including underwriting long-term fixed rate loans that are saleable in the secondary market, offering longer term deposit products and diversifying the loan portfolio into shorter term consumer and commercial business loans. In addition, since the mid-1980s, the Bank has primarily originated one year, three year and five year adjustable-rate mortgage loans for its portfolio. The Committee manages the interest rate sensitivity of the Bank through the determination and adjustment of asset/liability composition and pricing strategies. The Committee then monitors the impact of the interest rate risk and earnings consequences of such strategies for consistency with the Bank's liquidity needs, growth, and capital adequacy. The Bank's principal strategy is to reduce the interest rate sensitivity of its interest earning assets and attempt to match the maturities of interest earning assets with interest bearing liabilities, while allowing for a mismatch in an attempt to increase net interest income. NET PORTFOLIO VALUE In order to encourage savings associations to reduce their interest rate risk, the OTS adopted a rule incorporating an interest rate risk ("IRR") component into the risk-based capital rules. However, this rule is not yet in effect. The IRR component is a dollar amount that will be deducted from total capital for the purpose of calculating an institution's risk-based capital requirement and is measured in terms of the sensitivity of its net portfolio value ("NPV") to changes in interest rates. NPV is the difference between incoming and outgoing discounted cash flows from assets, liabilities, and off- balance sheet contracts. An institution's IRR is measured as the change to its NPV as a result of a hypothetical 200 basis point ("bp") change in market interest rates. A resulting change in NPV of more than 2% of the estimated present value of total assets ("PV") will require the institution to deduct from its capital 19 50% of that excess change. The rules provide that the OTS will calculate the IRR component quarterly for each institution. The following table presents the Bank's NPV at June 30, 1996, as calculated by the OTS, based on quarterly information voluntarily provided to the OTS by the Bank.
NPV as % of PV Net Portfolio Value of Assets ------------------------------------------- ------------------------ Change NPV in Rates $ Amount $Change(1) %Change(2) Ratio(3) Change(4) -------- --------- ---------- ---------- -------- --------- (Dollars in Thousands) +400 bp 3,504 (5,021) (59)% 4.01% (505) bp +300 bp 4,912 (3,613) (42) 5.50 (355) bp +200 bp 6,292 (2,232) (26) 6.91 (215) bp +100 bp 7,559 (966) (11) 8.15 (91) bp 0 bp 8,525 -- -- 9.06 -- -100 bp 9,076 551 6 9.54 48 bp -200 bp 9,382 857 10 9.78 72 bp -300 bp 9,990 1,465 17 10.30 124 bp -400 bp 10,830 2,305 27 11.00 195 bp
_________________ (1) Represents the excess (deficiency) of the estimated NPV assuming the indicated change in interest rates minus the estimated NPV assuming no change in interest rates. (2) Calculated as the amount of change in the estimated NPV divided by the estimated NPV assuming no change in interest rates. (3) Calculated as the estimated NPV divided by present value of total assets. (4) Calculated as the excess (deficiency) of the NPV ratio assuming the indicated change in interest rates over the estimated NPV ratio assuming no change in interest rates. At June 30, 1996, a change in interest rates of a positive 200 basis points would have resulted in a 215 basis point decrease in NPV as a percentage of the present value of the Bank's total assets. Utilizing the OTS IRR measurement described above, the Bank, at June 30, 1996, would have been considered by the OTS to have been subject to "above normal" IRR and an additional $175,000 would have been required to be deducted from risk-based capital. Certain assumptions utilized by the OTS in assessing the interest rate risk of savings associations were employed in preparing the previous table. These assumptions related to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under the various interest rate scenarios. It was also assumed that delinquency rates will not change as a result of changes in interest rates although there can be no assurance that this will be the case. Even if interest rates change in the designated amounts, there can be no assurance that the Bank's assets and liabilities would perform as set forth above. Certain shortcomings are inherent in the preceding NPV tables because the data reflect hypothetical changes in NPV based upon assumptions used by the OTS to evaluate the Bank as well as other institutions. Based on the above, net interest income should decline with instantaneous increases in interest rates while net interest income should increase with instantaneous declines in interest rates. Generally, during periods of increasing interest rates, the Bank's interest rate sensitive liabilities would reprice faster than its interest rate sensitive assets causing a decline in the Bank's interest rate spread and 20 margin. This would result from an increase in the Bank's cost of funds that would not be immediately offset by an increase in its yield on earning assets. An increase in the cost of funds without an equivalent increase in the yield on earning assets would tend to reduce net interest income. The Bank's net interest rate spread decreased between the fiscal years ended June 30, 1994 and June 30, 1996 from 4.18% to 3.13%. In times of decreasing interest rates, fixed rate assets could increase in value and the lag in repricing of interest rate sensitive assets could be expected to have a positive effect on the Bank's net interest income. 21 AVERAGE BALANCE SHEET, INTEREST RATES, AND YIELD The following table sets forth certain information relating to the Bank's average balance sheet and reflects the average yield on assets and average cost of liabilities for or as of the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from monthly balances, however, management does not believe the use of month-end balances has caused any material difference in the information presented. There have been no tax equivalent adjustments made to the yields.
At June 30, Year Ended June 30, ------------- --------------------------------------------------------------------- 1996 1996 1995 ------------- --------------------------------- --------------------------------- Average Average Average Average Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost ------- ---------- ------- -------- ---------- ------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-earning assets:...... Loans receivable(1).......... $79,266 7.95% $76,096 $6,153 8.09% $69,378 5,449 7.85% Investment securities (2).... 8,496 5.51% 6,826 388 5.68% 7,257 388 5.35% Mortgage-backed securities.................. 537 8.94% 770 69 8.96% 971 90 9.27% ------- ------- ------ ------- ------ Total interest-earning assets....................... 88,299 7.72% 83,692 6,610 7.90% 77,606 5,927 7.64% ------ ------ Non-interest-earning assets... 3,553 3,042 2,456 ------- ------- ------- Total assets.................. $91,852 $86,734 $80,062 ======= ======= ======= Interest-bearing liabilities: Interest-bearing demand deposits................... $10,930 2.96% $ 9,975 298 2.99% $ 9,204 279 3.03% Certificates of Deposit...... 50,855 5.33% 50,093 2,787 5.56% 44,695 2,142 4.79% Savings deposits............. 17,378 3.18% 16,572 543 3.28% 16,933 558 3.30% Short-term borrowings........ 4,376 5.49% 3,105 173 5.57% 3,012 165 5.48% ------- ----- ------- ------ ------- ----- Total interest-bearing liabilities................. 83,539 4.58% 79,745 3,801 4.77% 73,844 3,144 4.26% ------ ----- Non-interest bearing liabilities.................. 2,113 833 648 ------- ------- ------- Total Liabilities............. 85,652 80,578 74,492 ------- ------- ------- Retained Earnings............. 6,200 6,156 5,570 ------- ------- ------- Total liabilities and retained earnings..................... $91,852 $86,734 $80,062 ======= ======= ======= Net interest income........... $2,809 $2,783 ====== ====== Interest rate spread (3)...... 3.14% 3.13% 3.38% Net yield on interest-earning assets(4).................... 3.38% 3.36% 3.59% Ratio average interest earning assets to average interest- bearing liabilities......... 105.70% 104.95% 105.09% 1994 --------------------------------- Average Average Balance Interest Yield/Cost ------- -------- ---------- Interest-earning assets:...... Loans receivable(1).......... $60,046 $ 4,896 8.15% Investment securities (2).... 5,817 357 6.14% Mortgage-backed securities.................. 1,591 129 8.11% ------- ------- Total interest-earning assets....................... 67,454 5,382 7.98% ------- Non-interest-earning assets 2,694 ------- Total assets.................. $70,148 ======= Interest-bearing liabilities: Interest-bearing demand deposits................... $ 9,745 300 3.08% Certificates of Deposit...... 31,578 1,317 4.17% Savings deposits............. 19,102 631 3.30% Short-term borrowings........ 4,362 211 4.84% ------- ------ Total interest-bearing liabilities................. 64,787 2,459 3.80% ------ Non-interest bearing liabilities.................. 618 ------- Total Liabilities............. 65,405 ------- Retained Earnings............. 4,743 ------- Total liabilities and retained earnings..................... $70,148 ======= Net interest income........... $2,923 ====== Interest rate spread (3)...... 4.18% Net yield on interest-earning assets(4).................... 4.33% Ratio average interest earning assets to average interest- bearing liabilities......... 104.12%
___________________ (1) Average balances include non-accrual loans. (2) Includes interest-bearing deposits in other financial institutions and FHLB stock. (3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 22 RATE/VOLUME ANALYSIS The table below sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods indicated. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by old rate) and (ii) changes in rates (changes in rate multiplied by old volume). Increases and decreases due to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended June 30, ----------------------------------------------------------------------------------- 1996 vs 1995 1995 vs 1994 ------------------------------- -------------------------------- Increase (Decrease) Increase (Decrease) Due to Due to -------------------------- -------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (In Thousands) Loans receivable............... $ 528 $ 176 $ 704 $ 761 $ (208) $ 553 Investment securities.......... (23) 23 -- 88 (57) 31 Mortgage-backed securities..... (19) (2) (21) (50) 11 (39) ------ ------ ------ ------ ------ ------ Total interest-earning assets $ 486 $ 197 $ 683 $ 799 $ (254) $ 545 ====== ====== ====== ====== ====== ====== Interest expense: Interest-bearing demand deposits................... $ 23 $ (4) $ 19 $ (17) $ (4) $ (21) Certificates of Deposit...... 259 386 645 547 278 825 Savings deposits............. (12) (3) (15) (72) (1) (73) Short-term borrowings........ 5 3 8 (65) 19 (46) ------ ------ ------ ------ ------ ------ Total interest-bearing liabilities.................. $ 275 $ 382 $ 657 $ 393 $ 292 $ 685 ====== ====== ====== ====== ====== ====== Net change in interest income.. $ 211 $ (185) $ 26 $ 406 $ (546) $ (140) ====== ====== ====== ====== ====== ======
FINANCIAL CONDITION Total assets increased by $8.1 million or 9.7% to $91.9 million at June 30, 1996 from $83.7 million at June 30, 1995 and by $4.8 million at June 30, 1995 from $78.9 million at June 30, 1994, primarily due to increases in loans receivable of $4.5 million and $7.2 million, respectively, as well as increases of $1.1 million and $1.4 million in securities held to maturity, respectively, and offset, in 1995, by a decrease in interest-bearing deposits with other institutions of $3.6 million. The increases in the dollar amount of loans receivable primarily resulted from increases in the dollar amount of one- to four-family mortgage loan portfolio and to a lesser extent in the non- residential real estate, automobile, and commercial loan portfolios. The Bank's deposits increased by $6.1 million or 8.1% to $80.8 million at June 30, 1996 and by $7.5 million or 11.1% to $74.7 million at June 30, 1995 from $67.2 million at June 30, 1994. Between 1994 and 1995, the Bank increased the size of its certificates of deposit portfolio through extensive advertising of a "yes we can!" slogan in conjunction with providing above-market interest rates for certificates of deposit with nine month terms. Between 1995 and 1996, the Bank increased the size of its certificates of deposit and number of deposit accounts as a result of the opening of a new branch office in Follonsbee, West Virginia. During the past several years, the Bank believes its deposits have 23 increased due to funds deposited by customers of other local institutions who experienced higher fees and less personalized service following mergers and acquisitions of financial institutions located in the Bank's market areas. The Bank's equity increased by $417,000 or 7.2% to $6.2 million at June 30, 1996 from $5.8 million at June 30, 1995. The Bank's equity increased $713,000 or 14.1% at June 30, 1995 from $5.1 million at June 30, 1994. The increases were primarily the result of earnings for the fiscal years ended June 30, 1996 and 1995. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 Net Income. Net income decreased by $297,000 or 41.6% for fiscal 1996 to $417,000 from $715,000 for fiscal 1995. Net income for fiscal 1996 was reduced primarily as a result of an increase of $253,000 in noninterest expense and an increase in the provision for loan losses of $215,000 partially offset by an increase of $58,000 in noninterest income and a decrease of $87,000 in income taxes. Net Interest Income. Net interest income increased by approximately $26,000 or 0.9% to $2.81 million for fiscal 1996 from $2.78 million for fiscal 1995. The interest rate spread decreased to 3.13% for fiscal 1996 from 3.38% for fiscal 1995. The decline in interest rate spread was primarily the result of an increase in the cost of funds due to higher market interest rates for time deposits and an increase in the average balance of time deposits. Net interest income increased between the periods despite this decrease in interest rate spread due to increases in the average balances of both interest-earning assets and interest-bearing liabilities. Interest and Dividend Income. Interest income on loans increased by approximately $703,000 to $6.2 million for fiscal 1996 from $5.4 million for fiscal 1995. The increase for fiscal 1996 was largely the result of an increase of $6.7 million in the average balance of loans outstanding during fiscal 1996, to $76.1 million, as compared to fiscal 1995 as well as an increase in the average yield from 7.85% for fiscal 1995 to 8.09% for fiscal 1996. Interest Expense. Interest expense on deposits increased by approximately $649,000 or 21.8% to $3.6 million for fiscal 1996 from $3.0 million for fiscal 1995. The increase for fiscal 1996 was substantially due to an increase in the average cost of time deposits to 5.56% in fiscal 1996 from 4.79% in fiscal 1995 as well as an increase in the average balance of time deposits to $50.1 million from $44.7 million during this same period. These average costs and balances on time deposits increased as market interest rates increased in fiscal 1996 and the Bank offered higher interest rates to attract and retain time deposits. Interest expense on FHLB advances increased by $8,000 to $173,000 for fiscal 1996 compared to $165,000 for fiscal 1995, as the amount of, and rate paid on, borrowed funds increased. Provision for Loan Losses. The provision for loan losses increased $215,000 or 445.4% to $263,000 for fiscal 1996 from $48,000 for fiscal 1995. The Bank's ratio of non-performing loans to total loans was 0.55% and 0.33% at June 30, 1996 and 1995, respectively. The increase in the amount of the provision for fiscal 1996 was based on management's decision to increase the allowance from $198,000 at June 30, 1995 to $325,000 at June 30, 1996, as well as take a $145,000 charge-off during fiscal 1996. The increase in the provision for loan losses was in part the result of a larger loan portfolio and a significant increase from 1995 to 1996 in automobile loans ($1.6 million), non-residential real estate loans ($2.1 million) and commercial loans ($1.0 million). The $145,000 charge-off during 1996 was related primarily to one loan. See "Business of the Bank -- Analysis of Allowance for Loan Losses." 24 Noninterest Income. Noninterest income increased by $58,000 to $294,000 during fiscal 1996 from $236,000 for fiscal 1995. This increase was primarily due to a $16,000 increase in service charges on deposit accounts and a $20,000 gain on the sale of education loans during the year ended June 30, 1996. The increase in service charges on deposit accounts was primarily the result of an increase in the number of deposit accounts. Noninterest Expense. Noninterest expense increased to $2.1 million or 13.4% for fiscal 1996 from $1.9 million during fiscal 1995. Compensation and benefits expenses increased by $106,000 or 13.7% to $886,000 for fiscal 1996 from $779,000 for fiscal 1995. The increase in compensation and benefits expenses in fiscal 1996 was primarily the result of cost of living increases, the hiring of additional personnel and increased benefit plan expense. Occupancy and equipment expenses increased by $39,000 or 17.3% to $264,000 for fiscal 1996 due to purchases of data processing equipment and renovation of the branch office. Deposit insurance premiums, professional fees, advertising, data processing charges, and other noninterest expense also experienced an aggregate increase of $108,000 or 12.2% over fiscal 1995 due primarily to increases related to the growth in the certificate of deposit portfolio and increased deposit related services. Income Taxes. Income taxes decreased by approximately $87,000 or 24.0% to $276,000 for fiscal 1996 from $363,000 for fiscal 1995. The decrease in fiscal 1996 compared to fiscal 1995 was primarily the result of the decrease in net income before taxes. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1995 AND 1994 Net Income. Net income decreased by $141,000 or 16.5% for fiscal 1995 to $715,000 from $856,000 for fiscal 1994 primarily as a result of a decrease in net interest income of $140,000 and an increase in noninterest expense of $129,000 or 7.3% partially offset by a decrease in income taxes of $58,000 and a $56,000 addition to net income in fiscal 1994 due to an accounting change that was not repeated in fiscal 1995. Net Interest Income. Net interest income decreased to $2.8 million for fiscal 1995 from $2.9 million for fiscal 1994, a decrease of 4.8%. The decrease in net interest income for fiscal 1995 was due to an increase of $684,000 in interest expense that was only partially offset by a $544,000 increase in interest and dividend income. Despite an increase in average balances of interest-earning assets and interest-bearing liabilities in fiscal 1994, the interest rate spread decreased in fiscal 1995 to 3.38% from 4.18% for fiscal 1994, resulting in reduced net interest income. The decrease in the interest rate spread was primarily due to an increase in the cost of interest-bearing liabilities and a decrease in the yield on interest earning assets. Interest and Dividend Income. Interest income on loans increased by approximately $554,000 or 11.3% to $5.4 million for fiscal 1995. This increase was due to a $9.3 million or 15.5% increase in the average balance of loans in fiscal 1995 as compared to fiscal 1994 offset by a 30 basis point or 3.7% decline in the yield earned on loans between these two periods due to a decrease in market interest rates. Interest on deposits with other institutions increased by $73,000 or 74.0% to $171,000 for fiscal 1995, interest income on mortgage- backed securities decreased by $40,000 for fiscal 1995 and interest income on investment securities decreased by $43,000 or 18.7% to $188,000 for fiscal 1995. These changes 25 reflect, in part, the decision of management to increase liquidity by shifting assets from less liquid but higher yielding mortgage-backed and investment securities to more liquid but lower yielding deposits with other institutions. The yield on the average balance of interest earning assets was 7.64% and 7.98%, respectively, for fiscal 1995 and 1994. Interest Expense. Interest expense on deposits increased by approximately $731,000 or 32.5% for fiscal 1995 from $2.2 million for fiscal 1994. The increase for fiscal 1995 was substantially due to an increase of $13.1 million or 41.5% in the average balance of time deposits from $31.6 million in fiscal 1994 to $44.7 million in fiscal 1995 as well as an increase in the cost of time deposits of 62 basis points or 14.9% from 4.17% in fiscal 1994 to 4.79% in fiscal 1995 due to rising market interest rates. Interest on FHLB of Pittsburgh advances decreased $46,000 or 21.8% during fiscal 1995 to $165,000 from $211,000 for fiscal 1994 resulting from a reduction in average borrowings. Provision for Loan Losses. The provision for loan losses decreased $8,000 or 14.7% to $48,000 for fiscal 1995 from $57,000 for fiscal 1994. The Bank's ratio of non-performing loans to total loans was 0.33% and 0.65% at June 30, 1995 and 1994, respectively. Noninterest Income. Noninterest income increased $6,000 during fiscal 1995 from $230,000 for fiscal 1994. Service charges on deposit accounts increased $9,000 and other income decreased $3,000. Noninterest Expense. Noninterest expense increased $129,000 or 7.3% for fiscal 1995 from $1.8 million during fiscal 1994. Compensation and benefits expense increased $109,000 or 16.2% from fiscal 1994 primarily due to cost of living increases and additional personnel. Data processing charges increased $16,000 or 14.4% for fiscal 1995 from $114,000 for fiscal 1994 due to an increased number of accounts and new services being provided. FDIC deposit insurance premium expense increased $17,000 or 12.8% in fiscal 1995 as the average balance of deposits increased in fiscal 1995. Income Taxes. Income taxes decreased by approximately $58,000 or 13.7% to $363,000 for fiscal 1995 from $420,000 for fiscal 1994. The decrease in fiscal 1995 compared to fiscal 1994 was primarily the result of a decrease in net income before taxes. LIQUIDITY AND CAPITAL RESOURCES The Bank is required by OTS regulations to maintain, for each calendar month, a daily average balance of cash and eligible liquid investments of not less than 5% of the average daily balance of its net withdrawable savings and borrowings (due in one year or less) during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10%. The Bank's average liquidity ratio was 10.79%, 9.39%, and 13.97% at June 30, 1996, 1995, and 1994, respectively. The Bank's sources of liquidity include cash flows from operations, principal and interest payments and prepayments on loans, maturities and prepayments of securities, deposit inflows, and borrowing from the FHLB of Pittsburg. During fiscal 1996, 1995, and 1994, the primary source source of funds was cash flows from deposit growth. Cash flow from net deposit growth was $6.1 million, 26 $7.5 million, and $7.9 million, for fiscal years ending June 30, 1996, 1995, and 1994, respectively. Cash flows used to fund loan growth during these same periods totalled $6.2 million, $5.9 million and $12.6 million, respectively. In addition, from time-to-time the Bank borrows funds from the FHLB of Pittsburgh to supplement its cash flows. At June 30, 1996, the Bank had outstanding borrowings from the FHLB of $4.4 million. See Note 10 to the Consolidated Financial Statements. As of June 30, 1996, the Bank had $69,000 of securities classified as available for sale and $4.8 million of investment securities classified as held to maturity. The equity of the Bank at June 30, 1996 was reduced by $9,450 which represents the net unrealized loss on securities classified as available for sale. See Notes 1 and 2 to the Consolidated Financial Statements. The Bank has received regulatory approval to open a branch office during 1997 in Wintersville, Ohio. Refurbishing and related expenses for the proposed branch (estimated at approximately $500,000) are not expected to have a material impact on the capital or liquidity of the Bank. However, the opening and operation of the branch will result in additional noninterest expense relating to hiring additional staff and other related expenses. The Bank is subject to federal regulations that impose certain minimum capital requirements. At June 30, 1996, the Bank exceeded these capital requirements. See "Historical and Pro Forma Capital Compliance." Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid by competitors, adverse publicity relating to the savings and loan industry, and similar matters. Further, the disparity in insurance premiums described herein could result in the Bank losing deposits to BIF members that have lower costs of funds and therefore are able to pay higher rates of interest on deposits. Management monitors projected liquidity needs and determines the level desirable, based in part on the Bank's commitments to make loans and management's assessment of the Bank's ability to generate funds. RECENT ACCOUNTING PRONOUNCEMENTS FASB Statement on Disclosures About Fair Value of Financial Instruments. In December 1991, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 107. The Statement requires the disclosure of the fair value of financial instruments in the footnotes to the financial statements. The Statement is effective for the Bank for fiscal years ending after December 15, 1995. FASB Statement on Accounting by Creditors for Impairment of a Loan. In May 1993, FASB issued SFAS No. 114. SFAS No. 114 addresses the accounting by creditors for impairment of a loan by specifying how allowances for credit losses related to certain loans should be determined. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS No. 114 generally requires creditors to account for impaired loans, except those loans that are accounted for at fair value or at the lower of cost or fair value, at the present value of the expected future cash flows discounted at the loan's effective interest rate. The Statement also addresses the accounting by creditors for loans that are restructured in a troubled debt restructuring involving a modification of terms of a receivable including those involving a receipt of assets in partial satisfaction of a receivable. This 27 Statement is effective for fiscal years beginning after December 15, 1994. In October 1994, FASB amended certain provisions of SFAS No. 114 by the issuance of SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 118 amends SFAS No. 114 by eliminating provisions describing how a creditor should report income on an impaired loan and increasing disclosure requirements as to information on recorded investments in certain impaired loans and how a creditor recognizes related interest income. The effective date of SFAS No. 118 is the same as for SFAS No. 114. The adoption of SFAS No. 114 and the amendment by SFAS No. 118 did not have a material effect on the Bank's financial statements. FASB Statement on Accounting for the Impairment of Long-Lived Asset and for Long-Lived Assets to be Disposed of. In March 1995, FASB issued SFAS No. 121, which will become effective for fiscal years beginning after December 15, 1995. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is evaluated based upon the estimated future cash flows expected to result from the use of the asset and its eventual disposition. If expected cash flows are less than the carrying amount of the asset, an impairment loss is recognized. Additionally, this Statement requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. However, based on existing conditions, and a preliminary review, management believes that the impact of adopting this Statement will not be material to the Bank's financial statements. FASB Statement on Accounting for Mortgage Servicing Rights. In May 1995, FASB issued SFAS No. 122, which will become effective, on a prospective basis, for fiscal years beginning after December 31, 1995. This Statement requires mortgage banking enterprises to recognize as separate assets rights to service mortgage loans, however those servicing rights are acquired. When mortgage loans, acquired either through a purchase transaction or by origination, are sold or securitized with servicing rights retained, an allocation of the total cost of the mortgage loans should be made between the mortgage servicing rights and the loans based on their relative fair values. In subsequent periods, all mortgage servicing rights capitalized must be periodically evaluated for impairment based on the fair value of those rights, and any impairments recognized through a valuation allowance. However, based on existing conditions, and a preliminary review, management believes that the impact of adopting this Statement will not be material to the Bank's financial statements. Effective January 1, 1997, this Statement will be superseded by SFAS No. 125, which is discussed below. FASB Statement on Accounting for Stock-Based Compensation. In October 1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based method" of accounting for an employee stock option whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. FASB encouraged all entities to adopt the fair value based method, however, it will allow entities to continue the use of the "intrinsic value based method" prescribed by Accounting Principles Board ("APB") Opinion No. 25. Under the intrinsic value based method, compensation cost is the excess of the market price of the stock at the grant date over the amount an employee must pay to acquire the stock. However, most stock option plans have no intrinsic value at the grant date and, as such, no compensation cost is recognized under APB Opinion No. 25. Entities electing to continue use of the accounting treatment of APB Opinion No. 25 must make certain pro forma disclosures as if the fair value based method had been applied. The accounting requirements of SFAS No. 123 are effective for transactions entered into in fiscal years beginning after December 15, 1995. Pro forma disclosures must include the effects of all awards granted in fiscal years beginning after December 15, 1994. The Bank expects to continue to use the "intrinsic value based method" as 28 prescribed by APB Opinion No. 25. Accordingly, the impact of adopting this Statement will not be material to the Bank's financial statements. FASB Statement on Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. In June 1996, FASB issued SFAS No. 125, which will be effective, on a prospective basis, for fiscal years beginning after December 31, 1996. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on consistent application of a financial-components approach that focuses on control. SFAS No. 125 extends the "available for sale" and "trading" approach of SFAS No. 115 to non-security financial assets that can be contractually prepaid or otherwise settled in such a way that the holder of the asset would not recover substantially all of its recorded investment. In addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from being classified as held to maturity if the security can be prepaid or settled in such a manner that the holder of the security would not recover substantially all of its recorded investment. The extension of the SFAS No. 115 approach to certain non-security financial assets and the amendment to SFAS No. 115 are effective for financial assets held on or acquired after January 1, 1997. Effective January 1, 1997, SFAS No. 125 will supersede SFAS No. 122, which is discussed above. Management has not yet determined the effect, if any, SFAS No. 125 will have on the Company's financial statements. In December 1994, the Accounting Standards Division of the American Institute of Certified Public Accountants ("AICPA") approved SOP 94-6, Disclosure of Certain Significant Risks and Uncertainties. SOP 94-6 requires additional disclosure in financial statements about the risk and uncertainties existing as of the date of those financial statements in the following areas: nature of operations, use of estimates in the preparation of financial statements, certain significant estimates and current vulnerability due to certain concentrations. The standard is effective for financial statements issued for fiscal years ending after December 15, 1995. Management does not believe that the adoption of SOP 94-6 will have a material impact on the financial position of the Bank. In November 1993, the AICPA issued SOP 93-6 Employers' Accounting for Employee Stock Ownership Plan. SOP 93-6 addresses accounting for shares of stock issued to employees by an employee stock ownership plan. SOP 93-6 requires that the employer record compensation expense in an amount equal to the fair value of shares committed to be released from the ESOP to employees. SOP 93-6 is effective for fiscal years beginning after December 15, 1993 and relates to shares purchased by an ESOP after December 31, 1992. Management has determined that, assuming the Common Stock appreciates over time, the adoption of SOP 93-6 will likely increase compensation expense relative to the ESOP, as compared with prior guidance that required recognition of compensation expense based on the cost of the shares acquired by the ESOP. The amount of any such increase, however, cannot be determined at this time because the expense will be based on the fair value of the shares committed to be released to employees, which amount is not determinable. EFFECT OF INFLATION AND CHANGING PRICES The Bank's financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a 29 more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. BUSINESS OF THE COMPANY The Company is a Delaware corporation organized in September 1996 at the direction of the Bank to acquire all of the capital stock that the Bank will issue upon the Bank's conversion from the mutual to stock form of ownership. The Company is not an operating company and has not engaged in any significant business to date. Management believes that the holding company structure and retention of proceeds from the Offerings will, should it decide to do so, facilitate diversification into other non-banking activities and possible future acquisitions of other financial institutions such as savings institutions and commercial banks, and thereby further its expansion into existing and new market areas and also enable the Company to repurchase its own stock. However, there are no present plans, arrangements, agreements, or understandings, regarding any such activities. Upon consummation of the Conversion, the Company will be a unitary savings and loan holding company which, under existing laws, generally would not be restricted in the types of business activities in which it may engage, provided that the Bank retains a specified amount of its assets in housing-related investments. The Company will not initially conduct any active business. The Company does not intend to employ any persons other than officers, but will utilize the support staff of the Bank from time to time. BUSINESS OF THE BANK GENERAL The Bank attracts deposits from the general public and uses such deposits primarily to originate loans secured by first mortgages on one- to four-family residences in its market areas. One-to four-family loans secured by first mortgages totalled $56.0 million, or 69.1%, of the Bank's total loan portfolio at June 30, 1996. To a lesser extent, the Bank originates consumer loans and non-residential real estate loans which totalled $10.1 million, or 12.4%, and $8.3 million, or 10.3%, respectively, of the total loan portfolio at June 30, 1996. The Bank also originates construction loans and other commercial loans. The principal sources of funds for the Bank's lending activities are deposits, the repayment and maturity of loans and sale, maturity, and call of securities, and FHLB advances. The principal source of income is interest on loans and the principal expense is interest paid on deposits. MARKET AREAS The Bank operates two offices. The main office is located in Wellsburg, West Virginia, and the branch office is located in Follansbee, West Virginia, both of which are in Brooke County. Wellsburg is located approximately 37 miles west of Pittsburgh, Pennsylvania and 16 miles north of Wheeling, West Virginia on U.S. Route 22. The Pittsburgh International Airport is located approximately 45 minutes from Wellsburg. The Bank's primary market area for lending and deposits consists of Brooke and Hancock Counties of West Virginia and portions of Jefferson County, Ohio and Washington County, Pennsylvania. Regulatory approval to open a new branch office in Wintersville, Ohio, located in Jefferson County, has been received by the Bank. 30 Economic growth in the Bank's market areas remains dependent upon the local economy. The deposit and loan activity of the Bank is significantly affected by economic conditions in its market areas. However, the economies of the Bank's market areas have been relatively stable. Major area employers include Weirton Steel Corporation, Wheeling Pittsburgh Steel Corporation, American Electric Power and Koppers Industries. LENDING ACTIVITIES GENERAL. The Bank's loan portfolio predominantly consists of mortgage loans secured by one- to four-family residences. At June 30, 1996, the Bank's loan portfolio totalled $81.1 million. Loans secured by first mortgages on one- to four-family residences totalled $56.0 million, or 69.1%, of the Bank's total loan portfolio at June 30, 1996. The Bank has not purchased loans in several years and is primarily a portfolio lender. Recently, the Bank has adopted a strategy to sell fixed-rate, one- to four-family mortgage loans in the secondary market. At June 30, 1996, such loans held for sale totalled $1.4 million. For its mortgage loan portfolio, the Bank originates fixed-rate and adjustable-rate mortgage loans. At June 30, 1996, adjustable-rate residential one- to four- family mortgage loans totalled approximately 66.8% of the Bank's residential mortgage loans. Loan originations are generally obtained from existing customers, members of the local community, and referrals from real estate brokers, lawyers, accountants, and current and past customers within the Bank's lending area. The Bank also advertises on an extensive basis in the local print media and periodically advertises on radio and television. Mortgage loans originated by the Bank in its portfolio generally include due-on-sale clauses that provide the Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent. 31 ANALYSIS OF LOAN PORTFOLIO. The following table sets forth information concerning the composition of the Bank's loan portfolio in dollar amounts and in percentages of the total loan portfolio as of the dates indicated.
June 30, ------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------- ---------------- ---------------- ---------------- ---------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) TYPE OF LOANS: - ------------- REAL ESTATE LOANS: Construction............. $ 1,901 2.35% $ 2,402 3.21% $ 4,038 5.86% $ 1,929 3.42% $ 1,962 3.79% 1-4 Family(1)............ 55,975 69.05 52,711 70.40 48,051 69.67 41,315 73.25 38,079 73.54 Multi-family............. 1,697 2.09 1,737 2.32 1,367 1.98 849 1.51 885 1.71 Non-residential.......... 8,327 10.27 6,232 8.32 5,519 8.00 3,381 5.99 3,079 5.95 Consumer Loans: Home improvement......... 1,119 1.38 1,313 1.75 899 1.30 690 1.22 538 1.04 Automobile............... 6,178 7.62 4,598 6.14 3,750 5.44 3,935 6.98 3,377 6.52 Share.................... 1,125 1.39 1,026 1.37 809 1.17 818 1.45 734 1.42 Education................ 128 0.16 1,571 2.10 1,608 2.33 1,538 2.73 1,600 3.09 Other.................... 1,512 1.87 1,230 1.64 957 1.39 1,008 1.79 796 1.54 Commercial loans........... 3,100 3.82 2,058 2.75 1,967 2.86 942 1.66 732 1.40 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total loans........... 81,062 100.00% 74,878 100.00% 68,965 100.00% 56,405 100.00% 51,782 100.00% ====== ====== ====== ====== ====== Less: Loans in process......... (1,549) (1,327) (2,598) (1,344) (1,466) Deferred loan origination fees and costs............... (247) (296) (302) (288) (195) Allowance for possible loan losses.................. (325) (198) (174) (119) (119) ------- ------- ------- ------- ------- Total loans, net...... $78,941 $73,057 $65,891 $54,654 $50,002 ======= ======= ======= ======= =======
- ------------------------ (1) Includes $1,375,000 of one- to four-family mortgages held for sale at June 30, 1996 and home equity and second mortgage loans. 32 LOAN MATURITY TABLES The following table sets forth the estimated maturity of the Bank's loan portfolio, including loans held for sale, at June 30, 1996. The table does not include the effects of possible prepayments or scheduled repayments. All mortgage loans are shown as maturing based on contractual maturities.
1-4 Family Residential Multi-family Non-residential Real Estate Real Estate Real Estate Construction Consumer Commercial Total ----------- ----------- ----------- ------------ -------- ---------- ----- (In Thousands) Non-performing............. $ 214 $ 55 $ 77 $ -- $ 87 $ 9 $ 442 AMOUNTS DUE: Within 1 year.............. 2,959 -- 1 -- 471 1,354 4,785 Over 1 to 2 years.......... 58 -- 370 -- 1,185 227 1,840 Over 2 to 3 years.......... 243 -- 22 -- 2,050 230 2,545 Over 3 to 5 years.......... 534 28 319 50 5,008 869 6,808 Over 5 to 10 years......... 8,466 402 1,738 -- 1,121 290 12,017 Over 10 to 15 years........ 18,333 612 3,404 -- 103 85 22,537 Over 15 years.............. 25,168 600 2,396 1,851 37 36 30,088 ------- ------ ------ -------- ------ ------ ------- Total amount due........... 55,975 1,697 8,327 1,901 10,062 3,100 81,062 ------- ------ ------ -------- ------- ------ ------- Less: Allowance for loan losses.. (75) (8) (41) -- (85) (116) (325) Loans in process........... (162) -- (30) (1,217) (55) (85) (1,549) Net deferred loan fees..... (247) -- -- -- -- -- (247) ------- ------ ------ -------- ------- ------ ------- Loans receivable, net...... $55,491 $1,689 $8,256 $ 684 $ 9,922 $2,899 $78,941 ======= ====== ====== ======= ======= ====== =======
The following table sets forth the dollar amount of all loans, including loans held for sale, contractually due after June 30, 1997, and shows the amount of such loans which have pre-determined interest rates and which have floating or adjustable interest rates.
At June 30, 1996 ----------------------------------------- Fixed Rates Adjustable Rates Total ----------- ---------------- ----- (In Thousands) One- to four-family.......... $19,494 $33,520 $53,014 Multi-family................. 699 998 1,697 Non-residential real estate.. 4,220 4,106 8,326 Construction................. 195 1,706 1,901 Consumer..................... 9,589 -- 9,589 Commercial................... 1,456 281 1,737 ------- ------- ------- Total...................... $35,653 $40,611 $76,264 ======= ======= =======
33 The following table shows the total loan originations, repayments, and sales activity by the Bank for the periods indicated:
Year ended June 30, ------------------------- 1996 1995 1994 ---- ---- ---- (In Thousands) Total gross loans receivable at beginning of period....... $74,878 $68,965 $56,405 Loans originated: 1 to 4 family residential.... 6,306 7,194 10,494 Construction................. 2,962 3,212 4,778 Multi-family................. 408 50 837 Non-residential real estate.. 2,013 1,320 2,287 Consumer..................... 8,083 6,008 3,619 Commercial................... 7,789 6,114 4,666 ------- ------- ------- Total loans originated......... 27,561 23,898 26,681 Total loans sold............... 1,488 -- -- Loan principal repayments...... 19,889 17,985 14,121 ------- ------- ------- Net loan activity.............. 6,184 5,913 12,560 ------- ------- ------- Total gross loans receivable at end of period............. $81,062 $74,878 $68,965 ======= ======= =======
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. The Bank's primary lending activity consists of the origination of one- to four-family residential mortgage loans secured by property located in the Bank's primary market areas. The Bank generally originates owner-occupied one- to four-family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property without requiring mortgage insurance. The Bank will originate a mortgage loan in an amount up to 95% of the lesser of the appraised value or selling price of a mortgaged property, however, mortgage insurance is required for the amount in excess of 80% of such value. Non-owner-occupied residential mortgage loans are originated up to 80% of the lesser of the appraised value or selling price of the property on a fixed-rate basis only. The Bank also originates construction permanent loans on one- to four-family residences. The Bank retains most of the mortgage loans that it originates. Adjustable-rate mortgage loans, which can adjust annually or every three or five years over the life of the loan depending on the terms of the loan, can have maturities of up to 30 years. Fixed-rate loans can have maturities of up to 30 years depending on the terms of the loan. For all adjustable-rate mortgage loans, the Bank requires the borrower to qualify at the initial rate. The Bank's adjustable-rate mortgage loans provide for periodic interest rate adjustments of plus or minus 1% to 2% with a maximum adjustment over the term of the loan as set forth in the loan agreement and usually ranges from 6% to 7% above the initial interest rate depending on the terms of the loan. 34 Adjustable-rate mortgage loans reprice every year, every three years or every five years, and provide for terms of up to 30 years with most loans having terms of between 15 and 30 years. The Bank offers adjustable-rate loans with initial interest rates set below the fully indexed rate. The Bank offers adjustable-rate mortgage loans indexed to the weekly average of the one year U.S. Treasury bill. Interest rates charged on mortgage loans are competitively priced based on market conditions and the Bank's cost of funds. Generally, the Bank's standard underwriting guidelines for mortgage loans conform to the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines and most of the Bank's loans are salable in the secondary market. However, it is the current policy of the Bank to remain a portfolio lender for its adjustable rate loans. The Bank's one- to four-family residential loan portfolio also includes second mortgage loans and home equity loans secured by second mortgages. NON-RESIDENTIAL REAL ESTATE LOANS. Non-residential real estate loans consist of loans made for the purpose of purchasing the non-residential real estate used as collateral and includes loans secured by mixed residential and commercial use property, professional office buildings, churches and restaurants. At June 30, 1996, non-residential real estate loans totalled $8.3 million, or 10.3% of total loans. Loans secured by non-residential property may be originated in amounts up to 80% of the appraised value for a maximum term of 15 years. CONSUMER LOANS. The Bank offers consumer loans in order to provide a wider range of financial services to its customers. Federal savings associations are permitted to make secured and unsecured consumer loans up to 35% of their assets. In addition, savings associations have lending authority above the 35% limitation for certain consumer loans, such as home improvement, automobile and savings account or passbook loans. Consumer or other loans totalled $10.1 million, or 12.4% of the Bank's total loans, of which loans secured by automobiles totalled $6.2 million, or 7.6% of the Bank's total loans at June 30, 1996. The Bank originates automobile loans with terms of up to six years for both new and used automobiles. Most of these automobile loans are originated directly by the Bank. During the past two years, the Bank has begun to originate automobile loans indirectly by purchasing such loans from automobile dealers with whom the Bank provides floor plan financing. Indirect automobile loans are underwritten by the Bank and a fee is remitted to the automobile dealer upon the successful underwriting and closing of the loan. The fee is rebated to the Bank, on a pro rata basis, if the loan is repaid within the first six months. The Bank does not have recourse against the automobile dealer in the event of a default by the borrower. The Bank originates each indirect auto loan in accordance with its underwriting standards and procedures, which are intended to assess the applicant's ability to repay the amounts due on the loan and the adequacy of the financed vehicle as collateral. COMMERCIAL LOANS. Commercial loans, other than commercial real estate loans, consist of, among other things, commercial lines of credit (which include automobile floor plan lines of credit), commercial vehicle loans, and working capital loans and are typically secured by residential or commercial property, receivables or inventory, vehicles comprising the automobile floor plan, or some other form of collateral. Floor plan financing involves continuing financing for an automobile dealer that is secured by automobiles physically located on the dealer's lot. The Bank holds the title to the automobiles during the pendency of the loan. Floor plan financing typically involves high loan origination volume and repayment within 30 days of origination. CONSTRUCTION LENDING. The Bank makes construction loans primarily for the construction of single-family dwellings. The aggregate outstanding balance of such loans on June 30, 1996 was $1.9 million, representing 2.35% of the Bank's net loan portfolio. Approximately half of these loans were 35 made to persons who are constructing properties for the purpose of occupying them. Such loans may also be made to builders to construct properties for sale. Loans made to builders are generally "pure construction" loans which require the payment of interest at fixed rates during the construction period and the payment of the principal in full at the end of the construction period. Loans made to individual property owners are either pure construction loans or "construction-permanent" loans which generally provide for the payment of interest only during a construction period, after which the loans convert to a permanent loan at fixed or adjustable interest rates having terms similar to other one- to four-family residential loans. Construction loans made to builders who are building to resell have a maximum loan-to-value ratio of 80% of the appraised value of the property. Construction loans to individuals who intend to occupy the finished premises generally have a maximum loan-to-value ratio of 80%. LOAN UNDERWRITING RISKS. Adjustable-rate mortgage loans decrease the risks associated with changes in interest rates by periodically repricing, but involve other risks because as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic interest rate adjustment permitted by the adjustable-rate mortgage loan documents, and, therefore is potentially limited in effectiveness during periods of rapidly rising interest rates. These risks have not had an adverse effect on the Bank. While non-residential real estate and consumer or other loans provide benefits to the Bank's asset/liability management program by reducing the Bank's exposure to interest rate changes, due to their generally shorter terms, and producing higher yields, such loans may entail significant additional credit risks compared to owner-occupied residential mortgage lending. However, the Bank believes that the higher yields and shorter terms compensate the Bank for the increased credit risk associated with such loans. Commercial lending entails significant additional risks when compared with one- to four-family residential lending. For example, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers, the payment experience on such loans typically is dependent on the successful operation of the project and these risks can be significantly impacted by the cash flow of the borrowers and supply and demand conditions in the market for commercial office, retail, and warehouse space. In periods of decreasing cash flows, the commercial borrower may permit a lapse in general maintenance of the property causing the value of the underlying collateral to deteriorate. In addition, due to the type and nature of the collateral, and, in some cases the absence of collateral, consumer lending generally involves more credit risk when compared with one- to four-family residential lending. Consumer lending collections are typically dependent on the borrower's continuing financial stability, and thus, are more likely to be adversely effected by job loss, divorce, illness, and personal bankruptcy. In most cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower and is usually turned over to a collection agency. Construction lending is generally considered to involve a higher level of credit risk than one- to four-family residential lending since the risk of loss on construction loans is dependent largely upon the accuracy of the initial estimate of the individual property's value upon completion of the project and the 36 estimated cost (including interest) of the project. If the cost estimate proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Bank has established various lending limits for its officers and maintains a Loan Committee. A report of all mortgage loans originated is presented to the Board of Directors monthly. The President and Vice President of the Bank each have the authority to approve all applications for consumer loans up to $35,000 for secured loans and up to $2,500 for unsecured loans, on an aggregate basis, exclusive of mortgage balances on owner-occupied residential property. Five other officers have authority to approve secured consumer credit applications in varying amounts up to $35,000, on an aggregate basis, respectively, exclusive of mortgage balances on owner- occupied residential property. The Loan Committee considers all applications for commercial loans up to $100,000, whether secured or unsecured, and all consumer loans in amounts above the lending limit established above, up to $100,000. All loans in excess of those limits set for the Loan Committee require the consideration and approval of the entire Board of Directors. Upon receipt of a completed loan application from a prospective borrower, a credit report is generally ordered, income and certain other information is verified and, if necessary, additional financial information is requested. An appraisal from a licensed fee appraiser of the real estate intended to be used as security for the proposed loan is obtained. For construction/permanent loans, funds advanced during the construction phase are held in a loan-in-process account and disbursed based upon various stages of completion in accordance with the results of inspection reports that are based upon physical inspection of the construction by a loan officer. For real estate loans, each title is reviewed by the attorney for the Bank to determine the necessity for title insurance. Historically, the Bank has not required title insurance except in those instances where the attorney has seen a need for title insurance. Borrowers must also obtain fire and casualty insurance (for loans on property located in a flood zone, flood insurance is required) prior to the closing of the loan. The Bank is named as mortgagee/loss payee of this insurance. LOAN COMMITMENTS. The Bank issues written commitments to prospective borrowers on all approved mortgage loans which generally expire within 30 days of the date of issuance. The Bank charges no commitment fees or points to lock in rates or to secure commitments. In some instances, after a review of the rate, terms, and circumstances, commitments may be renewed or extended beyond the 30 day limit. At June 30, 1996, the Bank had $1.5 million of outstanding commitments to originate loans and $1.6 million in undisbursed funds related to construction loans. Management believes that less than 2% of loan commitments expire. Furthermore, at June 30, 1996, the Bank had $2.0 million in unused equity lines of credit. LOANS TO ONE BORROWER. Regulations limit loans-to-one borrower or affiliated group of borrowers in an amount equal to 15% of unimpaired capital and unimpaired surplus of the Bank. The Bank is authorized to lend up to an additional 10% of unimpaired capital and unimpaired surplus if the loan is fully secured by readily marketable collateral. At June 30, 1996, the Bank's lending limit for loans to one borrower was approximately $1.0 million. At June 30, 1996, the largest loan of the Bank was a commercial real estate loan that was secured by a strip mall shopping center and totalled $919,000. At that date, the Bank held a residential mortgage loan with a balance of $181,000 that was secured by the single family residence of one of the guarantors to that $919,000 loan. At June 30, 1996, a customer of the Bank had loans totalling $759,000 that were secured by commercial property such as trucks and commercial real estate of which the largest loan 37 totalled $300,000 and was secured by a golf course. At June 30, 1996, the Bank also had outstanding two loans aggregating $660,000 to an automobile dealer consisting of a $450,000 commercial loan secured by automobiles covered under a floor plan and a $210,000 home mortgage loan. At June 30, 1996, all of the loans discussed above were secured by property located within the Bank's lending market areas, were performing in accordance with their contractual terms, and were within the Bank's lending limit. NON-PERFORMING AND PROBLEM ASSETS LOAN DELINQUENCIES. The Bank's collection procedures provide that when a mortgage loan is 30 days past due, a delinquent notice is sent to the borrower and a late charge is imposed in accordance with the mortgage or Deed of Trust agreement. If payment is still delinquent after 90 days, the borrower will receive a notice of default establishing a date by which the borrower must bring the account current or foreclosure proceedings will be instituted. Late charges are also imposed in accordance with the mortgage or Deed of Trust agreement. If the delinquency continues, similar subsequent efforts are made to eliminate the delinquency. If the loan continues in a delinquent status for 90 days past due and no repayment plan is in effect, the account is turned over to an attorney for foreclosure. Management meets regularly to determine when foreclosure proceedings should be initiated and the borrower is notified when foreclosure has been commenced. At June 30, 1996, nonaccrual loans and loans past due greater than 90 days totalled $442,000 or 0.48% of total assets. Loans are reviewed on a monthly basis and are placed on non-accrual status when considered doubtful of collection by management. Generally, loans past due 90 days or more as to principal or interest and, in the opinion of management, are not adequately secured to insure the collection of the entire outstanding balance of the loan including accrued interest are placed on non-accrual status. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent cash payments, if any, are generally applied to reduce the outstanding principal balance. NON-PERFORMING ASSETS. The following table sets forth information regarding non-accrual loans, accruing loans which are past due more than 90 days as to principal or interest payments, and foreclosed assets. As of the dates indicated, the Bank had no loans categorized as troubled debt restructuring. 38
At June 30, ------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in Thousands) Loans accounted for on a non-accrual basis: Mortgage loans: One-to four-family........................... $ 82 $ 86 $ 7 $ 73 $ 170 Multi-family................................. 55 -- -- -- -- Non-residential.............................. -- -- -- -- -- Construction................................. -- -- -- -- -- Consumer....................................... 2 2 2 2 91 Commercial..................................... -- -- 6 -- -- ----- ----- ----- ----- ----- Total non-accrual loans.................... 139 88 15 75 261 ----- ----- ----- ----- ----- Accruing loans greater than 90 days past due: Mortgage loans: One-to four-family......................... 132 136 132 21 48 Multi-family............................... -- -- -- -- -- Commercial................................. 77 -- 177 -- -- Construction............................... -- -- -- -- -- Consumer....................................... 85 24 122 57 -- Commercial..................................... 9 -- -- 15 5 ----- ----- ----- ----- ----- Total accruing loans greater than 90 days 303 160 431 93 53 past due..................................... ----- ----- ----- ----- ----- Total non-performing loans..................... 442 248 446 168 314 Real estate acquired in settlement of loans.... -- 334 53 102 99 Other non-performing assets.................... -- -- -- -- -- ----- ----- ----- ----- ----- Total non-performing assets.................... $ 442 $ 582 $ 499 $ 270 $ 413 ===== ===== ===== ===== ===== Total non-performing loans to total loans...... 0.55% 0.33% 0.65% 0.30% 0.61% ===== ===== ===== ===== ===== Total non-performing loans to total assets..... 0.48% 0.30% 0.57% 0.25% 0.49% ===== ===== ===== ===== ===== Total non-performing assets to total assets.... 0.48% 0.69% 0.63% 0.41% 0.64% ===== ===== ===== ===== =====
Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was $35,000 for the year ended June 30, 1996 and $31,000 was collected and included in the Bank's interest income from non-accrual loans for the year ended June 30, 1996. CLASSIFIED ASSETS. OTS regulations provide for a classification system for problem assets of insured institutions. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered substandard if it is inadequately protected by the current equity and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as loss are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets may be designated "special mention" because of potential weakness that does not currently warrant classification in one of the aforementioned categories. 39 When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. In accordance with its classification of assets policy, the Bank regularly reviews the problem assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management's review of its assets, at June 30, 1996, the Bank had classified $19,415 of assets as substandard, $1,000 of assets as doubtful, $0 as loss, and $172,000 of assets as special mention. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. Real estate acquired in settlement of loans is classified separately on the balance sheet at the lower of the recorded investment in the property or its fair value minus estimated costs of sale. Prior to foreclosure, the value of the underlying collateral is written down by a charge to the allowance for possible loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on their disposition are included in other expenses. At June 30, 1995, foreclosed real estate consisted of a former bank building owned by the Bank that was transferred to property, plant and equipment for the purpose of loan file storage during fiscal 1996 and one residential property that was sold at a loss of $23,000 in fiscal 1996. The bank had no real estate acquired in settlement of loans at June 30, 1996. ALLOWANCES FOR LOAN LOSSES. Management regularly performs an analysis to identify the inherent risk of loss in its loan portfolio. This analysis includes evaluation of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio (including loans being specifically monitored by management), estimated fair value of underlying collateral, loan commitments outstanding, delinquencies, and other factors. The Bank will continue to monitor its allowance for loan losses and make future additions to the allowance through the provision for loan losses as economic conditions dictate. Although the Bank maintains its allowance for loan losses at a level that it considers to be adequate to provide for the inherent risk of loss in its loan portfolio, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Bank's determination as to the amount of its allowance for loan losses is subject to review by the OTS, as part of its examination process, which may result in the establishment of an additional allowance based upon the judgment of the OTS after a review of the information available at the time of the OTS examination. 40 ANALYSIS OF ALLOWANCE FOR LOAN LOSSES The following table sets forth information with respect to the Bank's allowance for loan losses at the dates indicated:
Year Ended June 30, ----------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (Dollars in Thousands) Total loans outstanding(1).............. $81,062 $74,878 $68,965 $56,405 $51,782 ======= ======= ======= ======= ======= Average loans outstanding............... $76,096 $69,378 $60,046 $56,533 $50,163 ======= ======= ======= ======= ======= Allowance balance (at beginning of period)............................. $ 198 $ 174 $ 119 $ 119 $ 89 Provision: Mortgages............................. -- 37 36 14 3 Consumer.............................. 33 11 7 8 28 Commercial............................ 230 -- 14 1 6 Charge-offs: Mortgages............................. -- (22) -- -- (3) Consumer(2)........................... (4) (16) (1) (25) (9) Commercial(2)......................... (141) -- (8) -- -- Recoveries: Mortgages............................. -- -- -- -- 3 Consumer.............................. 9 6 7 2 2 Commercial............................ -- 8 -- -- -- ------- ------- ------- ------- ------- Allowance balance (at end of period).... $ 325 $ 198 $ 174 $ 119 $ 119 ======= ======= ======= ======= ======= Allowance for loan losses as a percent of total loans outstanding............ 0.40% 0.26% 0.25% 0.21% 0.23% Net loans charged off as a percent of average loans outstanding............. (0.19)% (0.05)% (0.01)% (0.04)% (0.02)%
- ------------------ (1) Includes $1,375,000 in loans held for sale. (2) The charge-offs constitute two secured loans aggregating $145,000 from one borrower who declared bankruptcy in 1996. The Bank filed an objection to the bankruptcy, though there is no assurance that the Bank will receive any recovery on either loan. 41 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The following table sets forth the allocation of the allowance for loan losses by category as prepared by the Bank. In management's opinion, the allocation has, at best, a limited utility. It is based on management's assessment as of a given point in time of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes as and when the risk factors of each such component part change. The allocation is not indicative of either the specific amounts or the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. In addition, by presenting the allocation, management does not mean to imply that the allocation is exact or that the allowance has been precisely determined from the allocation. The allocation of the allowance to each category is not necessarily indicative of future loss in any particular category and does not restrict the use of the allowance to absorb losses in any category.
June 30, -------------------------------------------------------------------------- 1996 1995 1994 ---------------------- ---------------------- ---------------------- Percent of Percent of Percent of Loans in Loans in Loans in Each Each Each Category Category Category to Total to Total to Total Amount Loans Amount Loans Amount Loans ------ ------ ------ ----- ------ ----- (Dollars in Thousands) Mortgages: One- to four-family.. $ 75 69.05% $ 88 70.40% $ 65 69.67% Multi-family......... 8 2.09 8 2.32 6 1.98 Non-residential...... 41 10.27 34 8.32 45 8.00 Construction......... -- 2.35 -- 3.21 -- 5.86 Consumer............... 85 12.42 47 13.00 45 11.63 Commercial............. 116 3.82 21 2.75 13 2.86 ---- ------ ---- ------ --- ------ Total.............. $ 325 100.00% $ 198 100.00% $174 100.00% ==== ====== ==== ====== === ======
42 INVESTMENT ACTIVITIES GENERAL. The Bank is required under federal regulations to maintain a minimum amount of liquid assets which may be invested in specified short term securities and certain other investments. See "Regulation - Federal Home Loan Bank System" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Bank has maintained a liquidity portfolio in excess of regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of future yield levels, as well as management's projections as to the short term demand for funds to be used in the Bank"s loan origination and other activities. The Bank classifies its investments as securities available for sale or investments securities held to maturity in accordance with SFAS No. 115. At June 30, 1996, the Bank's investment portfolio policy allowed investments in instruments such as U.S. Treasury obligations, U.S. federal agency or federally sponsored agency obligations, municipal obligations, mortgage-backed securities, banker's acceptances, certificates of deposit, federal funds, including FHLB overnight and term deposits (up to six months), as well as investment grade corporate bonds, commercial paper and the mortgage derivative products described below. The Board of Directors may authorize additional investments. The Bank's securities available for sale and investment securities held to maturity portfolios at June 30, 1996 did not contain securities of any issuer with an aggregate book value in excess of 10% of the Bank"s equity, excluding those issued by the United States Government or its agencies. MORTGAGE-BACKED SECURITIES. To supplement lending activities, the Bank has invested in residential mortgage-backed securities. Mortgage-backed securities can serve as collateral for borrowings and, through repayments, as a source of liquidity. Mortgage-backed securities represent a participation interest in a pool of single-family or other type of mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities, to investors such as the Bank. Such quasi-governmental agencies, which guarantee the payment of principal and interest to investors, primarily include FHLMC, Government National Mortgage Association ("GNMA"), and FNMA. The Bank's mortgage-backed securities were classified as held to maturity at June 30, 1996 and were all issued by GNMA or FHLMC, representing participating interests in direct pass-through pools of long-term mortgage loans originated and serviced by the issuers of the securities. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties. Mortgage-backed securities typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable- rate mortgage loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate or adjustable-rate), as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. Mortgage-backed securities issued by FHLMC and GNMA make up a majority of the pass-through certificates market. 43 The Bank has also invested in collateralized mortgage obligations ("CMOs"), a type of mortgage-backed security, and as of June 30, 1996 did not hold any CMOs. CMOs have been developed in response to investor concerns regarding the uncertainty of cash flows associated with the prepayment option of the underlying mortgagor and are typically issued by government agencies, government sponsored enterprises, and special purpose entities established by financial institutions and other similar institutions. Some CMO instruments are most like traditional debt instruments because they have stated principal amounts and traditionally defined interest rate terms. Purchasers of certain other CMO instruments are entitled to the excess, if any, of the issuer's cash inflows, including reinvestment earnings, over the cash outflows for debt servicing and administrative expenses. CMOs may include instruments designated as residual interests, which represent an equity ownership interest in the underlying collateral, subject to the first lien of the investors in the other classes of the CMO and may be riskier than many regular CMO interests. At June 30, 1996, the Bank held mortgage-backed securities in its investment securities held to maturity portfolio with an amortized cost of $537,000. The average yield on mortgage-backed securities at June 30, 1996 was 8.94%. SECURITIES PORTFOLIO. The following table sets forth the carrying value of the Bank's securities at the dates indicated. At June 30, 1996, the approximate fair value of the Bank's securities available for sale was $68,000 resulting in a net unrealized loss of $9,000.
At June 30, -------------------------------- 1996 1995 1994 ---- ---- ---- (Dollars in Thousands) U.S. Government and agency securities......... $4,800 $3,737 $2,299 Securities available for sale................. 68 84 106 Interest-bearing deposits in other financial institutions................................ 3,068 2,334 5,976 FHLB Stock.................................... 560 502 436 ------ ------ ------ Total....................................... $8,496 $6,657 $8,817 ====== ====== ======
44 The following table sets forth information regarding the scheduled maturities, carrying values, approximate fair values, and weighted average yields for the Bank's securities portfolio at June 30, 1996 by contractual maturity. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
At June 30, 1996 ------------------------------------------------------------------------------------------------- Less than 1 to 5 to Over 10 1 year 5 years 10 years years ---------------------- ---------------------- ---------------------- ---------------------- Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in Thousands) U.S. Government and agencies securities........... $ 1,000 5.93% $2,500 6.47% $ 300 7.27% $1,000 7.95% Securities available for sale... -- -- 45 11.50 23 9.92 -- -- Interest-bearing deposits in other financial institutions.................. 3,068 5.37 -- -- -- -- -- -- FHLB stock (1)................. 560 6.38 -- -- -- -- -- -- ------- ------ ------ ------ ------ ---- ------ ---- Total........................... $ 4,628 5.61% $2,545 6.57% $323 7.48% $1,000 7.95% ======= ====== ====== ====== ====== ==== ====== ---- ------------------------------- Total Securities ------------------------------- Carrying Market Value Yield Value ----- ------ ----- U.S. Government and agencies securities........... $4,800 6.71% $4,762 Securities available for sale... 68 10.97 68 Interest-bearing deposits in other financial institutions.................. 3,068 5.37 3,068 FHLB stock (1)................. 560 6.38 560 ------ ----- ------ Total........................... $8,496 6.25% $8,458 ====== ====== ======
_________________________________ (1) Recorded at cost. 45 SOURCES OF FUNDS GENERAL. Deposits are the major source of the Bank's funds for lending and other investment purposes. The Bank also derives funds from the (1) amortization and prepayment of loans, (2) sales, maturities, and calls of securities, and (3) operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. The Bank may also borrow funds from the FHLB as a source of funds. DEPOSITS. Consumer and commercial deposits are attracted principally from within the Bank's primary market areas through the offering of a selection of deposit instruments including savings accounts, NOW accounts, money market accounts, and time deposits or certificate of deposit accounts. Deposit account terms vary according to the minimum balance required, the time period the funds must remain on deposit, and the interest rate, among other factors. The interest rates paid by the Bank on deposits are set by the President and at the direction of the asset/liability management committee. The Bank determines the interest rate to offer the public on new and maturing accounts by reviewing the market interest rates offered by competitors, the Bank"s need for funds, and the current cost of money. The Bank reviews, weekly, the interest rates being offered by other financial institutions within its market areas. Savings, money market, and NOW accounts constituted $28.3 million, or 35.0%, of the Bank's deposit portfolio at June 30, 1996. Non-interest bearing deposits constituted $1.6 million or 2.0% of the Bank's deposit portfolio at June 30, 1996. Certificates of deposit constituted $50.9 million or 63.0% of the deposit portfolio of which $7.8 million or 15.3% of the deposit portfolio were certificates of deposit with balances of $100,000 or more. As of June 30, 1996, the Bank had no brokered deposits. The following table sets forth the savings activity of the Bank during the periods indicated.
Year Ended June 30, ----------------------- 1996 1995 1994 ---- ---- ---- (In Thousands) Net increase before interest credited.. $3,150 $5,014 $6,058 Interest credited...................... 2,923 2,454 1,880 ----- ----- ----- Net increase in deposits............... $6,073 $7,468 $7,938 ===== ===== =====
46 DEPOSIT PORTFOLIO. Deposits in the Bank as of June 30, 1996, were represented by various types of deposit programs described below.
Balance as of Interest June 30, Percent of Category Term Rate (1) 1996 Deposits -------- ---- -------- ---- -------- (In thousands) Transaction Accounts(2): - ----------------------- NOW accounts.................... (3) $ 6,373 7.90% Super NOW accounts.............. 3.30% 1,665 2.06 Regular savings................. 3.25% 13,806 17.09 Passbook plus................... (4) 3,572 4.42 Money Market accounts........... 2.75% 2,893 3.58 Non interest-bearing accounts... 1,607 1.99 ------- ----- Total transaction accounts.. 29,916 37.04 ------- ----- Certificates of Deposit: - ----------------------- Fixed Term, Fixed Rate........ 31-32 days 3.30% 3,054 3.78 Fixed Term, Fixed Rate........ 01-03 months 4.50% 235 0.29 Fixed Term, Fixed Rate........ 04-06 months 4.75% 2,842 3.52 Fixed Term, Fixed Rate........ 07-09 months 5.10% 12,435 15.40 Fixed Term, Fixed Rate........ 11-12 months 5.20% 5,722 7.08 Fixed Term, Fixed Rate........ 15 months 5.30% 2,762 3.42 Fixed Term, Fixed Rate........ 18 months 5.35% 1,136 1.41 Fixed Term, Fixed Rate........ 21 months 5.35% 2,120 2.62 Fixed Term, Fixed Rate........ 24 months 5.45% 2,819 3.49 Fixed Term, Fixed Rate........ 30 months 5.65% 3,368 4.17 Fixed Term, Fixed Rate........ 31-48 months 5.75% 2,164 2.68 Fixed Term, Fixed Rate........ 49-96 months 5.90% 4,438 5.49 Jumbo certificates............ 7,760 9.61 ----- ---- Total certificate accounts.. 50,855 62.96 ------ ----- Total deposits................................................. $80,771 100.00% ====== ======
_____________________________ (1) Rates are effective as of June 30, 1996. (2) No minimum term is specified for transaction accounts. (3) NOW accounts with balances less than $200 earn 2.75%, over $200 earn 3.00% (4) Passbook Plus rates are tiered: Tier 1: $5,000-10,000, 3.35%, Tier 2: $10,001 - 25,000, 3.40%, Tier 3: $25,001 -75,000, 3.45%, Tier 4: $75,001 -100,000, 3.50%, Tier 5: 100,001 and over, 3.55%. 47 TIME DEPOSITS MATURITY. The following table sets forth the amount and maturities of time deposits at June 30, 1996.
Amount Due ------------------------------------------------------------------------ 12 month 12 month 12 month period ended period ended period ended After June 30, June 30, June 30, June 30, Interest Rate 1997 1998 1999 2000 Total - ------------- ------ ------ ------ ------ ------- (In Thousands) 4.00% or less.. $ 2,393 $ 127 $ 13 $ 521 $ 3,054 4.01 - 6.00%... 31,102 3,870 1,454 832 37,258 6.01 - 8.00%... 3,600 2,431 1,327 3,155 10,513 8.01 - 10.00%.. 30 -- -- -- 30 ------- ------ ------ ------ ------- Total $37,125 $6,428 $2,794 $4,508 $50,855 ======= ====== ====== ====== =======
TIME DEPOSITS. The following table indicates the amount of the Bank's time deposits of $100,000 or more by time remaining until maturity as of June 30, 1996.
Maturity Period Time Deposits --------------- ------------- (In Thousands) Within three months................. $2,496 More than three through six months.. 1,445 More than six through nine months... 853 Over nine months.................... 2,966 ------ Total.......................... $7,760 ======
BORROWINGS The Bank may obtain advances from the FHLB of Pittsburgh to supplement its supply of lendable funds. Advances from the FHLB of Pittsburgh are typically secured by a pledge of the Bank's stock in the FHLB of Pittsburgh and a portion of the Bank's first mortgage loans. Each FHLB borrowing has its own interest rate, which may be fixed or variable, and range of maturities. The Bank, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. At June 30, 1996, the Bank had $4.4 million in borrowings outstanding from the FHLB of Pittsburgh. See Note 10 to the Notes to Consolidated Financial Statements. At June 30, 1996, the Bank had no other borrowings outstanding. COMPETITION The Bank has been able to maintain its position in mortgage loan originations, market share, and deposit accounts throughout its market areas by virtue of its local presence, competitive pricing, and referrals from existing customers. The Bank is one of many financial institutions serving its market areas. The deposit base of the Bank"s market areas is sought by many of these financial institutions. 48 The competition for deposits comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, and multi-state regional banks in the Bank's market areas. Competition for funds also includes a number of insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions and comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, multi-state regional banks, and mortgage bankers, many of whom have far greater resources then the Bank. SUBSIDIARY ACTIVITY The Bank is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, subsidiary corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes. At June 30, 1996, the Bank had one wholly-owned subsidiary, Advance Financial Service Corporation of West Virginia ("Service Corporation"). The Service Corporation was formed in 1989 to hold stock in the Bank's outside data processing servicer. The Bank's investment in its subsidiary totalled $15,000 at June 30, 1996. As of June 30, 1996, the Service Corporation had not conducted any operations other than to hold the stock of that servicer. 49 PROPERTIES The Bank operates from its main office and one branch office. The Bank's total investment in office property and equipment was $3.2 million with a net book value of $2.1 million at June 30, 1996.
Net Book Value Of Real Property or Leasehold Year Leased Improvements Location Leased or Owned or Acquired and Equipment - ----------------------------- ---------------- ----------- ---------------- MAIN OFFICE: 1015 Commerce Street Owned 1984 $1,231,762 Wellsburg, West Virginia 27060 BRANCH OFFICE: 1409 Main Street Leased (1) 1996 $ 649,207 Follansbee, West Virginia 26037
_______________________ (1) The Bank holds a 40 year lease on the land upon which its branch office is located. The Bank owns the branch building. The Bank owns property in Wintersville, Ohio upon which it expects to construct and open a branch office during 1997. The branch is expected to have a net book value of approximately $500,000 when it is opened. In addition, the Bank owns property at 901 Main Street, Follansbee, West Virginia, which was formerly a branch office, and property at 727 Charles Street, Wellsburg, West Virginia, which was formerly the location of the main office. At June 30, 1996, the net book value of the properties was $182,678 and $35,821, respectively. PERSONNEL At June 30, 1996, the Bank had 33 full-time and three part-time employees. None of the Bank's employees are represented by a collective bargaining group. The Bank believes that its relationship with its employees is good. LEGAL PROCEEDINGS The Bank, from time to time, is a party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of the Bank. There were no lawsuits pending or known to be contemplated against the Bank or the Company at June 30, 1996 that would have a material effect on the operations or income of the Bank or the Company. 50 REGULATION Set forth below is a brief description of certain laws which relate to the regulation of the Bank and the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. COMPANY REGULATION GENERAL. After the Conversion, the Company will be a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS will have enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Company. The Company will also be required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the Securities and Exchange Commission ("SEC"). QTL TEST. As a unitary savings and loan holding company, the Company generally will not be subject to activity restrictions, provided the Bank satisfies the QTL test. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF-insured savings association) would become subject to restrictions applicable to bank holding companies and those activities specified by the OTS as permissible for a multiple savings and loan holding company, unless such other associations each also qualify as a QTL or were acquired in a supervised acquisition. See "- Qualified Thrift Lender Test." RESTRICTIONS ON ACQUISITIONS. The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally insured savings institution without giving at least 60 days written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. In addition, no company may acquire control of such an institution without prior OTS approval. FEDERAL SECURITIES LAW. The Company has filed with the SEC a registration statement under the Securities Act for the registration of the Common Stock to be issued pursuant to the Conversion. Upon completion of the Conversion, the Company's Common Stock will be registered with the SEC under the Exchange Act. The Company will then be subject to the information, proxy solicitation, insider trading restriction, and other requirements under the Exchange Act. BANK REGULATION GENERAL. As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with various federal and state statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System ("Federal Reserve System"). 51 The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that they find in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal and state law, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC or the United States Congress could have a material adverse impact on the Company and the Bank and their operations. INSURANCE OF DEPOSIT ACCOUNTS. The Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). If an institution has no tangible capital, the FDIC has the authority, should it initiate proceedings to terminate an institution"s deposit insurance, to suspend the insurance of any such institution. However, if a savings association has positive capital when it includes qualifying intangible assets, the FDIC cannot suspend deposit insurance unless capital declines materially, the institution fails to enter into and remain in compliance with an approved capital plan, or the institution is operating in an unsafe or unsound manner. Regardless of an institution's capital level, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The FDIC may also prohibit an insured depository institution from engaging in any activity the FDIC determines to pose a serious threat to the SAIF. The management of the Bank is unaware of any practice, condition, or violation that might lead to termination of its deposit insurance. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. Under this system, a savings association pays within a range of 23 cents to 31 cents per $100 of domestic deposits, depending upon the institution's risk classification. This risk classification is based on an institution's capital group and supervisory subgroup assignment. In addition, the FDIC is authorized to increase such deposit insurance rates on a semi-annual basis if it determines that such action is necessary to cause the balance in the SAIF to reach the designated reserve ratio of 1.25% of SAIF-insured deposits within a reasonable period of time. The SAIF was substantially underfunded at June 30, 1996. In addition, the FDIC may impose special assessments on SAIF members to repay amounts borrowed from the U.S. Treasury or for any other reason deemed necessary by the FDIC. The Bank's federal deposit insurance premium expense for the year ended June 30, 1996 amounted to approximately $171,000. By comparison, at June 30, 1996, members of the BIF were required to pay substantially lower, or virtually no, federal deposit insurance premiums. REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted assets. The Bank's capital ratios are set forth under "Historical and Pro Forma Capital Compliance." 52 Tangible capital is defined as core capital less all intangible assets (including supervisory goodwill), less certain mortgage servicing rights and less certain investments. Core capital is defined as common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual savings associations and qualifying supervisory goodwill, less nonqualifying intangible assets, certain mortgage servicing rights and certain investments. The risk-based capital standard for savings institutions requires the maintenance of total risk-based capital (which is defined as core capital plus supplementary capital) of 8% of risk-weighted assets. The components of supplementary capital include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, intermediate-term preferred stock, and the portion of the allowance for loan losses not designated for specific loan losses. The portion of the allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100% of core capital. A savings association must calculate its risk- weighted assets by multiplying each asset and off-balance sheet item by various risk factors as determined by the OTS, which range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure, commercial loans, and other assets. The OTS has adopted a rule requiring a deduction from capital for institutions with certain levels of interest rate risk. This rule is not yet in effect. DIVIDEND AND OTHER CAPITAL DISTRIBUTION LIMITATIONS. OTS regulations require the Bank to give the OTS 30 days advance notice of any proposed declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends to the Company. In addition, the Bank may not declare or pay a cash dividend on its capital stock if the effect thereof would be to reduce the regulatory capital of the Bank below the amount required for the liquidation account to be established pursuant to the Bank's Plan. See "The Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank -Liquidation Account." OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger, and other distributions charged against capital. The rule establishes three tiers of institutions based primarily on an institution's capital level. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 institution") and has not been advised by the OTS that it is in need of more than the normal supervision can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net income over the most recent four quarter period. Any additional capital distributions require prior regulatory notice. As of June 30, 1996, the Bank was a Tier 1 institution. In the event the Bank's capital fell below its fully phased-in requirement or the OTS notified it that it was in need of more than normal supervision, the Bank would become a Tier 2 or Tier 3 institution and as a result, its ability to make capital distributions could be restricted. Tier 2 institutions, which are institutions that before and after the proposed distribution meet their current minimum capital requirements, may only make capital distributions of up to 75% of net income over the most recent four quarter period. Tier 3 institutions, which are institutions that do not meet current minimum capital requirements and propose to make any capital distribution, and Tier 2 institutions that propose to make a capital distribution in excess of the noted safe harbor level, must obtain OTS approval prior to making such distribution. In addition, the OTS could prohibit a proposed capital distribution by any institution, 53 which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. The OTS has proposed rules relaxing certain approval and notice requirements for well- capitalized institutions. A savings association is prohibited from making a capital distribution if, after making the distribution, the savings association would be undercapitalized (i.e., not meet any one of its minimum regulatory capital requirements). Further, a savings association cannot distribute regulatory capital that is needed for the liquidation account. QUALIFIED THRIFT LENDER TEST. Savings institutions must meet a qualified thrift lender ("QTL") test. If the Bank maintains an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Pittsburgh. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every 12 months. As of June 30, 1996, the Bank was in compliance with its QTL requirement with approximately 75% of its assets invested in QTIs. TRANSACTIONS WITH AFFILIATES. Generally, restrictions on transactions with affiliates require that transactions between a savings association or its subsidiaries and its affiliates be on terms as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain of these transactions are restricted to an aggregate percentage of the Bank's capital and collateral in specified amounts must usually be provided by affiliates in order to receive loans from the Bank. Affiliates of the Bank include the Company and any company which would be under common control with the Bank. In addition, a savings association may not extend credit to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of any affiliate that is not a subsidiary. The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case-by-case basis. LIQUIDITY REQUIREMENTS. All savings associations are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At June 30, 1996, the Bank's required liquid asset ratio was 5%. Monetary penalties may be imposed upon associations for violations of liquidity requirements. FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLBs that administer the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At June 30, 1996, the Bank had $560,000 in FHLB stock, at cost, which was in compliance with this requirement. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate related collateral to 30% of a member's capital and limiting total advances to a member. 54 The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. For the fiscal year ended June 30, 1996, dividends paid by the FHLB of Pittsburgh to the Bank totalled $34,000. FEDERAL RESERVE SYSTEM. The Federal Reserve System requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve System may be used to satisfy the liquidity requirements that are imposed by the OTS. At June 30, 1996, the Bank's reserve met the minimum level required by the Federal Reserve System. Savings associations have authority to borrow from the Federal Reserve System "discount window," but Federal Reserve System policy generally requires savings associations to exhaust all other sources before borrowing from the Federal Reserve System. The Bank had no borrowings from the Federal Reserve System at June 30, 1996. TAXATION FEDERAL TAXATION Savings associations are subject to the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in the same general manner as other corporations. However, prior to August 1996, savings associations such as the Bank, which met certain definitional tests and other conditions prescribed by the Code could benefit from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. The amount of the bad debt deduction that a qualifying savings institution could claim with respect to additions to its reserve for bad debts was subject to certain limitations. The Bank reviewed the most favorable way to calculate the deduction attributable to an addition to its bad debt reserve on an annual basis. In August 1996, the Code was revised to equalize the taxation of thrifts and banks. Thrifts, such as the Bank, no longer have a choice between the percentage of taxable income method and the experience method in determining additions to bad debt reserves. Thrifts with $500 million of assets or less may still use the experience method, which is generally available to small banks currently. Larger thrifts must use the specific charge off method regarding bad debts. Any reserve amounts added after 1987 will be taxed over a six year period beginning in 1996; however, bad debt reserves set aside through 1987 are generally not taxed. An institution may delay recapturing into income its post- 1987 bad debt reserves for an additional two years if it meets a residential- lending test. This law is not expected to have a material impact on the Bank. At June 30, 1996, the Bank had $347,000 of post 1987 bad-debt reserves. Under the percentage of taxable income method, the bad debt deduction attributable to "qualifying real property loans" could not exceed the greater of (i) the amount deductible under the experience method, or (ii) the amount which, when added to the bad debt deduction for non-qualifying loans, equaled the amount by which 12% of the sum of the total deposits and the advance payments by borrowers for taxes and insurance at the end of the taxable year exceeded the sum of the surplus, undivided profits and reserves at the beginning of the taxable year. The amount of the bad debt deduction attributable to qualifying real property loans computed using the percentage of taxable income method was permitted only to the extent that the institution's reserve for losses on qualifying real property loans at the close of 55 the taxable year did not exceed 6% of such loans outstanding at such time. The Bank used the percentage of taxable income method for the tax years ended December 31, 1994 and 1993. Under the experience method, the bad debt deduction may be based on (i) a six-year moving average of actual losses on qualifying and non-qualifying loans, or (ii) a fill-up to the institution's base year reserve amount, which is the tax bad debt reserve determined as of December 31, 1987. The Bank used the experience method for the tax year ended December 31, 1995. See Notes 11 and 12 to the Consolidated Financial Statements. The percentage of specially computed taxable income that was used to compute a savings association's bad debt reserve deduction under the percentage of taxable income method (the "percentage bad debt deduction") was 8%. The percentage of taxable income bad debt deduction thus computed was reduced by the amount permitted as a deduction for non-qualifying loans under the experience method. The availability of the percentage of taxable income method permitted qualifying savings associations to be taxed at a lower effective federal income tax rate than that applicable to corporations generally (approximately 31.3% assuming the maximum percentage bad debt deduction). If an association's qualifying assets (generally, loans secured by residential real estate or deposits, educational loans, cash and certain government obligations) constitute less than 60% of its total assets, the association may not deduct any addition to a bad debt reserve and generally must include existing reserves in income over a four year period, which is immediately accruable for financial reporting purposes. As of June 30, 1996, at least 60% of the Bank's assets were qualifying assets as defined in the Code. No assurance can be given that the Bank will meet the 60% test for subsequent taxable years. Earnings appropriated to the Bank's bad debt reserve and claimed as a tax deduction including the Bank's supplemental reserves for losses will not be available for the payment of cash dividends or for distribution to stockholders (including distributions made on dissolution or liquidation), unless the Bank includes the amount in income, along with the amount deemed necessary to pay the resulting federal income tax. As of June 30, 1996, the Bank had approximately $1.0 million of accumulated earnings, representing its base year tax reserve, for which federal income taxes have not been provided. If such amount is used for any purpose other than bad debt losses, including a dividend distribution or a distribution in liquidation, it will be subject to federal income tax at the then current rate. Generally, for taxable years beginning after 1986, the Code also requires most corporations, including savings associations, to utilize the accrual method of accounting for tax purposes. Further, for taxable years ending after 1986, the Code disallows 100% of a savings association's interest expense deemed allocated to certain tax-exempt obligations acquired after August 7, 1986. Interest expense allocable to (i) tax-exempt obligations acquired after August 7, 1986 which are not subject to this rule, and (ii) tax-exempt obligations issued after 1982 but before August 8, 1986, are subject to the rule which applied prior to the Code disallowing the deductibility of 20% of the interest expense. The Code imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by certain preference items, including the excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method. Only 90% of AMTI can be offset by net operating loss carryovers of which the Bank currently has none. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Bank's AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2 million is imposed on corporations, including the Bank, whether or not an AMT 56 is paid. Under pending legislation, the AMT rate would be reduced to zero for taxable years beginning after December 31, 1994, but this rate reduction would be suspended for taxable years beginning in 1995 and 1996 and the suspended amounts would be refunded as tax credits in subsequent years. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. A 70% dividends received deduction generally applies with respect to dividends received from corporations that are not members of such affiliated group, except that an 80% dividends received deduction applies if the Company and the Bank own more than 20% of the stock of a corporation paying a dividend. The above exclusion amounts, with the exception of the affiliated group figure, were reduced in years in which the Bank availed itself of the percentage of taxable income bad debt deduction method. The Bank's federal income tax return was last examined by the IRS for the year ended December 31, 1991. STATE TAXATION West Virginia Taxation. The State of West Virginia has a corporate income tax which subjects the Bank's West Virginia taxable income to tax at a 9.00% rate. West Virginia taxable income is computed by applying certain modifications to federal taxable income. The primary modification consists of an allowance factor calculated by dividing the average amount of Federal obligations and securities, West Virginia obligations, and loans secured by residential real property located within the State of West Virginia by the Bank"s average total assets for the year. The State of West Virginia also has a business franchise tax payable on the average amount of unappropriated retained earnings of the Bank reduced by an allowance factor, as discussed above. The adjusted retained earnings amount is subject to tax at a 0.75% rate. Due to allowable credits for property taxes paid on the Bank's capital, the Bank has not incurred a business franchise tax liability. The City of Wellsburg and the City of Follansbee, West Virginia have a business and occupation ("B & O") tax which subjected the Bank's taxable B & O income to tax at a $0.426 per $100 in value and $0.489 per $100 in value, respectively. Taxable B & O income is calculated by applying certain modifications, consisting primarily of deductions of income derived from Federal, state and local obligations and from loans secured by real estate, to the Bank's gross income. The Bank also files personal and real property tax returns with the County Assessor's Office in Brooke County, West Virginia. Delaware Taxation. As a Delaware corporation with no operations in the State of Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware. MANAGEMENT OF THE COMPANY The Board of Directors of the Company consists of those persons who currently serve as Directors of the Bank. The Board of Directors is divided into three classes, each of which contains approximately one-third of the Board. The directors are elected by the stockholders of the Company for staggered three-year terms, or until their successors are elected and qualified. One class of directors, consisting of Stephen M. Gagliardi and James R. Murphy has a term of office expiring at the first annual meeting following the Conversion. A second class, consisting of George H. Johnson, William E. Watson 57 and Gary Young has a term of office expiring at the annual meeting to be held one year thereafter. A third class, consisting of John R. Sperlazza and Noreen Mechling has a term of office expiring at the annual meeting to be held two years thereafter. The following individuals hold the executive offices in the Company set forth below opposite their names.
Name Age (1) Positions Held With the Company - ---- ------- ------------------------------- Stephen M. Gagliardi 48 President, Chief Executive Officer, and Director Noreen Mechling 62 Treasurer and Chief Financial Officer Steve D. Martino 41 Vice President
___________________________ (1) At June 30, 1996. The executive officers of the Company are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation, or removal by the Board of Directors. Additional information concerning the business experience and compensation of the directors and executive officers of the Company is set forth under "Management of the Bank - - Biographical Information." MANAGEMENT OF THE BANK DIRECTORS AND EXECUTIVE OFFICERS The Board of Directors of the Bank is composed of seven members each of whom serves for a term of three years. The Bank's proposed Charter and Bylaws require that directors be divided into three classes, as nearly equal in number as possible, each class to serve for a three-year period, with approximately one-third of the directors elected each year. Executive officers are elected annually by the Board of Directors and serve at the Board's discretion. The following table sets forth information with respect to the directors and executive officers of the Bank, all of whom will continue to serve in the same capacities after the Conversion.
Current Director Term Name Age (1) Position Since Expires - ---- ------- -------- -------- ------- Stephen M. Gagliardi 48 President, Chief Executive 1983 1997 Officer, and Director James R. Murphy 73 Director 1962 1997 George H. Johnson 74 Director 1977 1998 William E. Watson 59 Director 1991 1998 Gary Young 58 Director 1975 1998 Noreen Mechling 62 Director, Senior Vice 1994 1999 President, and Chief Financial Officer John R. Sperlazza 58 Director 1973 1999 Steve D. Martino 41 Senior Vice President and Chief Operating Officer
__________ (1) At June 30, 1996. 58 BIOGRAPHICAL INFORMATION The business experience of each director and executive officer of the Bank is set forth below. All directors and executive officers have held their present positions for a minimum of five years unless otherwise stated. STEPHEN M. GAGLIARDI is the President and Chief Executive Officer of the Bank and has served in these capacities with the Company since its formation. Mr. Gagliardi is the past Director of the West Virginia Appraiser Licensing and Certification Board and past President of the Brooke County Rotary and the Brooke County United Way. Mr. Gagliardi is Trustee and Treasurer of the Christ Episcopal Church of Wellsburg. JAMES R. MURPHY has been a director of the Bank since 1962 and a director of the Company since its formation. Mr. Murphy is a majority stockholder of Murphy Consolidated Industries. Mr. Murphy has been employed with this building contractor for 50 years. GEORGE H. JOHNSON has been a director of the Bank since 1977 and a director of the Company since its formation. Mr. Johnson is a retired employee of Koppers Co., Inc., a coal, tar and chemicals company. Mr. Johnson is also a director of Municipal Mutual of West Virginia. WILLIAM E. WATSON has been a director of the Bank since 1991 and a director of the Company since its formation. Mr. Watson is an attorney in Wellsburg, West Virginia and has practiced law since 1961. Mr. Watson serves as counsel for the Bank. Mr. Watson is the Chancellor (General Counsel) of the West Virginia Conference United Methodist Church, Chairman of the Board of Trustees of West Virginia Wesleyan College and Chairman of the Administrative Board of Wellsburg United Methodist Church. GARY YOUNG has been a director of the Bank since 1975 and a director of the Company since its formation. Mr. Young is the Park Director of the Brooke Hills Park in Wellsburg, West Virginia. Mr. Young is a member of the Royal Order of Moose, Brooke County Sportsman Club and Colliers Sportsman Club. NOREEN MECHLING has been a director of the Bank since 1994 and a director of the Company since its formation. Ms. Mechling has been an employee of the Bank since 1975 and currently serves as Senior Vice President and Chief Financial Officer. JOHN R. SPERLAZZA has been a director of the Bank since 1973 and a director of the Company since its formation. For the past four years, Mr. Sperlazza has been a co-owner of J&J Properties, a real estate rental company, and has been employed with JJ&R Enterprises, a real estate rental company, and Mark's Carry Out. Prior to that time Mr. Sperlazza retired as a co-owner of trucking, mining and coal companies. STEVEN D. MARTINO has been with the Bank since 1982. Mr. Martino has been a Vice President since 1986 and obtained his current titles in July 1996. Mr. Martino is the current President of the Wellsburg Chamber of Commerce and is the current Campaign Chairman of the Brooke County United Way. He is also a real estate appraiser licensed by the State of West Virginia. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS The Bank's Board of Directors conducts its business through meetings of the Board and through activities of its committees. During the fiscal year ended June 30, 1996, the Board of Directors held 24 regular meetings and one special meeting. No director attended fewer than 75% of the total meetings 59 of the Board of Directors of the Bank and committees on which such director served during the fiscal year ended June 30, 1996. The Audit Committee of the Bank is comprised of Directors Watson, Johnson and Murphy. The President also attends these meetings but is excused during certain portions. The Audit Committee is responsible for developing and maintaining the Bank's audit program. The committee also meets with the Bank's outside auditors to discuss the results of the annual audit and any related matters. The Audit Committee met one time during the 1996 fiscal year. The Nominating Committee consists of the entire board of directors and meets annually to select nominees to the Bank"s Board of Directors. DIRECTOR COMPENSATION Members of the Board of Directors received fees of $400 per meeting attended during the 1996 calendar year with up to four, regardless of attendance. Board members receive $35 for attendance at each committee meeting. The Bank paid a total of $71,000 in director fees for the year ended June 30, 1996. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The following table sets forth the cash and non-cash compensation awarded to or earned by the President and Chief Executive Officer of the Bank. No other executive officer of the Bank had a salary and bonus during the year ended June 30, 1996 that exceeded $100,000 for services rendered in all capacities to the Bank.
Annual Compensation ------------------------------------- Other Annual All Other Name and Principal Position Salary Bonus Compensation(1) Compensation(2) - --------------------------- ------ ------- --------------- --------------- Stephen M. Gagliardi $81,111 $10,000 $9,450 $8,305 President and Chief Executive Officer
__________ (1) Consists of Board of Directors' fees. (2) Consists of a contribution of $241 for term life insurance, a matching contribution of $2,526 to the 401(k) Plan, and a profit sharing contribution of $5,538. EMPLOYMENT AGREEMENTS. The Bank intends to enter into employment agreements with Stephen M. Gagliardi, President and Chief Executive Officer and two other officers of the Bank. Mr. Gagliardi's salary under the employment agreement will be based on his then current salary. Mr. Gagliardi's employment agreement will be for a term of three years. The agreements will be terminable by the Bank for "just cause" as defined in the agreements. If the Bank terminates the employee without just cause, the employee will be entitled to a continuation of the employee's salary from the date of termination through the remaining term of the agreement. Mr. Gagliardi's employment agreement will contain a provision stating that in the event of the termination of employment in connection with any future change in control of the Bank, as defined in the agreement, Mr. Gagliardi will be paid in a lump sum an amount equal to 2.99 times Mr. Gagliardi's five year average annual cash compensation. In addition, the Bank intends to enter into severance agreements with two key employees, which will provide a severance payment upon termination without just cause in the event of a change in control, as defined in the agreements. The agreements may be renewed annually by the Board of Directors upon a determination of satisfactory performance within the Board's sole discretion. 60 OTHER BENEFITS EMPLOYEE STOCK OWNERSHIP PLAN. The Bank has established an employee stock ownership plan, the ESOP, for the exclusive benefit of participating employees, to be implemented upon the completion of the Conversion. Participating employees are employees who have completed one year of service with the Bank and have attained the age 21. The Bank will submit to the IRS an application for a letter of determination as to the tax-qualified status of the ESOP. Although no assurances can be given, the Bank expects that the ESOP will receive a favorable letter of determination from the IRS. The ESOP is to be funded by tax-deductible contributions made by the Bank in cash or the Common Stock. Benefits may be paid either in shares of the Common Stock or in cash. In accordance with the Plan, the ESOP may borrow funds with which to acquire up to 10% of the Common Stock to be issued in the Conversion (8% if the Bank adopts the RSP within one year after the consummation of the Conversion and the RSP purchases 4% of the Common Stock sold in the conversion), and intends to borrow funds from the Company. See "Proposed Future Stock Benefit Plans - Restrictions on Benefit Plans." The loan is expected to be for a term of ten years at an annual interest rate equal to the prime rate as published in The Wall Street Journal. Presently it is anticipated that the ESOP will purchase up to 8% of the Common Stock to be issued in the Offerings (i.e., approximately $656,000, based on the midpoint of the EVR), however, no assurance may be given that ESOP purchases, if any, will not change. This loan will be secured by the shares purchased and earnings thereon. Shares of Common Stock purchased with such loan proceeds will be held in a suspense account for allocation among participants as the loan is repaid. The Bank anticipates contributing approximately $66,000 annually (based on a 65,600 share purchase) to the ESOP to meet principal obligations under the ESOP loan, as proposed. It is anticipated that all such contributions will be limited to an amount that is tax-deductible. Shares sold above the maximum of the EVR (i.e., more than 943,000 shares) may be sold to the ESOP before satisfying remaining unfilled orders of Eligible Account Holders to fill the ESOP's subscription or the ESOP may purchase some or all of the shares covered by its subscription after the Conversion in the open market. Contributions to the ESOP and shares released from the suspense account will be allocated among participants on the basis of total compensation. All participants must be employed at least 1,000 hours in a plan year or terminate service as a result of retirement, death or disability in order to receive an allocation for such plan year. Participant benefits become 100% vested after five years of service. Employment prior to the adoption of the ESOP shall be credited for the purposes of vesting. Vesting will be accelerated upon retirement, death, disability, change in control of the Company, or termination of the ESOP. Forfeitures will be reallocated to participants on the same basis as other contributions in the plan year. Benefits may be payable in the form of a lump sum upon retirement, death, disability, or separation from service. The Bank"s contributions to the ESOP are discretionary and may cause a reduction in other forms of compensation. Therefore, benefits payable under the ESOP cannot be estimated. The Board of Directors has appointed non-employee directors to the ESOP Committee to administer the ESOP and to serve as the initial ESOP Trustees. The Board of Directors or the ESOP Committee may instruct the ESOP Trustees regarding investments of funds contributed to the ESOP. The ESOP Trustees must vote all allocated shares held in the ESOP in accordance with the instructions of the participating employees. Unallocated shares and allocated shares for which no timely direction is received will be voted by the ESOP Trustees as directed by the Board of Directors or the ESOP Committee, subject to the Trustees' fiduciary duties. 61 401(K) SAVINGS PLAN. The Bank sponsors a tax-qualified defined contribution savings plan ("401(k) Plan") for the benefit of its employees. Employees become eligible to participate under the 401(k) Plan after reaching age 20 1/2 and completing one year (including 1,000 hours) of service. Under the 401(k) Plan, employees may voluntarily elect to defer compensation, not to exceed applicable limits under the Code (i.e., $9,500 in calendar 1995). The Bank matches 50% of the first 6% of employee contributions. The Bank does not match more than 6% of the employee"s base salary. Matching contributions vest over a 6 year period beginning after the first year at a rate of 20% per year, or become 100% vested upon termination of employment due to death, disability, or retirement. The Bank may make additional contributions. Employee contributions are immediately vested. The Bank intends to amend the 401(k) Plan to permit voluntary investments of plan assets by participants in the Common Stock in the Conversion and thereafter. Benefits are payable upon termination of employment, retirement, death, disability, or plan termination. Normal retirement age under the 401(k) Plan is age 65. Additionally, funds under the 401(k) Plan may be distributed upon application to the plan administrator upon severe financial hardship in accordance with uniform guidelines which comply with those specified by the Code. It is intended that the 401(k) Plan operate in compliance with the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the requirements of Section 401(a) of the Code. Costs associated with the 401(k) Plan were $56,000 for the year ended June 30, 1996. Contributions to the 401(k) Plan by the Bank for employees may be reduced in the future or eliminated as a result of contributions made to the Employee Stock Ownership Plan. See "- Employee Stock Ownership Plan." PROPOSED FUTURE STOCK BENEFIT PLANS STOCK OPTION PLAN. The Boards of Directors of the Company intend to adopt a stock option plan (the "Option Plan") within one year of the Conversion, subject to approval by the Company's stockholders at a stockholders meeting to be held no sooner than six months after the Conversion. The Option Plan would be in compliance with the OTS regulations then in effect. See "- Restrictions on Benefit Plans." In accordance with OTS regulations, a number of shares equal to 10% of the aggregate shares of Common Stock to be issued in the Offerings (i.e., 82,000 shares based upon the sale of 820,000 shares at the midpoint of the EVR) would be reserved for issuance by the Company upon exercise of stock options to be granted to officers, directors, and employees of the Company and the Bank from time to time under the Option Plan. The purpose of the Option Plan would be to provide additional performance and retention incentives to certain officers, directors, and employees by facilitating their purchase of a stock interest in the Company. The Option Plan, which would become effective upon stockholder approval of the Option Plan, would provide for a term of 10 years, after which no awards could be made, unless earlier terminated by the Board of Directors pursuant to the Option Plan. The options would vest over a five year period (i.e., 20% per year), beginning one year after the date of grant of the option. Options would be granted based upon several factors, including seniority, job duties and responsibilities, job performance, the Bank"s performance, and a comparison of awards given by other institutions converting from mutual to stock form. The Company would receive no monetary consideration for the granting of stock options under the Option Plan, however, the Company would receive the option price for each share issued to optionees upon the exercise of such options. Shares issued as a result of the exercise of options will be either authorized but unissued shares or shares purchased in the open market by the Company, however, no purchases in the open market will be made that would violate applicable regulations restricting purchases by the Company. The exercise of options and payment for the shares received would contribute to the equity of the Company. 62 If the Option Plan is implemented more than one year after the Conversion, the Option Plan will comply with such OTS regulations and policies that are applicable at such time. RESTRICTED STOCK PLAN. The Board of Directors of the Bank and the Company intend to adopt a restricted stock plan (the "RSP") within one year of the Conversion, the objective of which is to enable the Bank to retain personnel and directors of experience and ability in key positions of responsibility. The Company expects to hold a stockholders' meeting no sooner than six months after the Conversion in order for stockholders to vote to approve the RSP. The RSP will be implemented in accordance with applicable OTS regulations. See "- Restrictions on Benefit Plans." Awards would be granted based upon a number of factors, including seniority, job duties and responsibilities, job performance, the Bank's performance, and a comparison of awards given by other institutions converting from mutual to stock form. The RSP would be managed by a committee of non-employee directors (the "RSP Trustees"). The RSP Trustees would have the responsibility to invest all funds contributed by the Bank to the trust created for the RSP (the "RSP Trust"). The Bank will contribute sufficient funds to the RSP so that the RSP Trust can purchase, in the aggregate, up to 4% of the amount of Common Stock that is sold in the Conversion. The shares purchased by the RSP would be authorized but unissued shares or would be purchased in the open market. In the event the market price of the Common Stock is greater than $10.00 per share, the Bank's contribution of funds will be increased. Likewise, in the event the market price is lower than $10.00 per share, the Bank's contribution will be decreased. In recognition of their prior and expected services to the Bank and the Company, as the case may be, the officers, employees, and directors responsible for implementation of the policies adopted by the Board of Directors and the profitable operation of the Bank will, without cost to them, be awarded stock under the RSP. Based upon the sale of 820,000 shares of Common Stock in the Offerings at the midpoint of the EVR, the RSP Trust is expected to purchase up to 32,800 shares of Common Stock. In accordance with applicable OTS regulations, the shares granted under the RSP will be in the form of restricted stock vesting over a five year period (i.e., 20% per year) beginning one year after the date of grant of the award. Compensation expense in the amount of the market value of the Common Stock on the date an award is granted will be recognized pro rata over the years during which the shares are payable. Until they have vested, such shares may not be sold, pledged, or otherwise disposed of and are required to be held in escrow. The RSP Trustees shall vote all shares held by the RSP trust prior to vesting and delivery of shares to participants. If the RSP is implemented more than one year after the Conversion, the RSP will comply with such OTS regulations and policies that are applicable at such time. RESTRICTIONS ON BENEFIT PLANS. OTS regulations provide that in the event the Bank implements or adopts stock option or management and/or employee stock benefit plans within one year from the date of Conversion, such plans must comply with the following restrictions: (1) the plans must be fully disclosed in the prospectus, (2) for stock option plans, the total number of shares for which options may be granted may not exceed 10% of the shares issued in the Conversion, (3) for restricted stock plans, the shares may not exceed 3% of the shares issued in the Conversion (4% for institutions with 10% or greater tangible capital), (4) the aggregate amount of stock purchased by the ESOP in the Conversion may not exceed 10% (8% for well-capitalized institutions utilizing a 4% restricted stock plan), (5) no individual employee may receive more than 25% of the available awards under any plan, (6) directors who are not employees may not receive more than 5% individually or 30% in the aggregate of the awards under any plan, (7) all plans must be approved by a majority of the total votes eligible to be cast at any duly called meeting of the Company's stockholders held no earlier than six months following the Conversion, (8) for stock option plans, the exercise price must be at least equal to the market price of the stock at the time of grant, (9) for restricted stock plans, no stock issued in a conversion may be used 63 to fund the plan, (10) neither stock option awards nor restricted stock awards may vest earlier than 20% as of one year after the date of stockholder approval and 20% per year thereafter, and vesting may be accelerated only in the case of disability or death (or if not inconsistent with applicable OTS regulations in effect at such time, in the event of a change in control), (11) the proxy material must clearly state that the OTS in no way endorses or approves of the plans, and (12) prior to implementing the plans, all plans must be submitted to the Regional Director of the OTS within five days after stockholder approval with a certification that the plans approved by the stockholders are the same plans that were filed with and disclosed in the proxy materials relating to the meeting at which stockholder approval was received. Plans adopted and implemented more than one year after the Conversion would not necessarily be subject to these limitations. In addition, should the rules and regulations of the OTS be liberalized, the Bank and the Company reserve the right to adopt plans qualifying under the more liberal rules. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee consists of the entire Board of Directors. Mr. Gagliardi and Ms. Mechling do not participate in matters concerning their own compensation. CERTAIN RELATED TRANSACTIONS The Bank, like many financial institutions, has followed a policy of granting various types of loans to officers and directors. Such loans a) have been made in the ordinary course of business, b) were made on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable transactions with the Bank's other customers, and c) do not involve more than the normal risk of collectibility or present other unfavorable features. All loans by the Bank to its directors and executive officers are subject to OTS regulations restricting loans and other transactions with affiliated persons of the Bank. Loans to officers and directors of the Bank and their affiliates, amounted to approximately $615,000 or 9.9% of the Bank's equity at June 30, 1996. Assuming the Conversion had occurred as of June 30, 1996, and assuming the sale of 820,000 shares at the midpoint of the EVR, loans to officers and directors of the Bank at that date would have totalled approximately 4.7% of pro forma stockholders' equity of the Company. THE CONVERSION THE BOARDS OF DIRECTORS OF THE BANK AND THE COMPANY AND THE OTS HAVE APPROVED THE PLAN SUBJECT TO THE PLAN'S APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON THE MATTER AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE OTS. GENERAL On September 3, 1996, the Board of Directors of the Bank adopted the Plan, pursuant to which the Bank would be converted from a federally chartered mutual savings and loan association to a federally chartered stock savings bank, with the concurrent formation of the Company. It is currently intended that all of the capital stock of the Bank will be held by the Company. The OTS has approved the Plan subject to its approval by the members of the Bank entitled to vote on the matter at a special meeting (the "Special Meeting") called for that purpose and subject to the satisfaction of certain other conditions imposed by the OTS in its approval. 64 The OTS has approved the Company's application to become a savings and loan holding company and to acquire all of the Common Stock of the Bank to be issued in the Conversion. Pursuant to such OTS approval, the Company plans to retain 50% of the net proceeds from the sale of the Common Stock and to use the remaining 50% to purchase all of the to be issued and outstanding capital stock of the Bank. The Conversion will be accomplished through adoption of the proposed Federal Stock Charter and Bylaws to authorize the issuance of capital stock by the Bank, at which time the Bank will change its name to Advance Financial Savings Bank and will become a wholly owned subsidiary of the Company. The Conversion will be accounted for at historical cost in a manner similar to a pooling of interests. Under the Plan, the Common Stock is being offered for sale by the Company. As part of the Conversion, the Company is conducting a Subscription Offering of the Common Stock for holders of subscription rights and, depending upon market conditions at or near the completion of the Subscription Offering, may also, or in lieu thereof, conduct a Public Offering. The Plan provides that the Conversion must be completed within 24 months after the date of the approval of the Plan by the members of the Bank. In the event that the Bank is unable to complete the sale of Common Stock and effect the Conversion within 45 days after the end of the Subscription Offering, the Bank may request an extension of the period by the OTS. No assurance can be given that the extension would be granted if requested. Due to the volatile nature of market conditions, no assurances can be given that the Bank's valuation would not substantially change during any such extension. If the EVR of the Common Stock must be amended, no assurance can be given that such amended EVR would be approved by the OTS. Therefore, it is possible that if the Conversion cannot be completed within the requisite period, the Bank may not be permitted to complete the Conversion. A substantial delay caused by an extension of the period may also significantly increase the expense of the Conversion. No sales of the Common Stock may be completed in the Offerings unless the Plan is approved by the members of the Bank. Completion of the Offerings is subject to market conditions and other factors beyond the Bank's control. No assurance can be given as to the length of time following approval of the Plan at the Special Meeting that will be required to complete the Offerings. If delays are experienced, significant changes may occur in the estimated pro forma market value of the Bank upon Conversion together with corresponding changes in the offering price and the net proceeds realized by the Bank from the sale of the Common Stock. In the event the Conversion is terminated, the Bank would be required to charge all Conversion expenses against current income and any funds collected by the Bank in the Offerings would be promptly returned to each potential investor, plus interest at the prescribed rate. REASONS FOR THE CONVERSION The principal factors considered by the Bank's Board of Directors in reaching the decision to pursue a mutual-to-stock conversion are the future of mutual institutions generally and the numerous competitive disadvantages which the Bank faces if it continues in mutual form. These disadvantages relate to a variety of factors, including growth opportunities, employee retention, and regulatory uncertainty. In the opinion of management, if the Bank is to continue to grow and prosper, the mutual form of organization is the least desirable form from a competitive standpoint. The only realistic growth opportunity available to the Bank as a mutual is branching. The opportunities for a mutual to expand through mergers are extremely scarce. The only realistic merger possibilities are mutual to mutual mergers. As the number of mutual companies dwindles, so do the opportunities for such mergers. Although the Bank does not have any specific acquisitions planned at this time, the Conversion will position the Bank to take advantage of any acquisition opportunities that may present themselves. 65 Because a conversion to stock form is a time-consuming and complex process, the Bank cannot wait until an acquisition is imminent to begin the conversion process. As an increasing number of the Bank's competitors convert to stock form and can use stock based compensation programs, the Bank, as a mutual, is at a disadvantage in attracting and retaining qualified management. The Bank believes that the ESOP for all employees and the Stock Option Plan and the RSP for directors, officers, and certain employees are important tools in achieving such goals, even though the Bank will be required to wait until after the Conversion to implement the Stock Option Plan and the RSP. See "Management of the Bank - Proposed Future Stock Benefit Plans." Another benefit of the conversion will be an increase in capital. Notwithstanding the Bank's current capital position, the importance of higher levels of capital cannot be ignored in the current interest rate environment. For the last few years, thrift institutions have enjoyed very favorable net interest margins as interest rates dropped to very low levels. In more recent months, interest rates generally have been rising. As has been amply demonstrated in the past, changing accounting principles, interest rate shifts, and changing regulations can threaten even well-capitalized institutions. As a mutual institution, the Bank can only increase capital through retained earnings or the issuance of subordinated debentures, which do not count as Tier I capital for regulatory capital purposes. Capital that may seem unnecessary now may help the Bank withstand future threats to its capital. In view of the competitive disadvantage and the ongoing debate about the future of mutual institutions in the wake of regulatory consolidation and other forces, the Bank is choosing to reject the uncertainty inherent in the mutual structure in favor of the more widely used, recognized, and understood stock form of ownership. EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK VOTING RIGHTS. Depositor and borrower members will have no voting rights in the converted Bank and will therefore not be able to elect directors of the Bank or to otherwise participate in the conduct of the affairs of the Bank or the Company unless they hold Common Stock. Currently, these rights are accorded to depositor and certain borrower members of the Bank. Although the Bank holds annual meetings of members for the election of directors and for other purposes, very few members exercise their voting rights. Accordingly, voting control of the Bank has been effectively exercised by the Board of Directors through their individual votes and through proxies given by a limited number of members. Following the Conversion, the Bank will become a wholly owned subsidiary of the Company, which will hold all voting rights in the Bank. Voting rights in the Company will be vested exclusively in the Company"s stockholders. Stockholders will be entitled to vote on any matter to be considered by the stockholders of the Company and will be entitled to one vote for each share of the Common Stock owned. See "Certain Restrictions on Acquisition of the Company" with respect to limitations applicable to the rights of stockholders to exercise cumulative voting. SAVINGS ACCOUNTS AND LOANS. The Bank's savings accounts, balances of the individual accounts, and the existing FDIC insurance coverage will not be affected by the Conversion. Furthermore, the Conversion will not affect the loan accounts, the balances of these accounts, or the obligations of the borrowers under their individual contractual arrangements with the Bank. TAX EFFECTS. A discussion of the material taxes applicable to the Bank is included above under "Taxation." A summary of the material tax effects of the Conversion on the Bank and its members is set forth below. The Bank has received an opinion from its counsel, Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C., that the Conversion will constitute a nontaxable reorganization under Section 368(a)(1)(F) of the Code. Among other things, the opinion, filed as an exhibit to the registration statement of which this prospectus is a part, provides that: (i) the Conversion will qualify as a 66 reorganization under Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized by the Bank in either its mutual form or its stock form, or by the Company, by reason of the proposed Conversion; (ii) no gain or loss will be recognized by the Bank upon the receipt of money from the Company for stock of the Bank, and no gain or loss will be recognized by the Company upon the receipt of money for the Common Stock; (iii) the assets of the Bank in either its mutual or its stock form will have the same basis before and after the Conversion; (iv) the holding period of the assets of the Bank will include the period during which the assets were held by the Bank in its mutual form prior to conversion; (v) no gain or loss will be recognized by the Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members of the Bank upon the issuance to them of withdrawable savings accounts in the stock association in the same dollar amount as their savings accounts in the Bank plus an interest in the liquidation account of the stock association in exchange for their savings accounts in the Bank; (vi) the receipt by Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members of non-transferable subscription rights to purchase shares of the Common Stock under the Plan is taxable to Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members to the extent the subscription rights have value; (vii) the basis of each account holder's savings accounts in the Bank after the Conversion will be the same as the basis of his or her savings accounts in the Bank prior to the Conversion, decreased by the fair market value of the non-transferable subscription rights received and increased by the amount, if any, of gain recognized on the exchange; (viii) the basis of each account holder's interest in the liquidation account will be zero; (ix) the holding period of the Common Stock acquired through the exercise of subscription rights shall begin on the date on which the subscription rights are exercised; (x) the Bank will succeed to and take into account the earnings and profits or deficit in earnings and profits of the Bank, in its mutual form, as of the date of Conversion; (xi) the Bank, immediately after Conversion, will succeed to the bad debt reserve accounts of the Bank, in its mutual form, and the bad debt reserves will have the same character in the hands of the Bank after Conversion as if no distribution or transfer had occurred; and (xii) the creation of the liquidation account will have no effect on the Bank's taxable income, deductions, or addition to reserve for bad debts either in its mutual or stock form. The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based in part on the assumption that the exercise price of the subscription rights to purchase Common Stock will be approximately equal to the fair market value of that stock at the time of the completion of the proposed Conversion. With respect to the subscription rights, the Bank has received an opinion of Keller which, based on certain assumptions, concludes that the subscription rights to be received by Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members do not have any economic value at the time of distribution or at the time the subscription rights are exercised, whether or not a public offering takes place. Such opinion is based on the fact that such rights are: (i) acquired by the recipients without payment therefor, (ii) non-transferable, (iii) of short duration, and (iv) afford the recipients the right only to purchase Common Stock at a price equal to its estimated fair market value, which will be the same price at which shares of Common Stock for which no subscription right is received in the Subscription Offering may be offered in the Public Offering. If the subscription rights granted to Eligible Account Holders, Supplemental Eligible Account Holders, or Other Members are deemed to have an ascertainable value, receipt of such rights would be taxable probably only to those Eligible Account Holders, Supplemental Eligible Account Holders, or Other Members who exercise the subscription rights in an amount equal to such value (either as a capital gain or ordinary income), and the Bank could recognize gain on such distribution. The Bank is subject to West Virginia taxation and has received the opinion of S.R. Snodgrass, A.C. that the Conversion will be treated for West Virginia state tax purposes similar to the Conversion's treatment for federal tax purposes. 67 Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane & Fisch, P.C., Keller, and S.R. Snodgrass, A.C. have no binding effect or official status, and no assurance can be given that the conclusions reached in any of those opinions would be sustained by a court if contested by the IRS or the West Virginia tax authorities. ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS, AND OTHER MEMBERS ARE ENCOURAGED TO CONSULT WITH THEIR OWN TAX ADVISERS AS TO THE TAX CONSEQUENCES IN THE EVENT THE SUBSCRIPTION RIGHTS ARE DEEMED TO HAVE AN ASCERTAINABLE VALUE. LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of the Bank in its present mutual form, each eligible Account Holder and Supplemental Eligible Account Holder of the Bank is entitled to a liquidating distribution from the liquidation account, pro rata to the value of his or her accounts, of the Bank remaining after liquidation payment of claims of all creditors (including the claims of all account holders to the withdrawal value of their accounts). Each account holder's pro rata share of such liquidating distribution would be in the same proportion as the value of his or her deposit accounts was to the total value of all deposit accounts in the Bank at the time of liquidation. Upon a complete liquidation after the Conversion, each depositor would have a claim, as a creditor, of the same general priority as the claims of all other general creditors of the Bank. Therefore, except as described below, a depositor's claim would be solely in the amount of the balance in his or her deposit account plus accrued interest. A depositor would not have an interest in the residual value of the assets of the Bank above that amount, if any. The Plan and OTS rules provide for the establishment, upon the completion of the Conversion, of a special "liquidation account" for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the equity of the Bank as of the date of its latest statement of financial condition contained in the final prospectus. Each Eligible Account Holder and Supplemental Eligible Account Holder, if he or she continues to maintain his or her deposit account at the Bank, would be entitled pursuant to a complete liquidation of the Bank after Conversion, to an interest in the liquidation account prior to any payment to stockholders of the Bank. Each Eligible Account Holder would have an initial interest in such liquidation account for each deposit account held in the Bank on the qualifying date, August 31, 1995. Each Supplemental Eligible Account Holder would have a similar interest as of the qualifying date, September 30, 1996. The interest as to each deposit account would be in the same proportion of the total liquidation account as the balance of the deposit account on the qualifying dates was to the aggregate balance in all the deposit accounts of Eligible Account Holders and Supplemental Eligible Account Holders on such qualifying dates. However, if the amount in the deposit account on any annual closing date of the Bank (June 30) is less than the amount in such account on the respective qualifying dates, then the interest in this special liquidation account would be reduced from time to time by an amount proportionate to any such reduction, and the interest would cease to exist if such deposit account were closed. The interest in the special liquidation account will never be increased despite any increase in the related deposit account after the respective qualifying dates. No merger, consolidation, purchase of bulk assets with assumptions of savings accounts and other liabilities, or similar transactions with another insured institution in which transaction the Bank is not the surviving institution shall be considered a complete liquidation. In such transactions, the liquidation account shall be assumed by the surviving institution. SUBSCRIPTION RIGHTS AND THE SUBSCRIPTION OFFERING In accordance with OTS regulations, non-transferable subscription rights to purchase shares of the Common Stock have been granted to all persons and entities entitled to purchase the Common Stock in the Subscription Offering under the Plan. The amount of the Common Stock which these parties may purchase will be determined, in part, by the total amount of Common Stock to be issued and by the availability of the Common Stock for purchase under the categories set forth in the Plan. If the 68 Subscription Offering extends beyond ___________, 1997 (45 days following the Expiration Date of the Subscription Offering), subscribers will be resolicited. Subscription priorities have been established for the allocation of stock to the extent that the Common Stock is available after satisfaction of all subscriptions of all persons having prior rights and subject to the maximum and minimum purchase limitations set forth in the Plan and as described below under "-Limitations on Purchase of Shares." The following priorities have been established: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder (depositors of the Bank with account balances of at least $50 on August 31, 1995) will receive non- transferable subscription rights on a priority basis to purchase that number of shares of Common Stock which is equal to the greater of 10,000 shares ($100,000) sold in the Conversion, one-tenth of one percent (0.10%) of the total offering, or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Common Stock to be issued by a fraction of which the numerator is the amount of the qualifying deposit of the Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Eligible Account Holders, but in no event shall this number be greater that the maximum purchase limitation specified in the Plan. If the allocation made in this paragraph results in an oversubscription, shares of Common Stock shall be allocated among subscribing Eligible Account Holders so as to permit each such account holder, to the extent possible, to purchase a number of shares of Common Stock sufficient to make his or her total allocation equal to 100 shares of Common Stock or the total amount of his or her subscription, whichever is less. Any shares of Common Stock not so allocated shall be allocated among the subscribing Eligible Account Holders on an equitable basis, in the proportion that the amounts of their respective qualifying deposits bear to the qualifying deposits of all subscribing Eligible Account Holders. If the amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders, the excess shall be reallocated (one or more times as necessary) among those Eligible Account Holders whose subscriptions are still not fully satisfied on the same principle until all available shares have been allocated or all subscriptions satisfied. Subscription rights received by officers and directors in this category based on their increased deposits in the Bank in the one-year period preceding August 31, 1995, are subordinated to the subscription rights of other Eligible Account Holders. TAX-QUALIFIED EMPLOYEE BENEFIT PLANS. Tax-qualified employee benefit plans of the Bank ("Employee Plans") have been granted subscription rights to purchase up to 10% of the total shares issued in the Conversion. The ESOP is an Employee Plan and intends to purchase up to 8% of the Common Stock issued in the Conversion. The right of Employee Plans to subscribe for the Common Stock is subordinate to the right of the Eligible Account Holders to subscribe for the Common Stock. However, in the event the Offerings result in the issuance of shares above the maximum of the EVR (i.e., more than 943,000 shares), the Employee Plans have a priority right to fill their subscription (the ESOP, the only Employee Plan, currently intends to purchase up to 8% of the Common Stock issued in the Conversion). The Employee Plans may, however, determine to purchase some or all of the shares covered by their subscriptions after the Conversion in the open market or, if approved by the OTS, out of authorized but unissued shares in the event of an oversubscription. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental Eligible Account Holder (depositors who are not Eligible Account Holders of the Bank with account balances of at least $50 on September 30, 1996) will receive non-transferable subscription rights to purchase that number of shares of Conversion Stock which is equal to the greater of 10,000 shares ($100,000) sold in the Conversion, one- tenth of one percent (0.10%) of the total offering, or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Common Stock to be issued by a fraction of which the numerator is the amount of the qualifying deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account Holders. These non-transferable subscription rights shall be granted only in the event 69 that the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application filed prior to OTS approval. If the allocation made pursuant to this paragraph results in an oversubscription, shares of Common Stock shall be allocated among subscribing Supplemental Eligible Account Holders so as to permit each such account holder, to the extent possible, to purchase a number of shares of Common Stock sufficient to make his or her total allocation (including the number of shares of Common Stock, if any, allocated in accordance with the subscription rights of Eligible Account Holders) equal to 100 shares of Common Stock or the total amount of his or her subscription, whichever is less. Any shares of Common Stock not so allocated shall be allocated among the subscribing Supplemental Eligible Account Holders on an equitable basis, related to the amounts of their respective qualifying deposits as compared to the total qualifying deposits of all subscribing Supplemental Eligible Account Holders. The rights of Supplemental Eligible Account Holders to subscribe for the Common Stock is subordinate to the rights of the Eligible Account Holders and Employee Plans to subscribe for the Common Stock. OTHER MEMBERS. Other Members (depositors and borrowers who are entitled to vote at a special meeting of members called to vote on the Conversion) who are not Eligible Account Holders or Supplemental Eligible Account Holders, will receive non-transferable subscription rights to purchase up to the greater of 10,000 shares ($100,000), or one tenth of one percent (0.10%) of the total offering, subject to maximum and minimum purchase limitations and exclusive of an increase in the total number of shares issued due to an increase in the maximum EVR of up to 15%, to the extent such stock is available following subscriptions by Eligible Account Holders, Employee Plans, and Supplemental Eligible Account Holders. If the allocation made pursuant to this paragraph results in an oversubscription when added to the shares of Common Stock subscribed for by the Eligible Account Holders, the Employee Plans, and the Supplemental Account Holders, the subscriptions of such Other Members will be allocated among the subscribing Other Members so as to permit each subscribing Other Member, to the extent possible, to purchase a number of shares of Common Stock sufficient to make his or her total allocation equal to 100 shares of Common Stock or the total number of shares covered by the subscription of the Other Member. Any remaining shares will be allocated among the subscribing Other Members whose subscriptions remain unsatisfied on a 100 shares (or whatever lesser amount is available) per order basis until all orders have been filled or the remaining shares have been allocated. MEMBERS IN NON-QUALIFIED STATES. The Company will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for the Common Stock pursuant to the Plan reside. However, no person will be offered or allowed to purchase any Common Stock under the Plan if he or she resides in a foreign country or in a state of the United States with respect to which any of the following apply: (i) a small number of persons otherwise eligible to subscribe for shares under the Plan reside in such state or foreign country; (ii) the granting of subscription rights or offer or sale of shares of Common Stock to such persons would require the Bank, the Company, or its employees to register, under the securities laws of such state or foreign country, as a broker or dealer or to register or otherwise qualify its securities for sale in such state or foreign country; or (iii) such registration or qualification would be impracticable for reasons of cost or otherwise. No payments will be made in lieu of the granting of subscription rights to any such person. RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES. The OTS conversion regulations prohibit any person with subscription rights, including Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members of the Bank, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Such rights may be exercised only by the person to whom they are granted and only for his or her account. Each person subscribing for shares will be required to certify that such person is purchasing shares solely for his or her own account and that 70 such person has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase such subscription rights or shares of Common Stock prior to the completion of the Conversion. The Bank and the Company will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights. EXPIRATION DATE. THE SUBSCRIPTION OFFERING WILL EXPIRE AT 4:00 P.M., EASTERN TIME, ON ____________, 1996, UNLESS THE SUBSCRIPTION OFFERING IS EXTENDED, AT THE DISCRETION OF THE BOARD OF DIRECTORS, UP TO AN ADDITIONAL 45 DAYS WITH THE APPROVAL OF THE OTS, IF NECESSARY, BUT WITHOUT ADDITIONAL NOTICE TO SUBSCRIBERS (THE "EXPIRATION DATE"). Subscription rights will become void if not exercised prior to the Expiration Date. PUBLIC OFFERING To the extent that shares remain available and subject to market conditions at or near the completion of the Subscription Offering, the Company may offer shares pursuant to the Plan, to selected persons in a Public Offering on a best- efforts basis through Webb in such a manner as to promote a wide distribution of the Common Stock. Any orders received in connection with the Public Offering, if any, will receive a lower priority than orders properly made in the Subscription Offering by persons exercising Subscription Rights. Common Stock sold in the Public Offering will be sold at $10.00 per share and hence will be sold at the same price as all other shares in the Conversion. THE COMPANY AND THE BANK HAVE THE RIGHT TO REJECT ORDERS, IN WHOLE OR IN PART, IN THEIR SOLE DISCRETION IN THE PUBLIC OFFERING. No person (or persons acting through a single account) will be permitted to purchase more than 10,000 shares or $100,000 of Common Stock in the Public Offering. No person, together with any associate or group of persons acting in concert, will be permitted to purchase more than 15,000 shares or $150,000 of Common Stock in the Public Offering. To order Common Stock in connection with the Public Offering, if any, an executed stock order and account withdrawal authorization (if applicable) must be received by Webb prior to the termination of the Public Offering. The date by which orders must be received in the Public Offering ("Public Offering Expiration Date") will be set by the Company at the time of commencement of the Public Offering; provided however, if the Offerings are extended beyond __________, 1997, each purchaser will have the opportunity to maintain, modify, or rescind his or her order. In such event, all funds received in the Public Offering will be promptly returned with interest to each purchaser unless he or she affirmatively indicates otherwise. In the event the Company determines to conduct a Public Offering, persons to whom a Prospectus is delivered may order shares of Common Stock by submitting a completed stock order and account withdrawal authorization (provided by Webb, if applicable) and an executed certification along with immediately available funds (which may be obtained by debiting a Webb account) to Webb by not later than the Public Offering Expiration Date (as established by the Company). Promptly upon receipt of available funds, together with a properly executed stock order and account withdrawal authorization, if applicable, and certification, Webb will forward such funds to the Bank to be deposited in a subscription escrow account. If an order in the Public Offering is accepted, promptly after the completion of the Conversion, a certificate for the appropriate amount of shares will be forwarded to Webb as nominee for the beneficial owner. In the event that an order is not accepted or the Conversion is not consummated, the Bank will promptly refund with interest the funds received to Webb which will then return the funds to purchasers' 71 accounts. If the aggregate pro forma market value of the Company and the Bank, as converted, is less than $6,970,000 or more than $10,844,500, each purchaser will have the right to modify or rescind his or her order. IF A PUBLIC OFFERING IS HELD, THE OPPORTUNITY TO ORDER SHARES OF COMMON STOCK IN THE PUBLIC OFFERING IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN THEIR SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART. ORDERING AND RECEIVING COMMON STOCK USE OF ORDER FORMS. Rights to subscribe may only be exercised by completion of an Order Form or stock order and account withdrawal authorization ("Stock Order"), if applicable, in the case of the Public Offering. Any person receiving an Order Form or Stock Order who desires to subscribe for shares of Common Stock must do so prior to the Expiration Date or, if applicable, the Public Offering Expiration Date, by delivering (by mail or in person ) to the Bank a properly executed and completed Order Form or Stock Order, together with full payment of the Purchase Price for all shares for which subscription is made; provided, however, that if the Employee Plans subscribe for shares during the Subscription Offering, the Employee Plans will not be required to pay for the shares at the time they subscribe but rather may pay for the shares upon consummation of the Conversion. Except for institutional investors, all subscription rights under the Plan will expire on the Expiration Date, whether or not the Bank has been able to locate each person entitled to such subscription rights. The Bank and Company shall have the right, in their sole discretion, to permit institutional investors to submit contractually irrevocable orders in the Public Offering at any time prior to the completion of the Conversion. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE CONSENT OF THE BANK AND THE COMPANY UNLESS THE CONVERSION IS NOT COMPLETED WITHIN 45 DAYS OF THE EXPIRATION DATE. In the event an Order Form or Stock Order (i) is not delivered and is returned to the Bank by the United States Postal Service or the Bank is unable to locate the addressee; (ii) is not received or is received after the Expiration Date or the Public Offering Expiration Date; (iii) is defectively completed or executed; (iv) is not accompanied by the full required payment for the shares subscribed for (including instances where a savings account or certificate balance from which withdrawal is authorized is insufficient to fund the amount of such required payment, but excluding subscriptions by the Employee Plans) or, in the case of an institutional investor in the Public Offering, by delivering irrevocable orders together with a legally binding commitment to pay the full purchase price prior to 48 hours before the completion of the Conversion; or (v) is not mailed pursuant to a "no mail" order placed in effect by the account holder, the subscription rights for the person to whom such rights have been granted will lapse as though such person failed to return the completed Order Form or Stock Order within the time period specified. However, the Company may, but will not be required to, waive any irregularity on any Order Form or Stock Order or require the submission of corrected Order Forms or Stock Orders or the remittance of full payment for subscribed shares by such date as the Company may otherwise specify. The waiver of an irregularity on an Order Form or Stock Order in no way obligates the Company to waive any other irregularity on any other Order Form or Stock Order. Waivers will be considered on a case by case basis. The Bank and the Company reserve the right in their sole discretion to accept or reject orders received on photocopies or facsimile Order Forms or Stock Orders, or whose payment is to be made by wire transfer or payment from private third parties. The interpretation by the Bank or Company of the terms and conditions of the Plan and of the acceptability of the Order Forms or Stock Orders will be final, subject to the authority of the OTS. To ensure that each purchaser receives a Prospectus at least 48 hours before the Expiration Date or, if applicable, the Public Offering Expiration Date, in accordance with Rule 15c2-8 of the Exchange Act, no Prospectus will be mailed any later than five days prior to such date or hand delivered any later than two days prior to such date . Execution of the Order Form or Stock Order will confirm receipt or 72 delivery in accordance with Rule 15c2-8. Order Forms or Stock Orders will only be distributed with a Prospectus. PAYMENT FOR SHARES. For subscriptions to be valid, payment for all subscribed shares, computed on the basis of the Purchase Price, will be required to accompany all properly completed Order Forms, on or prior to the expiration date specified on the Order Form unless such date is extended by the Bank or the Company. Employee Plans subscribing for shares during the Subscription Offering may pay for such shares upon consummation of the Conversion. Payment for shares of Common Stock may be made (i) in cash, if delivered in person, (ii) by check or money order, or (iii) for shares of Common Stock subscribed for in the Subscription Offering, by authorization of withdrawal from savings accounts (including certificates of deposit) maintained with the Bank. Appropriate means by which such withdrawals may be authorized are provided in the Order Form. Once such a withdrawal has been authorized, none of the designated withdrawal amount may be used by a subscriber for any purpose other than to purchase the Common Stock for which a subscription has been made until the Conversion has been completed or terminated. In the case of payments authorized to be made through withdrawal from savings accounts, all sums authorized for withdrawal will continue to earn interest at the contract rate until the Conversion has been completed or terminated. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of shares, however, if a partial withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate shall be canceled at the time of withdrawal, without penalty, and the remaining balance will earn interest at the passbook savings account rate subsequent to the withdrawal. In the case of payments made in cash or by check or money order, such funds will be placed in a segregated account and interest will be paid by the Bank at the passbook savings account rate from the date payment is received until the Conversion is completed or terminated. An executed Order Form, once received by the Company, may not be modified, amended, or rescinded without the consent of the Bank, unless the Conversion is not completed within 45 days after the conclusion of the Subscription Offering, in which event subscribers may be given the opportunity to increase, decrease, or rescind their subscription for a specified period of time. In the event that the Conversion is not consummated for any reason, all funds submitted pursuant to the Offerings will be promptly refunded with interest as described above. Owners of self-directed IRAs may use the assets of such IRAs to purchase shares of Common Stock in the Offerings, provided that such IRAs are not maintained on deposit at the Bank. Persons with IRAs maintained at the Bank must have their accounts transferred to an unaffiliated institution or broker to purchase shares of Common Stock in the Offerings. Instructions on how to transfer self-directed IRAs maintained at the Bank can be obtained from the Conversion Information Center ((304) ______-_______) located at the Bank's main office. FEDERAL REGULATIONS PROHIBIT THE BANK FROM LENDING FUNDS OR EXTENDING CREDIT TO ANY PERSON TO PURCHASE THE COMMON STOCK IN THE CONVERSION. DELIVERY OF STOCK CERTIFICATES. Certificates representing Common Stock issued in the Conversion will be mailed to the persons entitled thereto at the address noted on the Order Form, as soon as practicable following consummation of the Conversion. Any certificates returned as undeliverable will be held until claimed by persons legally entitled thereto or otherwise disposed of in accordance with applicable law. Until certificates for the Common Stock are available and delivered to subscribers, subscribers may not be able to sell the shares of stock for which they subscribed. RESTRICTION ON SALES ACTIVITIES The Common Stock will be offered in the Offerings principally by the distribution of this prospectus and through activities conducted at a Conversion Information Center located at the Bank. The 73 Conversion Information Center is expected to operate during normal business hours throughout the Offerings. It is expected that a registered representative employed by Webb will be working at, and supervising the operation of, the Conversion Information Center. Webb will be responsible for overseeing the mailing of materials relating to the Offerings, responding to questions regarding the Conversion and the Offerings and processing Order Forms and Stock Orders. It is expected that Bank and Company personnel will be present in the Conversion Information Center to assist Webb with clerical matters and to answer questions related solely to the business of the Bank. Directors and executive officers of the Company may participate in the solicitation of offers to purchase Common Stock in jurisdictions where such participation is not prohibited. Other employees of the Company and the Bank may participate in the Offerings in ministerial capacities or providing clerical work in effecting a sales transaction. Such other employees have been instructed not to solicit offers to purchase Common Stock or provide advice regarding the purchase of Common Stock. Questions of prospective purchasers will be directed to executive officers of the Company or registered representatives of Webb. The Company will rely on Rule 3a4-1 promulgated under the Exchange Act, and sales of Common Stock will be conducted in accordance with Rule 3a4-1, so as to permit officers, directors, and employees to participate in the sale of Common Stock. No officer, director, or employee of the Company or the Bank will be compensated in connection with such person's solicitations or other participation in the Offerings by the payment of commissions or other remuneration based either directly or indirectly on transactions in the Common Stock. LIMITATIONS ON PURCHASES OF SHARES The Plan provides for certain additional limitations to be placed upon the purchase of the Common Stock by eligible subscribers and others in the Conversion. Each purchaser must purchase a minimum of 25 shares; provided, however, that the minimum number of shares requirement shall not apply if the number of shares of Conversion Stock purchased times the price per share exceeds $500. No person (or persons through a single account) may subscribe for or purchase more than 10,000 shares of Common Stock ($100,000) and no person (or persons through a single account), together with any associate or group of persons acting in concert, may subscribe for or purchase more than 15,000 shares of Common Stock ($150,000), except for the Employee Plans which may purchase up to 10% of the Common Stock issued in the Conversion, but currently intend to purchase 8% of the Common Stock issued in the Conversion. Depending on market conditions and the results of the Offerings, the Board of Directors, in its sole discretion, may increase or decrease the purchase limitation without the approval of the members of the Bank and without resoliciting subscribers, provided that the maximum purchase limitation may not be increased to a percentage in excess of 5%. The OTS regulations governing the Conversion limit the number of shares that officers and directors and their associates may purchase. In the aggregate, the officers and directors or their associates may not purchase more than 34% of the shares of the Common Stock issued pursuant to the Conversion. For purposes of the Plan, the directors are not deemed to be acting in concert solely by reason of their Board membership. Requests to purchase additional shares of Common Stock under the Plan will be allocated by the Board of Directors on a pro rata basis giving priority in accordance with the priority rights set forth above and in the Plan. Pro rata reduction within each subscription rights category will be made in allocating shares to the extent that the maximum purchase limitation is exceeded. In the event of an increase in the total number of shares offered in the Conversion due to an increase in the EVR of up to 15% (the "Adjusted Maximum"), the additional shares will be allocated in the following order of priority: (i) to fill the Employee Plans' subscription of up to 8% of the Adjusted Maximum number of shares; (ii) in the event that there is an oversubscription by Eligible Account Holders, to fill 74 unfulfilled subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum; (iii) in the event that there is an oversubscription by Supplemental Eligible Account Holders, to fill unfulfilled subscriptions to Supplemental Eligible Account Holders exclusive of the Adjusted Maximum; and (iv) in the event that there is an oversubscription by Other Members, to fill unfulfilled subscriptions of Other Members exclusive of the Adjusted Maximum. The term "associate" of a person is defined in the Plan to mean (i) any corporation or organization (other than the Bank or a majority-owned subsidiary of the Bank) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, (excluding tax-qualified employee stock benefit plans or tax-qualified employee stock benefit plans in which a person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity and except that, for purposes of aggregating total shares that may be held by officers and directors, the term "Associate" does not include any tax- qualified employee stock benefit plan), and (iii) any relative or spouse of such person or any relative of such spouse, who has the same home as such person or who is a director or officer of the Bank, or any of its parents or subsidiaries. For example, a corporation of which a person serves as an officer would be an associate of such person, and therefore, all shares purchased by such corporation would be included with the number of shares which such person individually could purchase under the above limitations. The term "officer" is defined in the Plan to mean an executive officer of the Bank and may include the Bank"s Chairman of the Board, Chief Executive Officer, President, Senior Vice Presidents, Vice Presidents in charge of principal business functions, Secretary and Treasurer and any other person performing similar functions. All references herein to an officer shall have the same meaning as used for an officer in the Plan. Each person purchasing shares of the Common Stock in the Conversion will be deemed to confirm that such purchase does not conflict with the maximum purchase limitation. In the event that such purchase limitation is violated by any person (including any associate or group of persons affiliated or otherwise acting in concert with such persons), the Bank will have the right to purchase from such person at the Purchase Price per share all shares acquired by such person in excess of such purchase limitation or, if such excess shares have been sold by such person, to receive the difference between the Purchase Price per share paid for such excess shares and the price at which such excess shares were sold by such person. This right of the Bank to purchase such excess shares will be assignable by the Bank. Common Stock purchased pursuant to the Conversion will be freely transferable, except for shares purchased by directors and officers of the Bank. For certain restrictions on the Common Stock purchased by directors and officers, see "- Restrictions on Transferability by Directors and Officers." In addition, under guidelines of the NASD, members of the NASD and their associates are subject to certain restrictions on the transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of such securities. PLAN OF DISTRIBUTION The Company and the Bank have entered into an Agency Agreement with Webb under which Webb will assist, on a best efforts basis, in the distribution of the Common Stock in the Conversion. Webb is a broker-dealer registered with the NASD. Specifically, Webb will assist in the Subscription Offering in the following manner: (i) training and educating the Company"s and the Bank"s employees regarding the mechanics and regulatory requirements of the stock conversion process; (ii) conducting information meetings for potential subscribers, if necessary; (iii) managing the sales efforts in the Subscription and Public Offerings; and (iv) keeping records of all stock subscriptions. 75 Materials for the Offerings have been initially distributed to eligible subscribers by mail, with additional copies available at the Conversion Information Center. In the Subscription Offering, officers of the Company may be available to answer questions about the Conversion. Such officers will not be permitted to make statements about the Bank or the Company unless such information is also set forth in this Prospectus, and they will not be authorized to render investment advice. All subscribers for the shares to be offered will be instructed to send payment directly to the Bank, where such funds will be held in a segregated special escrow account and not released until the closing of the Conversion or its termination. MARKETING ARRANGEMENTS The Bank and the Company have engaged Webb as a financial and marketing advisor in connection with the Offerings and Webb has agreed to act as an underwriter on a best efforts basis to solicit subscriptions and purchase orders for shares of Common Stock in the Offerings. Webb will receive, as compensation, a fee of 1.5% of the total dollar amount of Common Stock sold in the Offerings, excluding subscriptions by directors, officers and employees of the Bank and the Company and their immediate family members, and the ESOP. Webb will also be reimbursed for its legal fees and expenses up to $30,000. The Bank and the Company have agreed to indemnify Webb, to the extent allowed by law, for reasonable costs and expenses in connection with certain claims or liabilities, including certain liabilities under the Securities Act. Webb has received fees totalling $25,000 for consulting and advisory services relating to the Conversion, which fees will be in addition to marketing fees payable to Webb. See "Pro Forma Data" for further information regarding expenses of the Conversion. SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS The following table sets forth certain information as to the approximate purchases of Common Stock by each director and executive officer of the Bank and by all directors and officers as a group, including their "associates." All such shares will be purchased for investment purposes and not for purposes of resale. For purposes of the following table, it has been assumed that 820,000 shares (the midpoint of the EVR) of the Common Stock will be sold at $10.00 per share and that sufficient shares will be available to satisfy subscriptions in all categories.
Aggregate Total Price of Percent Shares Shares of Shares Name Position Purchased(1) Purchased(1) Purchased(1) - ---------------- --------------------- ------------ ------------ ------------ Stephen M. Gagliardi President, Chief 10,000 $100,000 1.3% Executive Officer and Director James R. Murphy Director 15,000 150,000 1.8 John R. Sperlazza Director 15,000 150,000 1.8 William E. Watson Director 15,000 150,000 1.8 George H. Johnson Director 5,000 50,000 0.6 Gary Young Director 2,500 25,000 0.3
76
Aggregate Total Price of Percent Shares Shares of Shares Name Position Purchased(1) Purchased(1) Purchased(1) - ---------------- --------------------- ------------ ------------ ------------ Noreen Mechling Director, Senior 5,000 50,000 0.6 Vice President and Chief Financial Officer Steve D. Martino Senior Vice 2,500 25,000 0.3 President and Chief ----- ------ --- Operating Officer Total executive officers and directors (8 persons) 70,000 $700,000 8.5% ====== ======== =====
_______________________ (1) Does not include shares to be purchased by the ESOP. STOCK PRICING Keller, a financial consulting and appraisal firm that is experienced in the evaluation and appraisal of business entities, including thrift institutions involved in the conversion process, has been retained by the Bank to prepare an appraisal of the estimated pro forma market value of the Common Stock to be sold pursuant to the Conversion. For its appraisal, Keller will receive a fee of $17,000, including out-of-pocket expenses. Keller will receive a fee of $1,000 for certain appraisal updates. The Bank has agreed to indemnify Keller under certain circumstances against liabilities and expenses (including certain legal fees) arising out of or based on any misstatement or untrue statement of a material fact contained in the information supplied by the Bank to Keller, except where Keller is determined to have been negligent or failed to exercise due diligence in the preparation of the appraisal. The appraisal was prepared by Keller in reliance upon the information contained herein, including the financial statements. The appraisal contains an analysis of a number of factors including, but not limited to, the Bank's financial condition and operating trends, the competitive environment within which the Bank operates, operating trends of certain thrift institutions and savings and loan holding companies, relevant economic conditions, both nationally and in the State of West Virginia which affect the operations of thrift institutions, and stock market values of certain institutions. In addition, Keller has advised the Bank that it has considered and will consider the effect of the additional capital raised by the sale of the Common Stock on the estimated aggregate pro forma market value of such shares. The appraisal has been filed as an exhibit to the registration statement of which this prospectus is a part. See "Additional Information." On the basis of the above, Keller has determined, in its opinion, that as of September 6, 1996, the estimated aggregate pro forma market value of the Common Stock to be issued in the Conversion was $8,200,000. The Company has determined to offer the shares in the Conversion at a price of $10.00 per share. By dividing the price per share into the estimated aggregate value, the Company initially plans to issue 820,000 shares. OTS regulations require, however, that the appraiser establish a range of value for the stock to allow for fluctuations in the aggregate value of the stock due to changing market conditions and other factors. Accordingly, Keller has established a range of value from $6,970,000 to $9,430,000 for this offering (the Estimated Valuation Range) that will be updated prior to consummation 77 of the Conversion. If the final value is outside the Estimated Valuation Range, the total number of shares being offered will be further adjusted and a new Estimated Valuation Range may be established without resolicitation of subscriptions and without the approval of the Bank's members, unless required by the OTS or unless the final valuation is less than $6,970,000 or more than $10,844,500 (15% above the maximum of the Estimated Valuation Range). The Board of Directors has reviewed the independent appraisal, including the stated methodology of the independent appraiser and the assumptions used in the preparation of the independent appraisal. The Board of Directors is relying upon the expertise, experience and independence of the appraiser and is not qualified to determine the appropriateness of the assumptions or the methodology. No sale of the shares will take place unless prior thereto Keller confirms to the OTS that, to the best of Keller's knowledge and judgment, nothing of a material nature has occurred which would cause it to conclude that the Purchase Price on an aggregate basis was incompatible with its estimate of the aggregate pro forma market value of the Common Stock at the time of the sale thereof. If, however, the facts do not justify such a statement, an amended Estimated Valuation Range may be set and subscribers may be resolicited. Subscribers will not be resolicited in the event the final valuation is not less than the minimum of the Estimated Valuation Range and is not more than 15% above the Estimated Valuation Range. THE APPRAISAL IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THE COMMON STOCK. IN PREPARING THE APPRAISAL, KELLER HAS RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND STATISTICAL INFORMATION PROVIDED BY THE BANK. KELLER DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID KELLER VALUE INDEPENDENTLY THE ASSETS AND LIABILITIES OF THE BANK. THE APPRAISAL CONSIDERS THE BANK ONLY AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH APPRAISAL IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING THE COMMON STOCK WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES WITHIN THE ESTIMATED RANGE AT THE TIME OF THE OFFERINGS. NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION Depending on market and financial conditions at the time of the completion of the Offerings, the Company may significantly increase or decrease the number of shares to be issued in the Conversion. No resolicitation of subscribers will be made and subscribers will not be permitted to modify or cancel their subscriptions unless the change in the number of shares to be issued in the Conversion results in an offering which is either below the minimum of the EVR or materially above the maximum of the EVR, provided that up to a 15% increase in the maximum of the EVR will not be deemed to be material. Any adjustments to the EVR as a result of market and financial conditions would be subject to OTS review. In the event of a material increase in the valuation, the Company may increase the total number of shares to be issued in the Conversion. An increase in the total number of shares to be issued in the Conversion would decrease both a subscriber's ownership interest and the pro forma equity and income on a per share basis while increasing the pro forma net income and equity and income on an aggregate basis. If the number of shares to be offered is to be increased, any person who subscribed in the Subscription Offering for the maximum number of shares permitted may be given the opportunity to purchase an additional number of shares sufficient to make the total number of shares of the Common Stock purchased by such subscriber equal to the same percentage of the increased number of shares of Common Stock to be issued in the Conversion. Purchase limitations will be based on the actual number of shares issued in the Conversion. 78 In the event of a material reduction in the valuation, the Bank may decrease the number of shares to reflect fully the reduced valuation. A decrease in the number of shares to be issued in the Conversion would increase both a subscriber's ownership interest and the pro forma equity on a per share basis while decreasing equity on an aggregate basis. A decrease in the total number of shares to be issued in the Conversion would not affect subscription rights by reducing the maximum number of shares that may be purchased under various purchase limitations and would not change the number of shares that a subscriber may purchase unless the purchase limitation was also changed. However, such a decrease could reduce the amount of shares allocated in the event of an oversubscription. RESTRICTIONS ON REPURCHASE OF STOCK Generally, within one year following the Conversion, the Company may not repurchase Common Stock and in the second and third year following the Conversion, the Company may only repurchase Common Stock as part of an open- market stock repurchase program in an amount up to 5% of the outstanding stock during each of those two years, provided the repurchase does not cause the Bank to become undercapitalized and at least 10 days prior notice of the repurchase is provided to the OTS. The OTS may disapprove the repurchase program upon a determination that (1) the repurchase program would adversely affect the financial condition of the Bank, (2) the information submitted is insufficient upon which to base a conclusion as to whether the financial condition would be adversely affected, or (3) a valid business purpose was not demonstrated. However, the Regional Director of the OTS may permit repurchases after six months following the Conversion and may permit additional repurchases during the second and third year. In addition, SEC rules also restrict the method, time, price, and number of shares of Common Stock that may be repurchased by the Company and affiliated purchasers. If, in the future, the rules and regulations regarding the repurchase of stock are liberalized, the Company may utilize the rules and regulations then in effect. RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS Shares of the Common Stock purchased by directors and officers of the Company shall be subject to the restriction that said shares shall not be sold for a period of one year following completion of the Conversion, except for a disposition of shares in the event of the death of the stockholder or in any exchange of the Common Stock in connection with a merger or acquisition of the Company approved by the regulatory authorities. Accordingly, shares of the Common Stock issued by the Company to directors and officers shall bear a legend giving appropriate notice of the foregoing restriction, and, in addition, the Company will give appropriate instructions to the transfer agent for the Common Stock with respect to the applicable restriction relating to the transfer of any restricted stock. Any shares issued to directors and officers as a stock dividend, stock split, or otherwise with respect to restricted stock shall be subject to the same restrictions. For a period of three years following the Conversion, no director or officer of the Bank, the Company or their associates may, without the prior approval of the OTS, purchase any shares of Common Stock other than from or through a broker or dealer registered with the SEC unless the purchase involves more than 1% of the outstanding shares of Common Stock through an arm's length transaction. INTERPRETATION AND AMENDMENT OF THE PLAN To the extent permitted by law, all interpretations of the Plan by the Board of Directors of the Bank will be final, however, such interpretations shall have no binding effect on the OTS. The Plan provides that, if deemed necessary or desirable by the Board of Directors, the Plan may be substantively amended by the Board of Directors as a result of comments from the OTS or otherwise, prior to the solicitation of proxies from the members and at any time thereafter with the concurrence of the OTS, except that in the event that the regulations under which the Plan was adopted are liberalized subsequent 79 to the approval of the Plan by the OTS and the members at the Special Meeting, the Board of Directors may amend the Plan to conform to the regulations without further approval of the OTS or the members of the Bank to the extent permitted by law. An amendment to the Plan that would result in a material adverse change in the terms of the Conversion would require a resolicitation. In the event of a resolicitation, subscriptions for which a confirmation or modification was not received would be rescinded. CONDITIONS AND TERMINATION Completion of the Conversion requires the approval of the Plan and the affirmative vote of not less than a majority of the total number of votes of the members of the Bank eligible to be cast at the Special Meeting and the sale of all shares of Common Stock within 24 months following approval of the Plan by members. If these conditions are not satisfied, the Plan will be terminated and the Bank will continue its business in the mutual form of organization. The Plan may be terminated by the Board of Directors at any time prior to the Special Meeting and, with the approval of the OTS, by the Board of Directors at any time thereafter. OTHER ALL STATEMENTS MADE IN THIS PROSPECTUS ARE HEREBY QUALIFIED BY THE CONTENTS OF THE PLAN, THE MATERIAL TERMS OF WHICH ARE SET FORTH HEREIN. THE PLAN IS ATTACHED TO THE PROXY STATEMENT. COPIES OF THE PLAN ARE AVAILABLE FROM THE BANK AND IT SHOULD BE CONSULTED FOR FURTHER INFORMATION. ADOPTION OF THE PLAN BY THE BANK'S MEMBERS AUTHORIZES THE BOARD OF DIRECTORS TO AMEND OR TERMINATE THE PLAN. CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY Although the Boards of Directors of the Bank and the Company are not aware of any effort that might be made to obtain control of the Company after Conversion, the Boards of Directors, as discussed below, believe it is appropriate to include certain provisions in the Company's Certificate of Incorporation to protect the interests of the Company and its stockholders from takeovers which the Board of Directors of the Company might conclude are not in the best interests of the Bank, the Company or the Company's stockholders. The following discussion is a general summary of certain material provisions of the Company's Certificate of Incorporation and Bylaws and certain other regulatory provisions, which may be deemed to have an "anti-takeover" effect. The following description of certain of these provisions is necessarily general and, with respect to provisions contained in the Company's Certificate of Incorporation and Bylaws and the Bank's proposed stock charter and bylaws, reference should be made in each case to the document in question, each of which is part of the Bank's application to the OTS and the Company's Registration Statement filed with the SEC. See "Additional Information." PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS LIMITATIONS ON VOTING RIGHTS. The Certificate of Incorporation of the Company provides that in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the then outstanding shares of Common Stock (the "Limit") be entitled or permitted to any vote in respect of the shares held in excess of the Limit. In addition, for a period of five years from the completion of the Conversion of the Bank, no person may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of an equity security of the Company. After five years from the date of the Conversion, a beneficial holder submitting a proxy or proxies totalling more than 10% of the then 80 outstanding shares of Common Stock will be able to vote in the following manner: the number of votes which may be cast by such a beneficial owner shall be a number equal to the total number of votes that a single record owner of all Common Stock owned by such person would be entitled to cast, multiplied by a fraction, the numerator of which is the number of shares of such class or series which are both beneficially owned and owned of record by such beneficial owner and the denominator of which is the total number of shares of Common Stock beneficially owned by such beneficial owner. The impact of these provisions on the submission of a proxy on behalf of a beneficial holder of more than 10% of the Common Stock is (1) to disregard for voting purposes and require divestiture of the amount of stock held in excess of 10% (if within five years of the Conversion more than 10% of the Common Stock is beneficially owned by a person) and (2) limit the vote on Common Stock held by the beneficial owner to 10% or possibly reduce the amount that may be voted below the 10% level (if more than 10% of the Common Stock is beneficially owned by a person more than five years after the Conversion). Unless the grantor of a revocable proxy is an affiliate or an associate of such a 10% holder or there is an arrangement, agreement or understanding with such a 10% holder, these provisions would not restrict the ability of such a 10% holder of revocable proxies to exercise revocable proxies for which the 10% holder is neither a beneficial nor record owner. A person is a beneficial owner of a security if he has the power to vote or direct the voting of all or part of the voting rights of the security, or has the power to dispose of or direct the disposition of the security. The Certificate of Incorporation of the Company further provide that this provision limiting voting rights may only be amended upon the vote of 80% of the outstanding shares of voting stock. ELECTION OF DIRECTORS. Certain provisions of the Company's Certificate of Incorporation and Bylaws will impede changes in majority control of the Board of Directors. The Company's Certificate of Incorporation provides that the Board of Directors of the Company will be divided into three classes, with directors in each class elected for three-year staggered terms except for the initial directors. Thus, it would take two annual elections to replace a majority of the Company's Board. The Company's Certificate of Incorporation provides that the size of the Board of Directors may be increased or decreased only if two-thirds of the directors then in office concur in such action. The Certificate of Incorporation also provides that any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, shall be filled for the remainder of the unexpired term by a majority vote of the directors then in office. Finally, the Certificate of Incorporation and the bylaws impose certain notice and information requirements in connection with the nomination by stockholders of candidates for election to the Board of Directors or the proposal by stockholders of business to be acted upon at an annual meeting of stockholders. The Certificate of Incorporation provides that a director may only be removed for cause by the affirmative vote of at least 80% of the shares of the Company entitled to vote generally in an election of directors cast at a meeting of stockholders called for that purpose. RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The Certificate of Incorporation of the Company provides that a special meeting of stockholders may be called only pursuant to a resolution adopted by a majority of the Board of Directors, or a Committee of the Board or other person so empowered by the Bylaws. The Certificate of Incorporation also provides that any action required or permitted to be taken by the stockholders of the Company may be taken only at an annual or special meeting and prohibits stockholder action by written consent in lieu of a meeting. ABSENCE OF CUMULATIVE VOTING. The Company's Certificate of Incorporation provides that there shall be no cumulative voting rights in the election of directors. AUTHORIZED SHARES. The Certificate of Incorporation authorizes the issuance of 2,000,000 shares of Common Stock and 500,000 shares of preferred stock ("Preferred Stock"). The shares of Common Stock and Preferred Stock were authorized in an amount greater than that to be issued in the Conversion 81 to provide the Company's Board of Directors with as much flexibility as possible to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and employee stock options. However, these additional authorized shares may also be used by the Board of Directors consistent with its fiduciary duty to deter future attempts to gain control of the Company. The Board of Directors also has sole authority to determine the terms of any one or more series of Preferred Stock, including voting rights, conversion rates, and liquidation preferences. As a result of the ability to fix voting rights for a series of Preferred Stock, the Board has the power, to the extent consistent with its fiduciary duty, to issue a series of Preferred Stock to persons friendly to management in order to attempt to block a post-tender offer merger or other transaction by which a third party seeks control, and thereby assist management to retain its position. The Company's Board currently has no plans for the issuance of additional shares, other than the issuance of additional shares upon exercise of stock options. PROCEDURES FOR CERTAIN BUSINESS COMBINATIONS. The Certificate of Incorporation requires the affirmative vote of at least 80% of the outstanding shares of the Company entitled to vote in the election of director in order for the Company to engage in or enter into certain "Business Combinations," as defined therein, with any Principal Stockholder (as defined below) or any affiliates of the Principal Stockholder, unless the proposed transaction has been approved in advance by the Company's Board of Directors, excluding those who were not directors prior to the time the Principal Stockholder became the Principal Stockholder. The term "Principal Stockholder" is defined to include any person and the affiliates and associates of the person (other than the Company or its subsidiary) who beneficially owns, directly or indirectly, 10% or more of the outstanding shares of voting stock of the Company. Any amendment to this provision requires the affirmative vote of at least 80% of the shares of the Company entitled to vote generally in an election of directors. AMENDMENT TO CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the Company's Certificate of Incorporation must be approved by the Company's Board of Directors and also by a majority of the outstanding shares of the Company's voting stock, provided, however, that approval by at least 80% of the outstanding voting stock is generally required for certain provisions (i.e., provisions relating to restrictions on the acquisition and voting of greater than 10% of the Common Stock; number, classification, election and removal of directors; amendment of Bylaws; call of special stockholder meetings; director liability; certain business combinations; power of indemnification; and amendments to provisions relating to the foregoing in the Certificate of Incorporation). The Bylaws may be amended by a majority vote of the Board of Directors or the affirmative vote of the holders of at least 80% of the outstanding shares of the Company entitled to vote in the election of Directors cast at a meeting called for that purpose. PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS. The Board of Directors of the Bank believes that the provisions described above are prudent and will reduce the Company's vulnerability to takeover attempts and certain other transactions which have not been negotiated with and approved by its Board of Directors. These provisions will also assist the Bank and the Company in the orderly deployment of the Conversion proceeds into productive assets during the initial period after the Conversion. The Board of Directors believe these provisions are in the best interests of the Bank and of the Company and its stockholders. In the judgment of the Board of Directors, the Company's Board will be in the best position to determine the true value of the Company and to negotiate more effectively for what may be in the best interests of its stockholders. Accordingly, the Board of Directors believes that it is in the best interests of the Company and its stockholders to encourage potential acquirors to negotiate directly with the Board of Directors of the Company and that these provisions will encourage such negotiations and discourage hostile takeover attempts. It is also the view of the Board of Directors that these provisions should not discourage persons from proposing a merger or other transaction at prices reflective of the true value of the Company and which is in the best interests of all stockholders. 82 Attempts to take over financial institutions and their holding companies have become increasingly common. Takeover attempts which have not been negotiated with and approved by the Board of Directors present to stockholders the risk of a takeover on terms which may be less favorable than might otherwise be available. A transaction which is negotiated and approved by the Board of Directors, on the other hand, can be carefully planned and undertaken at an opportune time in order to obtain maximum value for the Company and its stockholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum strategic development of the Company's assets. EFFECT OF TAKEOVER DEFENSES ON STOCKHOLDER INTERESTS. An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause it great expense. Although a tender offer or other takeover attempt may be made at a price substantially above the current market prices, such offers are sometimes made for less than all of the outstanding shares of a target company. As a result, stockholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise that is under different management and whose objectives may not be similar to those of the remaining stockholders. POTENTIAL NEGATIVE IMPACT OF TAKEOVER DEFENSES ON STOCKHOLDER INTERESTS. Despite the belief of the Bank and the Company as to the benefits to stockholders of these provisions of the Company's Certificate of Incorporation and Bylaws, these provisions may also have the effect of discouraging a future takeover attempt which would not be approved by the Company's Board, but pursuant to which stockholders may receive a substantial premium for their shares over then-current market prices. As a result, stockholders who might desire to participate in such a transaction may not have any opportunity to do so. Such provisions will also render the removal of the Company's Board of Directors and of management more difficult. The Boards of Directors of the Bank and the Company, however, have concluded that the potential benefits outweigh the possible disadvantages. Pursuant to applicable law, at any annual or special meeting of its stockholders after the Conversion, the Company may adopt additional charter provisions regarding the acquisition of its equity securities that would be permitted to a Delaware corporation. The Company and the Bank do not presently intend to propose the adoption of further restrictions on the acquisition of the Company's equity securities. EFFECT OF EMPLOYMENT AND SEVERANCE AGREEMENTS. The Bank intends to enter into an employment agreement with President Stephen M. Gagliardi that provides for payments in the event of termination of employment following a change in control, as defined in the agreement, of 2.99 times the five year average compensation paid to Mr. Gagliardi. In addition, the Bank intends to enter into employment agreements with two other executive officers that provide for payments in the event of termination of employment following a change in control, as defined in the agreements. At June 30, 1996, such payments, in the aggregate, would have totalled approximately $512,000, rendering an acquisition, followed by termination of their employment, more expensive to a possible acquiror as a result of these agreements. See "Management of the Bank -Executive Compensation - Employment Agreements." FEDERAL REGULATION. A federal regulation prohibits any person prior to the completion of a conversion from transferring, or entering into any agreement or understanding to transfer, the legal or beneficial ownership of the subscription rights issued under a plan of conversion or the stock to be issued upon their exercise. This regulation also prohibits any person prior to the completion of a conversion from offering, or making an announcement of an offer or intent to make an offer, to purchase such subscription rights or stock. For three years following conversion, OTS regulations prohibit any person, without the prior approval of the OTS, from acquiring or making an offer to acquire more than 10% of the stock of any converted savings institution if such person is, or after consummation of such acquisition 83 would be, the beneficial owner of more than 10% of such stock. In the event that any person, directly or indirectly, violates this regulation, the securities beneficially owned by such person in excess of 10% shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matter submitted to a vote of stockholders. Federal law provides that no company, "directly or indirectly or acting in concert with one or more persons, or through one or more subsidiaries, or through one or more transactions," may acquire "control" of a savings association at any time without the prior approval of the OTS. In addition, any company that acquires such control becomes a "savings and loan holding company" subject to registration, examination and regulation as a savings and loan holding company. Control in this context means ownership of, control of, or holding proxies representing more than 25% of the voting shares of a savings association or the power to control in any manner the election of a majority of the directors of such institution. Federal law also provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a savings association unless at least 60 days prior written notice has been given to the OTS and the OTS has not objected to the proposed acquisition. Control is defined for this purpose as the power, directly or indirectly, to direct the management or policies of a savings association or to vote more than 25% of any class of voting securities of a savings association. Under federal law (as well as the regulations referred to below) the term "savings association" includes state chartered and federally chartered SAIF-insured institutions, federally chartered savings and loans and savings banks whose accounts are insured by the FDIC and holding companies thereof. Federal regulations require that, prior to obtaining control of an insured institution, a person, other than a company, must give 60 days notice to the OTS and have received no OTS objection to such acquisition of control, and a company must apply for and receive OTS approval of the acquisition. Control, as defined under federal law, involves a 25% voting stock test, control in any manner of the election of a majority of the institution's directors, or a determination by the OTS that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of an institution's voting stock, if the acquiror also is subject to any one of either "control factors," constitutes a rebuttable determination of control under the regulations. The determination of control may be rebutted by submission to the OTS, prior to the acquisition of stock or the occurrence of any other circumstances giving rise to such determination, of a statement setting forth facts and circumstances which would support a finding that no control relationship will exist and containing certain undertakings. The regulations provide that persons or companies which acquire beneficial ownership exceeding 10% or more of any class of a savings association"s stock after the effective date of the regulations must file with the OTS a certification that the holder is not in control of such institution, is not subject to a rebuttable determination of control, and will take no action which would result in a determination or rebuttable determination of control without prior notice to or approval of the OTS, as applicable. DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 2,000,000 shares of the Common Stock, $0.10 par value per share, and 500,000 shares of serial preferred stock, $0.10 par value per share. The Company currently expects to issue up to 943,000 shares of Common Stock in the Conversion. The Company does not intend to issue any shares of serial preferred stock in the Conversion, nor are there any present plans to issue such preferred stock following the Conversion. The aggregate par value of the issued shares will constitute the capital account of the Company. The balance of the purchase price will be recorded for accounting purposes as additional paid-in capital. See "Capitalization." THE CAPITAL STOCK OF THE 84 COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL AND WILL NOT BE INSURED BY THE COMPANY, THE BANK, THE FDIC, OR ANY OTHER GOVERNMENT AGENCY. COMMON STOCK VOTING RIGHTS. Each share of the Common Stock will have the same relative rights and will be identical in all respects with every other share of the Common Stock. The holders of the Common Stock will possess exclusive voting rights in the Company, except to the extent that shares of serial preferred stock issued in the future may have voting rights, if any. Each holder of the Common Stock will be entitled to only one vote for each share held of record on all matters submitted to a vote of holders of the Common Stock and will not be permitted to cumulate their votes in the election of the Company's directors. LIQUIDATION. In the unlikely event of the complete liquidation or dissolution of the Company, the holders of the Common Stock will be entitled to receive all assets of the Company available for distribution in cash or in kind, after payment or provision for payment of (i) all debts and liabilities of the Company (including all deposits in the Bank and accrued interest thereon); (ii) any accrued dividend claims; (iii) liquidation preferences of any serial preferred stock which may be issued in the future; and (iv) any interests in the liquidation account established upon the Conversion for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who continue their deposits at the Bank. RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK. See "Certain Restrictions on Acquisition of the Company" for a discussion of the limitations on acquisition of shares of the Common Stock. OTHER CHARACTERISTICS. Holders of the Common Stock will not have preemptive rights with respect to any additional shares of the Common Stock which may be issued. Therefore, the Board of Directors may sell shares of capital stock of the Company without first offering such shares to existing stockholders of the Company. The Common Stock is not subject to call for redemption, and the outstanding shares of Common Stock when issued and upon receipt by the Company of the full purchase price therefor will be fully paid and non-assessable. TRANSFER AGENT AND REGISTRAR. _____________________________________ is expected to act as the transfer agent and registrar for the Common Stock of the Company. ISSUANCE OF ADDITIONAL SHARES. Except in the Subscription and Community Offerings and possibly pursuant to the RSP or Option Plan, the Company has no present plans, proposals, arrangements or understandings to issue additional authorized shares of the Common Stock. In the future, the authorized but unissued and unreserved shares of the Common Stock will be available for general corporate purposes, including, but not limited to, possible issuance as stock dividends, in connection with mergers or acquisitions, under a cash dividend reinvestment or stock purchase plan, in a public or private offering, or under employee benefit plans. See "Risk Factors - Possible Dilutive Effect of RSP and Stock Options and Effect of Purchases by the RSP and ESOP" and "Pro Forma Data." Normally no stockholder approval would be required for the issuance of these shares, except as described herein or as otherwise required to approve a transaction in which additional authorized shares of the Common Stock are to be issued. For additional information, see "Dividends," "Regulation," and "Taxation" with respect to restrictions on the payment of cash dividends; "- Restrictions on Transferability by Directors and Officers" relating to certain restrictions on the transferability of shares purchased by directors and officers; and "Certain Restrictions on Acquisition of the Company" for information regarding restrictions on acquiring Common Stock of the Company. 85 SERIAL PREFERRED STOCK None of the 500,000 authorized shares of serial preferred stock of the Company will be issued in the Conversion. After the Conversion is completed, the Board of Directors of the Company will be authorized to issue serial preferred stock and to fix and state voting powers, designations, preferences, or other special rights of such shares and the qualifications, limitations, and restrictions thereof, subject to regulatory approval but without stockholder approval. If and when issued, the serial preferred stock is likely to rank prior to the Common Stock as to dividend rights, liquidation preferences, or both, and may have full or limited voting rights. The Board of Directors, without stockholder approval, can issue serial preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of the Common Stock. The Board of Directors has no present intention to issue any of the serial preferred stock. LEGAL AND TAX MATTERS The legality of the Common Stock has been passed upon for the Bank and the Company by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain legal matters for Webb will be passed upon by Elias, Matz, Tiernan & Herrick, LLP, Washington, D.C. The federal income tax consequences of the Conversion have been passed upon for the Bank and the Company by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. The West Virginia income tax consequences of the Conversion have been passed upon for the Bank and the Company by S.R. Snodgrass, A.C.. EXPERTS The consolidated financial statements of the Bank as of June 30, 1996 and for the three years ended June 30, 1996, appearing in this prospectus have been audited by S.R. Snodgrass, A.C., independent certified public accountants, as set forth in their report thereon appearing elsewhere herein, and is included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. Keller has consented to the inclusion herein of a summary of its appraisal report setting forth its opinion as to the estimated pro forma market value of the Common Stock to be issued in the Conversion and its opinion setting forth the value of subscription rights and to the use of its name and statements with respect to it appearing herein. REGISTRATION REQUIREMENTS The Common Stock of the Company will be registered pursuant to Section 12(g) of the Exchange Act prior to completion of the Conversion. The Company will be subject to the information, proxy solicitation, insider trading restriction, tender offer rules, periodic reporting and other requirements of the SEC under the Exchange Act. The Company will not deregister the Common Stock under the Exchange Act for a period of at least three years following the Conversion. ADDITIONAL INFORMATION The Company has filed with the SEC a registration statement under the Securities Act of 1933, as amended, with respect to the Common Stock offered hereby. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration statement. Such information can be examined without charge at the public reference facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can be obtained from the SEC at prescribed rates. The SEC also maintains an internet address ("Web site") that contains reports, proxy and information statements and other information regarding registrants, including the 86 Company, that file electronically with the SEC. The address for this Web site is "http://www.sec.gov." The statements contained herein as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof and are not necessarily complete; each such statement is qualified by reference to such contract or document. The Bank has filed an Application for Conversion with the OTS with respect to the Conversion. Pursuant to the rules and regulations of the OTS, this prospectus omits certain information contained in that Application. The Application may be examined at the principal office of the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the Northeast Regional Office of the OTS, 10 Exchange Place, Jersey City, New Jersey 07302 without charge. A copy of the Certificate of Incorporation and Bylaws of the Company are available without charge from the Bank. ADVANCE FINANCIAL SAVINGS BANK, F.S.B. Index to Consolidated Financial Statements
PAGE(S) ------- Independent Auditors' Report......................... F-1 Consolidated Balance Sheet as of June 30, 1996 and June 30, 1995.................................. F-2 Consolidated Statement of Income for the Years Ended June 30, 1996, 1995 and 1994................. 17 Consolidated Statement of Retained Earnings for the Years Ended June 30, 1996, 1995, and 1994.......... F-3 Consolidated Statement of Cash Flows for the Years Ended June 30, 1996, 1995, and 1994.......... F-4 Notes to Consolidated Financial Statements........... F-6
All schedules (other than financial data schedules) are omitted because the required information is either not applicable or is included in the consolidated financial statements or related notes. Separate financial statements for the Company have not been included because the Company will not engage in material transactions until after the Conversion. The Company, which has been inactive to date, has no significant assets, liabilities, revenues, expenses, or contingent liabilities. [LETTERHEAD OF S.R. SNODGRASS, A.C.] REPORT OF INDEPENDENT AUDITORS ------------------------------ Board of Directors Advance Financial Savings Bank, f.s.b. We have audited the accompanying consolidated balance sheet of Advance Financial Savings Bank, f.s.b. and Subsidiary as of June 30, 1996 and 1995, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advance Financial Savings Bank, f.s.b. and Subsidiary as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles. As explained in the notes to the financial statements, effective July 1, 1995, the Bank changed its method of accounting for the impairment of loans and the related allowance for loan losses, effective July 1, 1994, changed its method of accounting for investment securities, and also effective July 1, 1993, changed its method of accounting for income taxes. /s/ S.R. SNODGRASS, A.C. Steubenville, Ohio August 19, 1996, except for the subsequent events as described in Note 17, which is as of September 3, 1996 F-1 ADVANCE FINANCIAL SAVINGS BANK, F.S.B. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
June 30, 1996 1995 ----------- ----------- Restated ASSETS Cash and Cash Equivalents Cash and amounts due from banks $ 948,671 $ 805,791 Interest-bearing deposits with other institutions 3,067,912 2,333,592 ----------- ----------- Total cash and cash equivalents 4,016,583 3,139,383 Investment Securities Securities held to maturity (fair value of $4,761,709 and $3,740,156) 4,799,596 3,736,914 Securities available for sale 68,549 83,787 ----------- ----------- Total investment securities 4,868,145 3,820,701 Mortgage-backed securities (fair value of $561,203 and $945,564) 536,808 907,707 Loans held for sale 1,375,143 - Loans receivable, (net of allowance for loan losses of $324,983 and $197,833) 77,565,831 73,057,262 Office properties and equipment, net 2,099,470 1,271,151 Federal Home Loan Bank Stock, at cost 559,500 501,800 Accrued interest receivable 521,187 545,343 Real estate acquired in settlement of loans - 334,121 Other assets 309,726 168,735 ----------- ----------- Total assets $91,852,393 $83,746,203 =========== =========== LIABILITIES AND RETAINED EARNINGS Deposit accounts $80,770,646 $74,698,144 Advances from Federal Home Loan Bank 4,376,452 2,842,887 Advances from borrowers for taxes and insurance 182,977 168,229 Accrued interest payable and other liabilities 322,439 254,434 ----------- ----------- Total liabilities 85,652,514 77,963,694 Retained Earnings - substantially restricted 6,209,329 5,791,963 Net unrealized loss on securities (9,450) (9,454) ----------- ----------- Total retained earnings 6,199,879 5,782,509 ----------- ----------- Total liabilities and retained earnings $91,852,393 $83,746,203 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-2 ADVANCE FINANCIAL SAVINGS BANK, F.S.B AND SUBSIDIARY CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Retained Net Earnings - Unrealized Total Substantially Loss on Retained Restricted Securities Earnings ------------- ----------- ----------- Balance, June 30, 1993 $ 4,221,540 $ - $ 4,221,540 Net income, as restated 855,715 - 855,715 Net unrealized loss on securities - (7,585) (7,585) ----------- --------- ----------- Balance, June 30, 1994, as restated 5,077,255 (7,585) 5,069,670 Net income 714,708 - 714,708 Net unrealized loss on securities - (1,869) (1,869) ----------- --------- ----------- Balance, June 30, 1995, as restated 5,791,963 (9,454) 5,782,509 Net income 417,366 - 417,366 Net unrealized gain on securities - 4 4 ----------- --------- ----------- Balance, June 30, 1996 $ 6,209,329 $ (9,450) $ 6,199,879 =========== ========= ===========
The accompanying notes are an integral part of the consolidated financial statements. F-3 ADVANCE FINANCIAL SAVINGS BANK, F.S.B. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30, 1996 1995 1994 ------------ ------------ ------------ Restated OPERATING ACTIVITIES Net income $ 417,366 $ 714,708 $ 855,715 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net 127,177 111,814 106,333 Provision for loan losses 262,942 48,208 56,511 Gain on sale of real estate owned (5,446) (5,945) (290) Gain on sale of loans (20,364) - - Origination of loans held for sale (1,485,034) - - Proceeds from the sale of loans 110,088 - - Increase in accrued interest receivable and other assets (113,459) (211,259) (6,812) Increase (decrease) in accrued interest payable and other liabilities 65,826 3,094 (5,061) Decrease in federal income tax payable (3,836) (3,444) (71,740) Increase in deferred federal income taxes 2,183 26,553 7,504 ----------- ----------- ----------- Net cash provided by (used for) operating activities (642,557) 683,729 942,160 ----------- ----------- ----------- INVESTING ACTIVITIES Purchases of held to maturity securities (3,050,000) (1,737,800) (997,734) Proceeds from maturities of held to maturity securities 1,987,130 300,000 2,899,648 Proceeds from redemptions of available for sale securities 14,310 19,345 - Principle collected on mortgage-backed securities 369,643 219,580 1,075,089 Purchases of Federal Home Loan Bank Stock (57,700) (65,600) (18,100) Proceeds from the sale of student loans 1,378,046 - - Net increase in loans (6,259,933) (7,501,134) (11,244,593) Purchases of office properties and equipment (786,000) (82,949) (69,169) Proceeds from sales of real estate acquired in settlement of loans, net 303,446 12,465 - ----------- ----------- ----------- Net cash used for investing activities (6,101,058) (8,836,093) (8,354,859) =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-4 ADVANCE FINANCIAL SAVINGS BANK, F.S.B. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Year Ended June 30, 1996 1995 1994 ------------ ------------ ------------ Restated FINANCING ACTIVITIES Net increase in deposits $ 6,072,502 $ 7,467,952 $ 7,937,939 Net increase (decrease) in advances from Federal Home Loan Bank 1,533,565 (3,350,000) 3,842,887 Net change in advances for taxes and insurance 14,748 56,827 - ----------- ----------- ----------- Net cash provided by financing activities 7,620,815 4,174,779 11,780,826 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 877,200 (3,977,585) 4,368,127 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,139,383 7,116,968 2,748,841 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,016,583 $ 3,139,383 $ 7,116,968 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-5 ADVANCE FINANCIAL SAVINGS BANK, F.S.B. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting and reporting policies applied in the presentation of the accompanying consolidated financial statements follows: NATURE OF OPERATIONS -------------------- Advance Financial Savings Bank, f.s.b. (the "Bank"), a federally-chartered Bank, and its wholly-owned service corporation subsidiary, Advance Financial Service Corporation of West Virginia, are located in Wellsburg, WV. The Bank's principal sources of revenue emanate from its portfolio of residential real estate and consumer loans, as well as, interest earnings on investment securities, interest-bearing deposits with other financial institutions, and a variety of deposit services provided to its customers through two locations. The Bank is subject to regulation and supervision by the Office of Thrift Supervision and Federal Deposit Insurance Corporation. BASIS OF PRESENTATION --------------------- The consolidated financial statements include the accounts of Advance Financial Savings Bank, f.s.b. and its wholly-owned subsidiary, Advance Financial Service Corporation of West Virginia. All material intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the statement of financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible the allowance for loan losses and foreclosed assets may change materially in the near term. INVESTMENT SECURITIES --------------------- Debt securities that management has the ability and intent to hold to maturity are classified as held-to-maturity and carried at cost, adjusted for amortization of premium and accretion of discounts using a method approximating a level yield. Other marketable securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on securities available-for-sale are recognized as direct increases or decreases in retained earnings. The cost of securities sold is recognized using the specific identification method. F-6 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MORTGAGE-BACKED SECURITIES -------------------------- Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Mortgage-backed securities are carried at unpaid principal balances, adjusted for unamortized premiums and unearned discounts. Premiums and discounts are amortized using a method approximating a level yield over the remaining period to contractual maturity, adjusted for anticipated prepayments. Management intends and has the ability to hold such securities to maturity. Should any be sold, the cost of the securities sold is determined using the specific identification method. LOANS HELD FOR SALE ------------------- Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost or market value determined on an aggregate basis. Net unrealized losses are recognized in a valuation allowance through charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method. At June 30, 1996, the cost of loans held for sale was equal to market value. LOANS ----- Loans are stated at unpaid principal balances, less loans in process, net deferred loan fees, and the allowance for loan losses. Loan origination and commitment fees, as well as, certain direct origination costs are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status. Loans are placed on nonaccrual status when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income, and thereafter, interest is recognized only to the extent of payments received. ALLOWANCE FOR LOAN LOSSES ------------------------- Effective July 1, 1995, the Bank adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended by Statement No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. These Statements prescribe recognition criteria for loan impairment, generally related to commercial loans, and measurement methods for certain impaired loans and all loans whose terms are modified in trouble debt restructurings subsequent to the adoption of these Statements. A loan is considered impaired when it is probable that the borrower will not repay the loan according to the original contractual terms of the loan agreement. Management has determined that first mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogenous loans are to be collectively evaluated. Accordingly, such loans are outside the scope of Statement Nos. 114 and 118. Management considers an insignificant delay, which is defined as 90 days by the Bank, will not cause a loan to be classified as impaired. A loan is not impaired during a period of delay in payment if the Bank expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay. All loans identified as impaired are evaluated independently by management. F-7 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ALLOWANCE FOR LOAN LOSSES (Continued) ------------------------- Under this Standard, the Bank estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. Statement No. 118 amends Statement No. 114 to permit a creditor to use existing methods for recognizing interest income on impaired loans eliminating the income recognition provisions of Statement No. 114. Prior to 1995, the credit losses related to these loans were estimated based on undiscounted cash flows or the fair value of the underlying collateral. The adoption of the statements did not have a material effect on the Bank's financial position or results of operations. Impaired loans, or portions thereof, are charged-off when it is determined that a realized loss has occurred. Until such time, an allowance for loan losses is maintained for estimated losses. Cash receipts on impaired loans are applied first to accrued interest receivable, unless otherwise required by the loan terms, except when an impaired loan is also a nonaccrual loan, in which case the portion of the receipts related to interest is recognized as income. The allowance for loan losses represents the amount which management estimates is adequate to provide for potential losses in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on management's periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to change in the near term. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS ------------------------------------------- Real estate acquired in settlement of loans is classified separately on the balance sheet at the lower of the recorded investment in the property or its fair value minus estimated costs of sale. Prior to foreclosure, the value of the underlying collateral is written down by a charge to the allowance for possible loan losses, if necessary. Any subsequent write- downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on their disposition are included in other expenses. OFFICE PROPERTIES AND EQUIPMENT ------------------------------- Land is carried at cost; buildings and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed primarily by the straight-line method based upon the estimated useful lives of the assets which range from five to forty years. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized. INCOME TAXES ------------ Effective July 1, 1993, the Bank adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this accounting standard, deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Deferred income tax expenses or benefits are based on the changes in the deferred tax asset or liability from period to period. F-8 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RETIREMENT PLAN --------------- The Bank maintains a profit sharing plan for all employees meeting special service requirements. RECLASSIFICATION ---------------- Certain amounts in prior years' consolidated financial statements have been reclassified to conform to the current year presentation. These reclassification had no effect on net income. PRIOR PERIOD ADJUSTMENT ----------------------- Net income for the year ended June 30, 1994 decreased by $189,692 to correct an error in the initial calculation of the cumulative effect adjustment in connection with the adoption of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The error had no effect of net income for the years ended June 30, 1996 and 1995. CASH FLOW INFORMATION --------------------- The Bank has defined cash and cash equivalents as cash on hand, amounts due from depository institutions, and overnight deposits with the Federal Home Loan Bank. Cash payments for interest for the fiscal years ended June 30, 1996, 1995, and 1994 were $3,801,247, $3,146,659, and $2,463,460. Cash payments for federal income taxes for the fiscal years ended June 30, 1996, 1995, and 1994 were $241,884, $300,840, and $479,807. Non cash investing activity included mortgages originated and office properties created from sales and transfers of real estate owned totaling $172,110, $10,835, and $88,900, and real estate acquired in settlement of loans of $130,543, $298,000, and $39,031 for the fiscal years ended June 30, 1996, 1995, and 1994 respectively. During the period ended June 30, 1994, securities with an amortized cost of $114,012 were transferred to investment securities available-for-sale. The securities had an unrealized loss of $7,585. There were no securities transferred between classifications during the period ended June 30, 1995 and 1996. RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- During the second quarter of 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, which becomes effective for the Bank in fiscal year 1997. This Statement requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present. Impairment would be considered when the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Management does not anticipate that implementation of this Statement will have a material, if any, effect on its consolidated financial condition or results of operations. Statement of Financial Accounting Standards Statement No. 122, Accounting for Mortgage Servicing Rights, was issued in May, 1995 and becomes effective for fiscal year 1997. This statement allows enterprises engaged in mortgage banking activities to recognize as separate assets the rights to service mortgage loans originated for sale. Additionally, the Bank must periodically assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. Presently, the Bank does not anticipate that implementation will have a material, if any, effect on its consolidated financial condition or results of operations. F-9 2. INVESTMENT SECURITIES Securities held-to-maturity are as follows:
1996 ---------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ U.S. Government and Agency Obligations $4,799,596 $ 6,020 $(43,907) $4,761,709 ========== ======= ======== ==========
1995 ---------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- U.S. Government and Agency Obligations $3,736,914 $26,417 $(23,175) $3,740,156 ========== ======= ======== ==========
Securities available-for-sale are as follows:
1996 ---------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- Money Fund Securities $ 77,999 $ - $(9,450) $ 68,549 ========== ======= ======= =========
1995 ---------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- Money Fund Securities $ 93,241 $ - $(9,454) $ 83,787 ========== ======= ======= =========
The amortized cost and fair value of investment securities at June 30, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or repayment penalties. F-10 2. INVESTMENT SECURITIES (CONTINUED)
Securities Securities Held-to-Maturity Available-for-Sale ------------------------- ------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---------- ---------- -------- --------- One year or less $1,000,061 $1,002,136 $ - $ - After one through five years 2,499,535 2,483,569 51,830 45,549 After five through ten years 300,000 297,094 26,169 23,000 After ten years 1,000,000 978,910 - - ---------- ---------- -------- -------- Total $4,799,596 $4,761,709 $ 77,999 $ 68,549 ========== ========== ======== ========
There were no securities sold during the three year period ended June 30, 1996. 3. MORTGAGE-BACKED SECURITIES The amortized cost and fair value of mortgage-backed and related securities are as follows:
1996 ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ----------- GNMA Certificates $ 258,991 $ 11,347 $ - $ 270,338 Federal Home Loan Mortgage Corporation Certificates 277,817 13,048 - 290,865 ---------- -------- ------- ---------- Total $ 536,808 $ 24,395 $ - $ 561,203 ========== ======== ======= ==========
1995 ----------------------------------------------------------- Gros Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ---------- ----------- GNMA Certificates $ 342,850 $ 18,459 $ - $ 361,309 Federal Home Loan Mortgage Corporation Certificates 529,790 19,749 - 549,539 Collateralized Mortgage Obligations 35,067 - (351) 34,716 ---------- -------- ------- ---------- Total $ 907,707 $ 38,208 $ (351) $ 945,564 ========== ======== ======= ==========
Mortgage-backed securities provide for periodic, generally monthly payments of principal and interest and have contractual maturities ranging from one to twenty-five years. However, due to expected repayment terms being significantly less than the underlying mortgage loan pool contractual maturities, the estimated lives of these securities could be significantly shorter. F-11 4. LOANS RECEIVABLE Loans receivable are comprised of the following:
1996 1995 ------------ ------------ Mortgage loans: 1 - 4 family $ 54,599,854 $ 52,710,826 Multi-family 1,697,235 1,736,893 Non-residential 8,327,445 6,231,815 Construction 1,900,718 2,402,458 ------------ ------------ 66,525,252 63,081,992 ------------ ------------ Consumer loans: Home improvement 1,118,956 1,312,846 Automobile 6,178,615 4,598,045 Share loans 1,124,674 1,025,532 Education 128,045 1,571,745 Other 1,511,864 1,229,717 ------------ ------------ 10,062,154 9,737,885 ------------ ------------ Commercial loans 3,099,876 2,058,129 ------------ ------------ Less: Loans in process 1,548,953 1,326,727 Net deferred loan fees 247,515 296,184 Allowance for loan losses 324,983 197,833 ------------ ------------ 2,121,451 1,820,744 ------------ ------------ Total $ 77,565,831 $ 73,057,262 ============ ============
In the normal course of business, loans are extended to directors and executive officers and their associates. In management's opinion, all of these loans are on substantially the same terms and conditions as loans to other individuals and businesses of comparable creditworthiness. A summary of loan activity for those directors, executive officers, and their associates with loan balances in excess of $60,000 for the year ended June 30, 1996 is as follows:
Balance Amounts Balance 1995 Additions Collected 1996 --------- --------- --------- --------- $ 366,491 $ 348,848 $ 101,794 $ 613,545
The Bank's loan portfolio is predominantly made up of one to four family unit first mortgage loans in the Brook and Hancock counties of West Virginia and Jefferson County, Ohio. These loans are typically secured by first lien positions on the respective real estate properties and are subject to the Bank's loan underwriting policies. In general, the Bank's loan portfolio performance is dependent upon the local economic conditions. F-12 5. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses for the years ended June 30, 1996, 1995, and 1994 is summarized as follows:
1996 1995 1994 --------- --------- --------- Balance, beginning of period $ 197,833 $ 174,090 $ 119,451 Add: Provisions charged to operations 262,942 48,208 56,511 Loan recoveries 8,896 14,227 7,006 --------- --------- --------- 469,671 236,525 182,968 Less loans charged off 144,688 38,692 8,878 --------- --------- --------- Balance, end of period $ 324,983 $ 197,833 $ 174,090 ========= ========= =========
6. OFFICE PROPERTIES AND EQUIPMENT, NET Office properties and equipment are summarized by major classification as follows:
1996 1995 ----------- ----------- Land $ 311,877 $ 303,857 Office buildings and improvements 1,749,040 1,153,258 Furniture, fixtures, and equipment 1,117,455 847,341 ----------- ----------- Sub-total 3,178,372 2,304,456 Less: accumulated depreciation 1,078,902 1,033,305 ----------- ----------- Total $ 2,099,470 $ 1,271,151 =========== ===========
Depreciation charged to operations amounted to $124,805, $109,010, and $102,147 for the years ended June 30, 1996, 1995, and 1994 respectively. 7. FEDERAL HOME LOAN BANK STOCK The Bank is a member of the Federal Home Loan Bank System. As a member, the Bank maintains an investment in the capital stock of the Federal Home Loan Bank of Pittsburgh, at cost, in an amount not less than the greater of 1% of its mortgage related assets or 0.3% of its total assets as calculated at December 31 of each year. 8. ACCRUED INTEREST RECEIVABLE Accrued interest receivable consists of the following:
1996 1995 --------- --------- Investment securities $ 65,540 $ 81,698 Mortgage-backed and related securities 7,769 11,868 Loans receivable 447,878 451,777 --------- --------- Total $ 521,187 $ 545,343 ========= =========
F-13 9. DEPOSIT ACCOUNTS Deposit accounts are summarized as follows:
1996 1995 ---------------------------------------------------------------- Percent of Percent of Amount Portfolio Amount Portfolio --------------------------- --------------------------- Non-interest-bearing $ 1,607,362 2.0 % $ 878,220 1.2 % Savings accounts 17,378,294 21.4 16,255,305 21.7 NOW accounts 8,036,844 10.0 6,872,206 9.2 Money market accounts 2,893,026 3.6 2,164,697 2.9 ------------ ----- ------------ ----- 29,915,526 37.0 26,170,428 35.0 ------------ ----- ------------ ----- Savings certificates: 2.00 - 4.00% 3,053,637 3.8 6,214,926 8.3 4.01 - 6.00% 37,258,267 46.1 30,979,224 41.5 6.01 - 8.00% 10,513,216 13.0 10,826,025 14.5 8.01 - 10.00% 30,000 .1 507,541 0.7 ------------ ----- ------------ ----- 50,855,120 63.0 48,527,716 65.0 ------------ ----- ------------ ----- Total $ 80,770,646 100.0 % $ 74,698,144 100.0 % ============ ====== ============ =====
The scheduled maturities of time certificates of deposit are as follows at June 30, 1996:
Amount ------------ Within one year $ 37,124,543 Beyond one year but within two years 6,428,126 Beyond two years but within three years 2,794,384 Beyond three years 4,508,067 ------------ Total $ 50,855,120 ============
The Bank had certificates of deposit with a minimum denomination of $100,000 in the amount of approximately $7,760,079 and $6,819,693 at June 30, 1996 and 1995 respectively. Interest expense by deposit category is as follows:
Year Ended June 30, 1996 1995 1994 ----------- ----------- ----------- Passbooks $ 543,002 $ 557,657 $ 631,461 NOW and Money Market Deposit accounts 297,880 278,749 300,105 Time certificates of deposit 2,786,900 2,142,292 1,316,571 ----------- ----------- ----------- $ 3,627,782 $ 2,978,698 $ 2,248,137 =========== =========== ===========
F-14 10. ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank consists of the following:
Principal Interest Interest Due Due Rate 1996 1995 ---------- -------- -------- ---------- ---------- Flexline Advance 6-20-1997 Monthly Variable $1,000,000 $1,000,000 Advance 7-31-1995 Monthly 4.21% - 247,700 Advance 10-29-1996 Monthly 4.23% 595,187 595,187 Advance 11-29-1996 Monthly 5.67% 1,000,000 - Advance 5-21-1998 Monthly 5.43% 1,000,000 1,000,000 Advance 11-13-2002 Monthly 6.51% 781,265 - ---------- ---------- $4,376,452 $2,842,887 ========== ==========
These borrowings are subject to the terms and conditions of the Advances, Collateral Pledge and Security Agreement between the Federal Home Loan Bank of Pittsburgh and the Bank. The variable interest rate on the Flexline Advance at June 30, 1996 was 5.91%. The advance due 11-13-2002 has a monthly scheduled payment of principal and interest of $6,973 with a balloon payment due at maturity of $524,863. As of June 30, 1996 the Bank had a Flexline line of credit with the Federal Home Loan Bank as follows:
Total Flexline $ 4,757,000 Flexline outstanding 1,000,000 ----------- Available Flexline $ 3,757,000 ===========
Interest paid on borrowings for the year ending June 30, 1996, 1995, and 1994 amounted to $173,624, $165,233, and $211,302 respectively. 11. INCOME TAXES The provision for income taxes consists of:
1996 1995 1994 --------- --------- --------- Currently payable: Federal $ 238,049 $ 297,395 $ 408,067 State 35,744 38,953 61,326 --------- --------- --------- 273,793 336,348 469,393 Deferred 2,183 26,553 (48,972) --------- --------- --------- Total $ 275,976 $ 362,901 $ 420,421 ========= ========= =========
F-15 The following temporary differences gave rise to deferred tax asset and liabilities at June 30:
1996 1995 1994 --------- --------- ---------- Deferred tax assets Allowance for loan losses $ 110,494 $ 67,263 $ 59,191 Loan origination fees, net 57,466 73,868 102,045 Other, net 8,050 8,792 8,191 --------- --------- ---------- Deferred tax assets 176,010 149,923 169,427 --------- --------- ---------- Deferred tax liabilities Premise and equipment 181,629 147,001 94,846 Tax reserve for loan losses 117,879 124,237 169,343 --------- --------- ---------- Deferred tax liabilities 299,508 271,238 264,189 --------- --------- ---------- Net deferred tax liabilities $ 123,498 $ 121,315 $ 94,762 ========= ========= =========
The reconciliation between the actual provision for income taxes and the amount of income taxes which would have been provided at statutory rates for the years ended June 30 is as follows:
1996 1995 1994 --------------------- --------------------- -------------------- Amount Percent Amount Percent Amount Percent --------- ------- --------- ------- --------- ------- Provision at statutory rate $ 235,736 34.0 % $ 366,387 34.0 % $ 453,088 34.0 % State income tax expense, net of federal tax benefit 23,591 3.4 25,709 2.4 40,475 3.0 Tax exempt interest (9,349) (1.3 ) (7,072) (.7 ) (8,342) (.6 ) Other, net 25,998 3.7 (22,123) (2.0 ) (64,800) (4.9 ) --------- ----- --------- ----- --------- ---- Total $ 275,976 39.8 % $ 362,901 33.7 % $ 420,421 31.5 % ========= ===== ========= ===== ========= =====
Savings institutions that meet certain definitional tests and other conditions prescribed by the Internal Revenue Code of 1986, as amended, are permitted to deduct, within limitations, a bad debt deduction computed as a percentage of taxable income before such deduction. The maximum deduction allowable was 8% of income subject to tax before such deduction. 12. RETAINED EARNINGS - SUBSTANTIALLY RESTRICTED The Bank is subject to the risk-based capital rules. These guidelines include a common framework for defining elements of capital and a system for relating capital to risk. The minimum total risk-based capital requirement is 8% which at least half must be Tier I capital. The Tier I and total risk-based capital positions of the Bank as of June 30, 1996, as calculated by management, amounted to 11.13% and 11.72% respectively. Additionally, the general regulatory guidelines establish a minimum ratio of leverage capital to adjusted total assets of 3.00% for top rated financial institutions with less highly rated institutions or those with higher levels of risk required to maintain ratios of 100 to 200 basis points above the minimum level. The Bank's ratios under these guidelines, as calculated by management, as of June 30, 1996 is 6.75%. As a result of the special treatment accorded the Bank under income tax regulations, approximately $1,352,000 of retained earnings at June 30, 1996, represents allocations of income to bad debt deductions for tax purposes only. Should amounts previously claimed as a bad debt deduction be used for any other purpose than to absorb bad debts (which is not anticipated), tax liabilities will be incurred at the rate then in effect. F-16 13. RETIREMENT PLAN The Bank has a profit-sharing plan with a 401(k) feature. The 401(k) allows employees to make contributions to the plan up to 12% of their annual compensation. The Bank will match 50% of the employees voluntary contributions of up to 3% of the employees' compensation. Additional employer contributions are made at the discretion of the Board of Directors. The plan covers substantially all employees with more than one year's service. The Bank's contributions for the benefit of covered employees amounted to $56,190, $52,060, and $48,101 for the years ended June 30, 1996, 1995, and 1994 respectively. 14. COMMITMENTS AND CONTINGENT LIABILITIES LOAN COMMITMENTS ---------------- The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statement of financial condition. The contract amounts of these instruments reflect the extent of involvement the bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. No losses are anticipated by management as a result of these commitments. The following represents financial instruments whose contract amounts represent credit risk at June 30, 1996 and 1995:
1996 1995 ---------- ----------- Commitments to originate loans $1,469,700 $ 1,574,360 Loans in process $1,548,953 $ 1,326,727 Unused equity lines of credit $2,046,746 $ 1,224,585
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held consists primarily of single-family residences and income- producing commercial properties. F-17 14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) LEASE COMMITMENTS ----------------- The future lease commitments as of June 30, 1996 for all noncancellable equipment and land leases follows:
Fiscal Year Ending June 30, Amount ------------------ --------------- 1997 $ 53,638 1998 54,015 1999 53,956 2000 36,000 2001 37,800 2002 and thereafter 1,858,500 ----------- $ 2,093,909 ===========
The Bank entered into a forty year land lease with two five year option periods for their Follansbee branch. The terms of this lease commenced as of than January 1, 1996. The Bank also signed a new five year contract with the Savings and Loan Data Corporation, Inc., commencing May 1, 1995 which requires the Bank to pay monthly processing fees for services provided by the service center. The amount of the monthly payment varies each month based upon the type and amount of service provided. Processing fees charged to operations amounted to $144,390, $129,975, and $113,606 for the years ended June 30, 1996, 1995, and 1994 respectively. SAVINGS ASSOCIATION INSURANCE FUND RACAPITALIZATION --------------------------------------------------- In November, 1995, the U.S. Senate and the U.S. House of Representatives included provisions in the Balanced Budget Act of 1995 (the "Act") which would, among other things, recapitalize the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") by a one-time charge of SAIF - insured institutions of approximately 85 cents for every one hundred dollars of accessible deposits, and an eventual merger of the SAIF with the Bank Insurance Fund administered by the FDIC. The Act was vetoed by the President in December, 1995 for reasons unrelated to the recapitalization of the SAIF. The Bank currently is unable to predict the likelihood of legislation effecting these changes. If an assessment of 85 cents per one hundred dollars of accessible deposits was effected based on deposits as of March 15, 1995, as proposed, the Bank's pro rata share would amount to approximately $600,000. LITIGATION ---------- Also, the Bank is involved in litigation arising in the normal course of business. Management believes that liabilities, if any, arising from these proceedings will not have a material adverse effect on the consolidated financial position, operating results, or liquidity. 15. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS Financial Accounting Standards Board Statements No. 107, Disclosure About Fair Value of Financial Instruments, requires disclosure of the estimated fair value of the financial instruments. Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms. F-18 15. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument. If no readily available market exists, the fair value estimates for financial instruments should be based upon management's judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values. As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Bank. The Bank employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions: CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH OTHER INSTITUTIONS, --------------------------------------------------------------------------- ACCRUED INTEREST RECEIVABLE, AND ACCRUED INTEREST PAYABLE --------------------------------------------------------- The fair value is equal to the current carrying value. INVESTMENT SECURITIES, MORTGAGE-BACKED SECURITIES, AND LOANS HELD FOR SALE -------------------------------------------------------------------------- The fair value of securities held to maturity and loans held for sale is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. The fair value of securities available for sale is equal to the current carrying value. LOANS, DEPOSITS. AND ADVANCES FROM FEDERAL HOME LOAN BANK --------------------------------------------------------- The fair value of loans, certificates of deposit, and advances from Federal Home Loan Bank is estimated by discounting the future cash flows using a simulation model which estimates future cash flows and constructs discount rates that consider reinvestment opportunities, operating expenses, non- interest income, credit quality, and prepayment risk. Demand, savings, and money-market deposit accounts are valued at the amount payable on demand as of the year end. F-19 15. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) COMMITMENTS TO EXTEND CREDIT ---------------------------- These financial instruments are generally not subject to sale and estimated fair values are not readily available. The contractual amounts of unfunded commitments and letters of credit are presented previously in this report. The estimated fair value of the Bank's financial instruments at June 30, 1996 are as follows:
Carrying Fair Value Value ------------ ------------ Financial assets: Cash and cash equivalents $ 4,016,583 $ 4,016,583 Securities available-for-sale 68,549 68,549 Securities held to maturity 4,799,596 4,761,709 Mortgage-backed securities 536,808 561,203 Loans held-for sale 1,375,143 1,375,143 Loans receivable 77,565,831 77,828,000 Accrued interest receivable 521,187 521,187 ------------ ------------ $ 88,883,697 $ 89,132,374 ============ ============ Financial liabilities: Deposits $ 80,770,646 $ 80,741,000 Advances from Federal Home Loan Bank 4,376,452 4,314,000 Accrued interest payable 25,887 25,887 Advances from borrowers for taxes and insurance 182,977 182,977 ------------ ------------ $ 85,355,962 $ 85,263,864 ============ ============
16. CONSOLIDATED SUBSIDIARY The following condensed statements summarize the financial position of the Bank's wholly-owned subsidiary. ADVANCE FINANCIAL SERVICE CORPORATION OF WEST VIRGINIA STATEMENT OF FINANCIAL CONDITION
June 30, 1996 1995 -------- --------- ASSETS Investment in Savings and Loan Data Corporation $ 15,000 $ 15,000 -------- -------- Total assets $ 15,000 $ 15,000 -------- -------- STOCKHOLDERS' EQUITY Capital stock $ 15,000 $ 15,000 ======== ======== Total stockholders' equity $ 15,000 $ 15,000 ======== ========
Advance Financial Service Corporation had no operating activity during the years ended June 30, 1996, 1995, and 1994. F-20 17. SUBSEQUENT EVENTS CONVERSION AND REORGANIZATION ----------------------------- On September 3, 1996, the Board of Directors of the Bank, subject to regulatory approval, adopted the Plan of Conversion pursuant to which the Bank proposed to convert from a federally-chartered mutual savings bank to a federally-chartered stock savings bank and concurrently form a Bank Holding Company. The conversion is expected to be accomplished through amendment of the Bank's federal charter and the sale of the holding company's common stock in an amount equal to the pro forma market value of the Bank after giving effect of the conversion. A subscription offering of the sale of the Bank's common stock will be offered initially to the Bank's depositors, then to other members and directors, officers, and employees of the Bank. Any shares of the Bank's common stock not sold in the subscription offering will be offered for sale to the general public in the Bank's market area. Conversion costs will be deferred and deducted from the proceeds of the shares sold in the conversion. At June 30, 1996, the Bank had not incurred any conversion costs. In the event that the conversion is not completed, any deferred conversion costs will be charged to operations. In accordance with regulations, at the time that the Bank converts from a mutual savings bank to a stock savings bank, a portion of retained earnings will be restricted by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount. F-21 ================================================================================ NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE BANK OR THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS BY THE BANK OR THE COMPANY NOR ANY SALE MADE HEREUNDER SHALL IN ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE BANK OR THE COMPANY SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF. _________ TABLE OF CONTENTS
PAGE ---- Summary..................................................... (i) Selected Financial and Other Data........................... Recent Selected Financial and Other Data.................... Risk Factors................................................ 1 Advance Financial Bancorp................................... Advance Financial Savings Bank, f.s.b....................... Use of Proceeds............................................. Dividends................................................... Market for the Common Stock................................. Capitalization.............................................. Pro Forma Data.............................................. Historical and Pro Forma Capital Compliance................. Statements of Income........................................ Management"s Discussion and Analysis of Financial........... Condition and Results of Operations........................ Business of the Company..................................... Business of the Bank........................................ Regulation.................................................. Taxation.................................................... Management of the Company................................... Management of the Bank...................................... The Conversion.............................................. Certain Restrictions on Acquisition of the Company................................................ Description of Capital Stock................................ Legal and Tax Matters....................................... Experts..................................................... Registration Requirements................................... Additional Information...................................... Index to Financial Statements...............................
UNTIL THE LATER OF ____________, 1996, OR 25 DAYS AFTER COMMENCEMENT OF THE OFFERING OF COMMON STOCK, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. UP TO 943,000 SHARES (ANTICIPATED MAXIMUM) COMMON STOCK ADVANCE FINANCIAL BANCORP (Proposed Holding Company for Advance Financial Savings Bank) __________ PROSPECTUS __________ CHARLES WEBB & COMPANY A Division of Keefe, Bruyette & Woods, Inc. Dated _________, 1996 THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR GUARANTEED ================================================================================ PART II: INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION * Local counsel legal fees...................... $ 5,000 * Business plan................................. 15,000 * Special counsel legal fees.................... 70,000 * Printing...................................... 40,000 * Postage and mailing........................... 8,000 * Appraisal..................................... 15,000 * Accounting fees............................... 40,000 * Data processing/Conversion agent/Edgarizing... 40,000 * SEC registration fee.......................... 4,000 * OTS filing fees............................... 8,400 * Nasdaq Small Cap Market listing fees.......... 6,100 * NASD fairness filing fee...................... 1,600 * Blue sky legal and filing fees................ 6,000 ** Underwriting fees and commissions............ 122,000 * Underwriter"s expenses, including legal fees.. 35,000 * Stock certificates............................ 4,000 * Transfer agent................................ 6,000 * Reimbursable and other expenses............... 23,900 -------- * TOTAL......................................... $450,000 ========
_________________ * Estimated ** Variable underwriting expenses estimated based on a midpoint of the Estimated Valuation Range of $8.0 million; insider purchases of $1,000,000; an 8.0% ESOP ($640,000 at midpoint); and a fee of 1.5% of the price of shares sold to Charles Webb of all shares sold, less shares bought by insiders and the ESOP (i.e. $6,460,000), plus a $25,000 management fee. ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the Delaware General Corporation Law sets forth circumstances under which directors, officers, employees, and agents may be insured or indemnified against liability which they may incur in their capacities as such. The Certificate of Incorporation of Advance Financial Bancorp attached as Exhibit 3(i) hereto, requires indemnification of directors, officers, and employees to the fullest extent permitted by Delaware law. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Company or is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against the person and incurred by the person in any such capacity or arising out of his status as such, whether or not the Company would have the power to indemnify the person against such liability under the provisions of the Certificate of Incorporation. The registrant believes that these provisions assist the registrant in, among other things, attracting and retaining qualified persons to serve the registrant and its subsidiary. However, a result of such provisions could be to increase the expenses of the registrant and effectively reduce the ability of stockholders to sue on behalf of the registrant since certain suits could be barred or amounts that might otherwise be obtained on behalf of the registrant could be required to be repaid by the registrant to an indemnified party. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Not Applicable ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES: The financial statements and exhibits filed as part of this Registration Statement are as follows: (a) List of Exhibits: 1.1 Agency Agreement with Charles Webb & Company* 1.2 Selected Dealers Agreement* 2 Plan of Conversion of Advance Financial Savings Bank, f.s.b. 3(i) Certificate of Incorporation of Advance Financial Bancorp 3(ii) Bylaws of Advance Financial Bancorp 4 Specimen Stock Certificate of Advance Financial Bancorp 5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities registered 5.2 Opinion of Keller & Company, Inc. as to the value of subscription rights 8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C. 8.2 State Tax Opinion of S.R. Snodgrass, A.C.* 23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in its opinions filed as Exhibits 5.1 and 8.1) 23.2 Consent of S.R. Snodgrass, A.C. 23.3 Consent of Keller & Company, Inc. ________________________ * To be filed by amendment 24 Power of Attorney (reference is made to the signature page) 27 Financial Data Schedule 99.1 Stock Order Form* 99.2 Appraisal Report of Keller & Company, Inc.* 99.3 Marketing Materials (b) Financial Statements Schedules** _____________________ * To be filed by amendment ** All schedules are omitted because they are not required or applicable or the required information is shown in the financial statements or the notes thereto. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933 ("Securities Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (5) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore, unenforceable. In the event that a claim for indemnification against liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the questions whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Wellsburg, West Virginia, as of September 25, 1996. ADVANCE FINANCIAL BANCORP By: /s/ Stephen M. Gagliardi ------------------------------------------ Stephen M. Gagliardi President (Duly Authorized Representative) We the undersigned directors and officers of Advance Financial Bancorp do hereby severally constitute and appoint Stephen M. Gagliardi our true and lawful attorney and agent, to do any and all things and acts in our names in the capacities indicated below and to execute all instruments for us and in our names in the capacities indicated below which said Stephen M. Gagliardi may deem necessary or advisable to enable Advance Financial Bancorp to comply with the Securities Act of 1933, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of Advance Financial Bancorp"s common stock, including specifically but not limited to, power and authority to sign for us or any of us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby ratify and confirm all that Stephen M. Gagliardi shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities indicated as of September 25, 1996. /s/ Stephen M. Gagliardi /s/ George H. Johnson - -------------------------------------- ----------------------------------- Stephen M. Gagliardi George H. Johnson President Director (Chief Executive Officer and Chairman of the Board) /s/ Noreen Mechling /s/ John R. Sperlazza - -------------------------------------- ---------------------------------- Noreen Mechling John R. Sperlazza Chief Financial Officer and Director Director /s/ James R. Murphy /s/ William E. Watson - -------------------------------------- -------------------------------- James R. Murphy William E. Watson Director Director /s/ Gary Young - -------------------------------------- Gary Young Director As filed with the Securities and Exchange Commission on September 27, 1996 Registration No. 333- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- EXHIBITS TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------- ADVANCE FINANCIAL BANCORP -------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter)
Delaware 6035 Requested - ------------------------------- -------------------------- --------------------------- (State or Other Jurisdiction of Primary Standard Industry (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
1015 Commerce Street, Wellsburg, West Virginia 26070 (304) 737-3531 ---------------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Mr. Stephen M. Gagliardi President Advance Financial Bancorp 1015 Commerce Street, Wellsburg, West Virginia 26070 (304) 737-3531 ---------------------------------------------------------------------- (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Please send copies of all communications to: Samuel J. Malizia, Esq. Gregory J. Rubis, Esq. Felicia C. Battista, Esq. MALIZIA, SPIDI, SLOANE & FISCH, P.C. 1301 K Street, N.W. Suite 700 East, Washington, D.C. 20005 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. INDEX TO EXHIBITS TO FORM S-1 1.1 Agency Agreement with Capital Resources, Inc.* 1.2 Selected Dealers Agreement* 2 Plan of Conversion of Advance Financial Savings Bank, f.s.b. 3(i) Certificate of Incorporation of Advance Financial Bancorp 3(ii) Bylaws of Advance Financial Bancorp 4 Specimen Stock Certificate of Advance Financial Bancorp 5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities registered 5.2 Opinion of Keller & Company, Inc. as to the value of subscription rights 8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C. 8.2 State Tax Opinion of S.R. Snodgrass, A.C.* 23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in its opinions filed as Exhibits 5.1 and 8.1) 23.2 Consent of S.R. Snodgrass, A.C. 23.3 Consent of Keller & Company, Inc. 24 Power of Attorney (reference is made to the signature page) 27 Financial Data Schedule 99.1 Stock Order Form* 99.2 Appraisal Report of Keller & Company, Inc.* 99.3 Marketing Materials ____________________ * To be filed by amendment EX-2 2 EXHIBIT 2 EXHIBIT.2 EXHIBIT A PLAN OF CONVERSION FOR ADVANCE FINANCIAL SAVINGS BANK, F.S.B. WELLSBURG, WEST VIRGINIA 1. INTRODUCTION This Plan of Conversion ("Plan") provides for the conversion of Advance Financial Savings Bank, F.S.B. ("INSTITUTION") into a federal capital stock savings institution, to be known as "Advance Financial Savings Bank." The Board of Directors of the INSTITUTION currently contemplates that all of the stock of the INSTITUTION shall be held by another corporation (the "Holding Company"). The purpose of this conversion is to enable the INSTITUTION to be in the stock form of organization, like commercial banks and most other corporations. The conversion will result in an increase in the INSTITUTION's capital available to support growth and for expansion of its facilities, possible diversification into other related financial services activities and further enhance the INSTITUTION's ability to render services to the public and compete with other financial institutions. The use of the Holding Company would also provide greater organizational flexibility. Shares of capital stock of the INSTITUTION will be sold to the Holding Company and the Holding Company will offer the Conversion Stock upon the terms and conditions set forth herein to Eligible Account Holders, the tax-qualified employee stock benefit plans (the "Employee Plans") established by the INSTITUTION or the Holding Company, which may be funded by the Holding Company, Supplemental Eligible Account Holders, and Other Members in the respective priorities set forth in this Plan. Any shares of Conversion Stock not subscribed for by the foregoing classes of persons may be offered for sale to certain members of the public either directly by the INSTITUTION and the Holding Company through a Community Offering or through a Public Offering or Syndicated Public Offering. In the event that the INSTITUTION decides not to utilize the Holding Company in the conversion, Conversion Stock of the INSTITUTION, in lieu of the Holding Company, will be sold as set forth above and in the respective priorities set forth in this Plan. In addition to the foregoing, the INSTITUTION and the Holding Company intend to implement stock option plans and other stock benefit plans at the time of or subsequent to the conversion and may provide employment or severance agreements to certain management employees and certain other benefits to the directors, officers and employees of the INSTITUTION as described in the prospectus for the Conversion Stock. This Plan, which has been unanimously approved by the Board of Directors of the INSTITUTION, must also be approved by the affirmative vote of a majority of the total number of votes entitled to be cast by Voting Members of the INSTITUTION at a special meeting to be called for that purpose. Prior to the submission of this Plan to the Voting Members for consideration, the Plan must be approved by the Office of Thrift Supervision (the "OTS"). Upon conversion, each Account Holder having a Savings Account at the INSTITUTION prior to conversion will continue to have a Savings Account, without payment therefor, in the same amount and subject to the same terms and conditions (except for voting and liquidation rights) as in effect prior to the conversion. After conversion, the INSTITUTION will succeed to all the rights, interests, duties A-1 and obligations of the INSTITUTION before conversion, including but not limited to all rights and interests of the INSTITUTION in and to its assets and properties, whether real, personal or mixed. The INSTITUTION will continue to be a member of the Federal Home Loan Bank System and all its insured savings deposits will continue to be insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by applicable law. 2. DEFINITIONS For the purposes of this Plan, the following terms have the following meanings: Account Holder - The term Account Holder means any Person holding a Savings -------------- Account in the INSTITUTION. Acting in Concert - The Term "Acting in Concert" means (i) knowing ----------------- participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise; or (iii) a person or company which acts in concert with another person or company ("other party") shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee stock benefit plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the plan will be aggregated. Associate - The term Associate when used to indicate a relationship with --------- any person, means (i) any corporation or organization (other than the INSTITUTION or a majority-owned subsidiary of the INSTITUTION) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity except that for the purposes of Sections 8 and 14 hereof, the term "Associate" does not include any Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified Employee Stock Benefit Plan in which a person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity, and except that, for purposes of aggregating total shares that may be held by Officers and Directors the term "Associate" does not include any Tax-Qualified Employee Stock Benefit Plan, and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a Director or Officer of the INSTITUTION or the Holding Company, or any of its parents or subsidiaries. Community Offering - The term Community Offering means the offering for ------------------ sale to certain members of the general public directly by the Holding Company, of shares not subscribed for in the Subscription Offering. Conversion Stock - The term Conversion Stock means the $.10 par value ---------------- common stock offered and issued by the Holding Company upon conversion. Director - The term Director means a member of the Board of Directors of -------- the INSTITUTION and, where applicable, a member of the Board of Directors of the Holding Company. A-2 Eligible Account Holder - The term Eligible Account Holder means any person ----------------------- holding a Qualifying Deposit in a Savings Account at the INSTITUTION on the Eligibility Record Date. Eligibility Record Date - The term Eligibility Record Date means the date ----------------------- for determining Eligible Account Holders in the INSTITUTION and is the close of business on August 31, 1995. Employees - The term Employees means all Persons who are employed by the --------- INSTITUTION. Employee Plans - The term Employee Plans means the Tax-Qualified Employee -------------- Stock Benefit Plans, including the Employee Stock Ownership Plan, approved by the Board of Directors of the INSTITUTION. Estimated Valuation Range. The term Estimated Valuation Range means the ------------------------- range of the estimated pro forma market value of the Conversion Stock as determined by the Independent Appraiser prior to the Subscription Offering and as it may be amended from time to time thereafter. FDIC - The term FDIC means the Federal Deposit Insurance Corporation. ---- Holding Company - The term Holding Company means the corporation formed for --------------- the purpose of acquiring all of the shares of capital stock of the INSTITUTION to be issued upon its conversion to stock form unless the Holding Company form of organization is not utilized. Shares of common stock of the Holding Company will be issued in the Conversion to Participants and others in a Subscription, Community, Public or Syndicated Public Offering, or through a combination thereof. Independent Appraiser - The term Independent Appraiser means an appraiser --------------------- retained by the INSTITUTION to prepare an appraisal of the pro forma market value of the Conversion Stock. Institution - The term INSTITUTION means Advance Financial Savings Bank, ----------- F.S.B., Wellsburg, West Virginia. Local Community - The term local community means the incorporated cities --------------- and counties in which the INSTITUTION has offices. Member - The term Member means any Person or entity who qualifies as a ------ member of the INSTITUTION pursuant to its charter and bylaws. OTS - The term OTS means Office of Thrift Supervision of the Department of --- the Treasury. Officer - The term Officer means an executive officer of the INSTITUTION ------- and may include the Chairman of the Board, Chief Executive Officer, Vice Presidents in charge of principal business functions, Secretary and Treasurer and any individual performing functions similar to those performed by the foregoing persons. Order Form - The term Order Form means any form together with attached ---------- cover letter, sent by the INSTITUTION to any Person containing among other things a description of the alternatives available to such Person under the Plan and by which any such Person may make elections regarding subscriptions for Conversion Stock in the Subscription and Community Offerings. A-3 Other Member - The term Other Member means any person, who is a Member of ------------ the INSTITUTION (other than Eligible Account Holders or Supplemental Eligible Account Holders) at the close of business on the voting record date. Participants - The term Participants means the Eligible Account Holders, ------------ Employee Plans, Supplemental Eligible Account Holders and Other Members. Person - The term Person means an individual, a corporation, a partnership, ------ an association, a joint-stock company, a trust (including Individual Retirement Accounts and KEOGH Accounts), any unincorporated organization, a government or political subdivision thereof or any other entity. Plan - The term Plan means this Plan of Conversion of the INSTITUTION as it ---- exists on the date hereof and as it may hereafter be amended in accordance with its terms. Public Offering - The term Public Offering means the offering for sale --------------- through the Underwriter to the general public of any shares of Conversion Stock not subscribed for in the Subscription Offering. Purchase Order - The term Purchase Order means any form together with -------------- attached cover letter, sent by the Underwriter to any Person containing among other things a description of the alternatives available to such Person under the Plan and by which any such Person may make elections regarding subscriptions for Conversion Stock in the Public Offering. Purchase Price - The term Purchase Price means the per share price at which -------------- the Conversion Stock will be sold in accordance with the terms hereof. Qualifying Deposit - The term Qualifying Deposit means the balance of each ------------------ Savings Account of $50 or more in the INSTITUTION at the close of business on the Eligibility Record Date or Supplemental Eligibility Record Date. Savings Accounts with total deposit balances of less than $50 shall not constitute a Qualifying Deposit. SEC - The term SEC refers to the Securities and Exchange Commission. --- Savings Account - The term Savings Account includes savings accounts as --------------- defined in Section 561.42 of the Rules and Regulations of the OTS and includes certificates of deposit. Special Meeting of Members - The term Special Meeting of Members means the -------------------------- special meeting and any adjournments thereof held to consider and vote upon this Plan. Subscription Offering - The term Subscription Offering means the offering --------------------- of Conversion Stock for purchase through Order Forms to Participants. Supplemental Eligibility Record Date - The term Supplemental Eligibility ------------------------------------ Record Date means the close of business on the last day of the calendar quarter preceding the approval of the Plan by the OTS. Supplemental Eligible Account Holder - The term Supplemental Eligible ------------------------------------ Account Holder means a holder of a Qualifying Deposit in the INSTITUTION (other than an officer or trustee or their Associates) at the close of business on the Supplemental Eligibility Record Date. A-4 Tax-Qualified Employee Stock Benefit Plan - The term Tax-Qualified Employee ----------------------------------------- Stock Benefit Plan means any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which, with its related trust, meets the requirements to be "qualified" under Section 401 of the Internal Revenue Code. Syndicated Public Offering - The term Syndicated Public Offering means the -------------------------- offering of Conversion Stock following the Subscription, Community (if applicable) or Public Offerings through a syndicate of broker-dealers. Underwriter - The term Underwriter means the investment banking firm or ----------- firms through which the Conversion Stock will be offered and sold in the Public Offering. Voting Members - The term Voting Members means those Persons qualifying as -------------- voting members of the INSTITUTION pursuant to its charter and bylaws. Voting Record Date - The term Voting Record Date means the date fixed by ------------------ the Directors in accordance with OTS regulations for determining eligibility to vote at the Special Meeting of Members. 3. PROCEDURE FOR CONVERSION After approval of the Plan by the Board of Directors of the INSTITUTION, the Plan shall be submitted together with all other requisite material to the OTS for its approval. Notice of the adoption of the Plan by the Board of Directors of the INSTITUTION will be published in a newspaper having general circulation in each community in which an office of the INSTITUTION is located and copies of the Plan will be made available at each office of the INSTITUTION for inspection by the Members. Upon filing the application with the OTS, the INSTITUTION also will cause to be published a notice of the filing with the OTS of an application to convert in accordance with the provisions of the Plan. Following approval by the OTS, the Plan will be submitted to a vote of the Voting Members at a Special Meeting of Members called for that purpose. Upon approval of the Plan by a majority of the total votes eligible to be cast by the Voting Members, the INSTITUTION will take all other necessary steps pursuant to applicable laws and regulations to convert the INSTITUTION to stock form. The conversion must be completed within 24 months of the approval of the Plan by the Voting Members, unless a longer time period is permitted by governing laws and regulations. The Board of Directors of the INSTITUTION intends to take all necessary steps to form the Holding Company including the filing of an Application on Form H-(e)1 or H-(e)1-S, if available to the Holding Company, with the OTS. Upon conversion, the INSTITUTION will issue its capital stock to the Holding Company and the Holding Company will issue and sell the Conversion Stock in accordance with this Plan. The Board of Directors of the INSTITUTION may determine for any reason at any time prior to the issuance of the Conversion Stock not to utilize a holding company form of organization in the Conversion, in which case, the Holding Company's registration statement on Form S-1 or Form SB-2 will be withdrawn from the SEC, the INSTITUTION will take all steps necessary to complete the conversion from the mutual to the stock form of organization, including filing any necessary documents with the OTS and will issue and sell the Conversion Stock in accordance with this Plan. In such event, any subscriptions or orders received for Conversion Stock of the Holding Company shall be deemed to be subscriptions or orders for Conversion Stock of the INSTITUTION without any further action by the A-5 INSTITUTION or the subscribers for the Conversion Stock. Any references to the Holding Company in this Plan shall mean the INSTITUTION in the event the Holding Company is eliminated in the Conversion. The Conversion Stock will not be insured by the FDIC. The INSTITUTION will not knowingly lend funds or otherwise extend credit to any Person to purchase shares of the Conversion Stock. 4. HOLDING COMPANY APPLICATIONS AND APPROVALS The Holding Company shall make timely applications for any requisite regulatory approvals, including an Application on Form H-(e)1 or an H-(e)1-S, if available to the Holding Company, to be filed with the OTS and a Registration Statement on Form S-1 or Form SB-2 to be filed with the SEC. The INSTITUTION shall be a wholly owned subsidiary of the Holding Company. 5. SALE OF CONVERSION STOCK The Conversion Stock will be offered simultaneously in the Subscription Offering to the Eligible Account Holders, Employee Plans, Supplemental Eligible Account Holders and Other Members in the respective priorities set forth in Sections 8 through 11 of this Plan. The Subscription Offering may be commenced as early as the mailing of the Proxy Statement for the Special Meeting of Members and must be commenced in time to complete the conversion within the time period specified in Section 3. Any shares of Conversion Stock not subscribed for in the Subscription Offering may be offered for sale in the Community Offering, if any, as provided in Section 12 of this Plan or offered in a Public Offering or Syndicated Public Offering, as provided in Section 13, if necessary and feasible. The Subscription Offering may be commenced prior to the Special Meeting of Members and, in that event, the Community Offering or Public Offering may also be commenced prior to the Special Meeting of Members. The offer and sale of Conversion Stock, prior to the Special Meeting of Members shall, however, be conditioned upon approval of the Plan by the Voting Members. Shares of Conversion Stock may be sold in a Syndicated Public Offering or in a Public Offering, as provided in Section 13 of this Plan in a manner that will achieve a wide distribution of the Conversion Stock as determined by the INSTITUTION. In the event of a Syndicated Public Offering or Public Offering, the sale of all Conversion Stock subscribed for in the Subscription Offering will be consummated simultaneously on the date the sale of Conversion Stock in the Syndicated Public Offering or Public Offering is consummated and only if all unsubscribed for Conversion Stock is sold. The INSTITUTION may elect to pay fees on either a fixed fee or commission basis or combination thereof to an investment banking firm which assists it in the sale of the Conversion Stock in the offerings. The INSTITUTION may also elect to offer to pay fees on a per share basis to brokers who assist Persons in determining to purchase shares in the Offerings and whose name appears on the purchaser's Order Form. A-6 6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK The total number of shares (or a range thereof) of Conversion Stock to be issued and offered for sale will be determined by the Boards of Directors of the INSTITUTION and the Holding Company, immediately prior to the commencement of the Offerings, subject to adjustment thereafter if necessitated by a change in the appraisal due to changes in market or financial conditions, with the approval of the OTS, if necessary. All shares sold in the Conversion will be sold at a uniform price per share referred to in this Plan as the Purchase Price. The aggregate Purchase Price for all shares of Conversion Stock will not be inconsistent with the estimated consolidated pro forma market value of the INSTITUTION. The estimated consolidated pro forma market value of the INSTITUTION will be determined for such purpose by the Independent Appraiser. Prior to the commencement of the Subscription and Community Offerings, an Estimated Valuation Range will be established, which range will vary within 15% above to 15% below the midpoint of such range. The number of shares of Conversion Stock to be issued and/or the Purchase Price may be increased or decreased by the INSTITUTION. In the event that the aggregate Purchase Price of the Conversion Stock is below the minimum of the Estimated Valuation Range, or materially above the maximum of the Estimated Valuation Range, resolicitation of purchasers may be required, provided that up to a 15% increase above the maximum of the Estimated Valuation Range will not be deemed material so as to require a resolicitation. Any such resolicitation shall be effected in such manner and within such time as the INSTITUTION shall establish, with the approval of the OTS, if required. Up to a 15% increase in the number of shares to be issued which is supported by an appropriate change in the estimated pro forma market value of the INSTITUTION or in order to fill the order by the Employee Plans will not be deemed to be material so as to require a resolicitation of subscriptions. Based upon the independent valuation, as updated prior to the consummation of the Subscription and Community Offerings, the Boards of Directors of the INSTITUTION and the Holding Company will fix the Purchase Price. Notwithstanding the foregoing, no sale of Conversion Stock may be consummated unless, prior to such consummation, the Independent Appraiser confirms to the INSTITUTION and Holding Company and to the OTS that, to the best knowledge of the Independent Appraiser, nothing of a material nature has occurred which, taking into account all relevant factors, would cause the Independent Appraiser to conclude that the aggregate value of the Conversion Stock sold at the Purchase Price is incompatible with its estimate of the aggregate consolidated pro forma market value of the INSTITUTION. If such confirmation is not received, the INSTITUTION may cancel the Subscription Offering, Community Offering and/or the Public Offering and Syndicated Public Offering, reopen or hold new Offerings to take such other action as the OTS may permit. The Conversion Stock to be issued in the Conversion shall be fully paid and nonassessable. 7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE INSTITUTION Upon the consummation of the sale of all of the Conversion Stock, the Holding Company will purchase from the INSTITUTION all of the capital stock of the INSTITUTION to be issued by the INSTITUTION in the conversion in exchange for the Conversion proceeds that are not permitted to be retained by the Holding Company. A-7 The Holding Company will apply to the OTS to retain up to 50% of the proceeds of the Conversion. Assuming the Holding Company is not eliminated, a lesser percentage may be acceptable. 8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY) A. Each Eligible Account Holder shall receive, without payment, nontransferable subscription rights to subscribe for shares of Conversion Stock equal to the greater of: (i) the maximum established for the Community Offering; (ii) one-tenth of one percent of the Conversion Stock offered; or (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock offered by a fraction of which the numerator is the amount of the Qualifying Deposit of such Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders but in no event greater than the maximum purchase limitation specified in Section 14 hereof. All such purchases are subject to the maximum and minimum purchase limitations specified in Section 14 and are exclusive of an increase in the total number of shares issued due to an increase in the maximum of the Estimated Valuation Range of up to 15%. B. In the event that Eligible Account Holders exercise Subscription Rights for a number of shares of Conversion Stock in excess of the total number of such shares eligible for subscription, the shares of Conversion Stock shall be allocated among the subscribing Eligible Account Holders so as to permit each subscribing Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation of Conversion Stock equal to the lesser of 100 shares or the number of shares subscribed for by the Eligible Account Holder. Any shares remaining after that allocation will be allocated among the subscribing Eligible Account Holders whose subscriptions remain unsatisfied in the proportion that the amount of the Qualifying Deposit of each Eligible Account Holder whose subscription remains unsatisfied bears to the total amount of the Qualifying Deposits of all Eligible Account Holders whose subscriptions remain unsatisfied. If the amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders, the excess shall be reallocated (one or more times as necessary) among those Eligible Account Holders whose subscriptions are still not fully satisfied on the same principle until all available shares have been allocated or all subscriptions satisfied. C. Subscription rights as Eligible Account Holders received by Directors and Officers and their Associates which are based on deposits made by such persons during the twelve (12) months preceding the Eligibility Record Date shall be subordinated to the Subscription Rights of all other Eligible Account Holders. 9. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY) Subject to the availability of sufficient shares after filling subscription orders of Eligible Account Holders under Section 8, the Employee Plans shall receive without payment nontransferable subscription rights to purchase in the Subscription Offering the number of shares of Conversion Stock requested by such Plans, subject to the purchase limitations set forth in Section 14. The Employee Plans shall not be deemed to be associates or affiliates of or Persons Acting in Concert with any Director or Officer of the Holding Company or the INSTITUTION. A-8 10. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD PRIORITY) A. In the event that the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application filed prior to OTS approval, then, and only in that event, each Supplemental Eligible Account Holder shall receive, without payment, nontransferable subscription rights entitling such Supplemental Eligible Account Holder to purchase that number of shares of Conversion Stock which is equal to the greater of: (i) the maximum purchase limitation established for the Community Offering; (ii) one-tenth of 1% of the Conversion Stock Offered; and (iii) or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of the Qualifying Deposits of all Supplemental Eligible Account Holders. All such purchases are subject to the maximum and minimum purchase limitations in Section 14 and are exclusive of an increase in the total number of shares issued due to an increase in the maximum of the Estimated Valuation Range of up to 15%. B. Subscription rights received pursuant to this Category shall be subordinated to the subscription rights received by Eligible Account Holders and by the Employee Plans. C. Any subscription rights to purchase shares of Conversion Stock received by an Eligible Account Holder in accordance with Section 8 shall reduce to the extent thereof the subscription rights to be distributed pursuant to this Section. D. In the event of an oversubscription for shares of Conversion Stock pursuant to this Section, shares of Conversion Stock shall be allocated among the subscribing Supplemental Eligible Account Holders as follows: (1) Shares of Conversion Stock shall be allocated so as to permit each such Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares of Conversion Stock sufficient to make his total allocation (including the number of shares of Conversion Stock, if any, allocated in accordance with Section 8) equal to 100 shares of Conversion Stock or the total amount of his subscription, whichever is less. (2) Any shares of Conversion Stock not allocated in accordance with subparagraph (1) above shall be allocated among the subscribing Supplemental Eligible Account Holders on an equitable basis, related to the amounts of their respective Qualifying Deposits as compared to the total Qualifying Deposits of all subscribing Supplemental Eligible Account Holders. 11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY) A. Each Other Member shall receive, without payment, nontransferable subscription rights to subscribe for shares of Conversion Stock in an amount equal to the greater of the maximum purchase limitation established for the Community Offering or one-tenth of one percent of the Conversion Stock offered, subject to the maximum and minimum purchase limitations specified in Section 14 and exclusive of an increase in the total number of shares issued due to an increase in the maximum of the Estimated Valuation Range of up to 15%, which will be allocated only after first allocating to Eligible Account A-9 Holders, the Employee Plans and Supplemental Eligible Account Holders all shares of Conversion Stock subscribed for pursuant to Sections 8, 9 and 10 above. B. In the event that such Other Members subscribe for a number of shares of Conversion Stock which, when added to the shares of Conversion Stock subscribed for by the Eligible Account Holders, the Employee Plans and the Supplemental Eligible Account Holders is in excess of the total number of shares of Conversion Stock being issued, the subscriptions of such Other Members will be allocated among the subscribing Other Members so as to permit each subscribing Other Member, to the extent possible, to purchase a number of shares sufficient to make his total allocation of Conversion Stock equal to the lesser of 100 shares or the number of shares subscribed for by the Other Member. Any shares remaining will be allocated among the subscribing Other Members whose subscriptions remain unsatisfied on a 100 shares (or whatever lesser amount is available) per order basis until all orders have been filled or the remaining shares have been allocated. 12. COMMUNITY OFFERING If less than the total number of shares of Conversion Stock to be subscribed for in the Conversion are sold in the Subscription Offering, shares remaining unsubscribed may be made available for purchase in the Community Offering to certain members of the general public, which may subscribe together with any Associate or group of persons Acting in Concert for up to that number of shares of Conversion Stock as shall equal $100,000 divided by the Purchase Price, subject to the maximum and minimum purchase limitations specified in Section 14 and exclusive of an increase in the total number of shares issued due to an increase in the maximum of the Estimated Valuation Range of up to 15%. The shares may be made available in the Community Offering through a direct community marketing program which may provide for utilization of a broker, dealer, consultant or investment banking firm, experienced and expert in the sale of savings institution securities. In the Community Offering, if any, shares will be available for purchase by the general public with preference given first to natural persons residing in the Local Community and second, to natural persons residing in the State of West Virginia. The INSTITUTION shall make distribution of the Conversion Stock to be sold in the Community Offering in such a manner as to promote a wide distribution of Conversion Stock. If the Community Purchasers in the Community Offering, whose orders would otherwise be accepted, subscribe for more shares than are available for purchase, the shares available to them will be allocated among persons submitting orders in the Community Offering in an equitable manner as determined by the Board of Directors. The INSTITUTION may establish all terms and conditions of such offer. The Community Offering, if any, may commence simultaneously with, during or subsequent to the completion of the Subscription Offering and if commenced simultaneously with or during the Subscription Offering the Community Offering may be limited to Community Purchases. The Community Offering must be completed within 45 days after the completion of the Subscription Offering unless otherwise extended by the OTS. The INSTITUTION and the Holding Company, in their absolute discretion, reserve the right to reject any or all orders in whole or in part which are received in the Community Offering, at the time of receipt or as soon as practicable following the completion of the Community Offering. A-10 13. PUBLIC OFFERING AND SYNDICATED PUBLIC OFFERING Any shares of Conversion Stock not sold in the Subscription Offering or in the Community Offering, if any, may then be sold through the Underwriter to the general public at the Purchase Price in the Public Offering, subject to such terms, conditions and procedures as may be determined by the Boards of Directors of the INSTITUTION and the Holding Company, in a manner that will achieve a wide distribution of the Conversion Stock and subject to the right of the INSTITUTION and the Holding Company, in their absolute discretion, to accept or reject in whole or in part all subscriptions in the Public Offering. In the Public Offering, if any, any person together with any Associate or group of persons Acting in Concert may purchase up to the maximum purchase limitation established for the Community Offering, subject to the maximum and minimum purchase limitations specified in Section 14 and exclusive of an increase in the total number of shares issued due to an increase in the maximum of the Estimated Valuation Range of up to 15%. Shares purchased by any Person together with any Associate or group of persons Acting in Concert pursuant to Section 12 shall be counted toward meeting the maximum purchase limitation specified for this Section. Provided that the Subscription Offering has commenced, the INSTITUTION may commence the Public Offering at any time after the mailing to the Members of the Proxy Statement to be used in connection with the Special Meeting of Members, provided that the completion of the offer and sale of the Conversion Stock shall be conditioned upon the approval of this Plan by the Voting Members. It is expected that the Public Offering, if any, will commence just prior to, or as soon as practicable after, the termination of the Subscription Offering. The Public Offering shall be completed within 45 days after the termination of the Subscription Offering, unless such period is extended as provided in Section 3, above. Shares of Conversion Stock not subscribed for in the Subscription Offering, Community Offering, if any, and Public Offering may be sold in a Syndicated Public Offering, subject to such terms, conditions and procedures as may be determined by the Boards of Directors of the INSTITUTION and the Holding Company, in a manner that will achieve a wide distribution of the Conversion Stock subject to the right of the INSTITUTION and the Holding Company, in their absolute discretion, to accept or reject in whole or in part all subscriptions in the Syndicated Public Offering. In the Syndicated Public Offering, any person together with any Associate or group of persons Acting in Concert may purchase up to the maximum purchase limitation established for the Public Offering, subject to the maximum and minimum purchase limitations specified in Section 14 and exclusive of an increase in the total number of shares issued due to an increase in the maximum of the Estimated Valuation Range of up to 15%. Shares purchased by any Person together with any Associate or group of persons Acting in Concert pursuant to Section 12 shall be counted toward meeting the maximum purchase limitation specified for this Section. Provided that the Subscription Offering has commenced, the INSTITUTION may commence the Syndicated Public Offering at any time after the mailing to the Members of the Proxy Statement to be used in connection with the Special Meeting of Members, provided that the completion of the offer and sale of the Conversion Stock shall be conditioned upon the approval of this Plan by the Voting Members. If the Syndicated Public Offering is not sooner commenced pursuant to the provisions of the preceding sentence, the Syndicated Public Offering will be commenced as soon as practicable following the date upon which the Subscription Offering and Community Offering, if any, terminate. If for any reason a Public Offering or Syndicated Public Offering of shares of Conversion Stock not sold in the Subscription and Community Offerings can not be effected, other purchase arrangements will be made for the sale of unsubscribed shares by the INSTITUTION, if possible. Such other purchase arrangements will be subject to the approval of the OTS. A-11 14. LIMITATION ON PURCHASES The following limitations shall apply to all purchases of shares of Conversion Stock: A. The maximum number of shares of Conversion Stock which may be purchased in the Subscription Offering by any person in the First Priority, Third Priority and Fourth Priority shall not exceed such number of shares as shall equal $100,000 divided by the Purchase Price. B. The maximum number of shares of Conversion Stock which may be subscribed for or purchased in all categories in the Conversion by any Person (or persons through a single account) or Participant together with any Associate or group of persons Acting in Concert shall not exceed such number of shares as shall equal $150,000 divided by the Purchase Price, except for Employee Plans, which in the aggregate may subscribe for up to 10% of the Conversion Stock issued. C. The maximum number of shares of Conversion Stock which may be purchased in all categories in the conversion by Officers and Directors of the INSTITUTION and their Associates in the aggregate shall not exceed 34% of the total number of shares of Conversion Stock issued. D. A minimum of 25 shares of Conversion Stock must be purchased by each Person purchasing shares in the conversion to the extent those shares are available; provided, however, that the minimum number of shares requirement will not apply if the number of shares of Conversion Stock purchased times the price per share exceeds $500. If the number of shares of Conversion Stock otherwise allocable pursuant to Sections 8 through 13, inclusive, to any Person or that Person's Associates would be in excess of the maximum number of shares permitted as set forth above, the number of shares of Conversion Stock allocated to each such person shall be reduced to the lowest limitation applicable to that Person, and then the number of shares allocated to each group consisting of a Person and that Person's Associates shall be reduced so that the aggregate allocation to that Person and his Associates complies with the above maximums, and such maximum number of shares shall be reallocated among that Person and his Associates as they may agree, or in the absence of an agreement, in proportion to the shares subscribed by each (after first applying the maximums applicable to each Person, separately). Depending upon market or financial conditions, the Board of Directors of the INSTITUTION and the Holding Company, without further approval of the Members, may decrease or increase the purchase limitations in this Plan, provided that the maximum purchase limitations may not be increased to a percentage in excess of 5%. Notwithstanding the foregoing, the maximum purchase limitation may be increased up to 9.99% provided that orders for Conversion Stock exceeding 5% of the shares being offered shall not exceed, in the aggregate, 10% of the total offering. If the INSTITUTION and the Holding Company increase the maximum purchase limitations, the INSTITUTION and the Holding Company are only required to resolicit Persons who subscribed for the maximum purchase amount and may, in the sole discretion of the INSTITUTION and the Holding Company, resolicit certain other large subscribers. For purposes of this Section 14, the Directors of the INSTITUTION and the Holding Company shall not be deemed to be Associates or a group affiliated with each other or otherwise Acting in Concert solely as a result of their being Directors of the INSTITUTION or the Holding Company. A-12 In the event of an increase in the total number of shares offered in the conversion due to an increase in the maximum of the Estimated Valuation Range of up to 15% (the "Adjusted Maximum") the additional shares will be used in the following order of priority: (i) to fill the Employees Plan's subscription to up to 10% of the Adjusted Maximum; (ii) in the event that there is an oversubscription at the Eligible Account Holder level, to fill unfilled subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum according to Section 8, with preference given to Community Purchasers; (iii) in the event that there is an oversubscription at the Supplemental Eligible Account Holder level, to fill unfilled subscriptions of Supplemental Eligible Account Holders exclusive of the Adjusted Maximum according to Section 10, with preference given to Community Purchasers; (iv) in the event that there is an oversubscription at the Other Member level, to fill unfilled subscriptions of Other Members exclusive of the Adjusted Maximum in accordance with Section 11, with preference given to Community Purchasers; and (v) to fill unfilled Subscriptions in the Community Offering exclusive of the Adjusted Maximum, with preference given to Community Purchasers. Each Person purchasing Conversion Stock in the Conversion shall be deemed to confirm that such purchase does not conflict with the above purchase limitations contained in this Plan. For a period of three years following the conversion, no Officer, Director or their Associates shall purchase, without the prior written approval of the OTS, any outstanding shares of common stock of the Holding Company, except from a broker-dealer registered with the SEC. This provision shall not apply to negotiated transactions involving more than one percent of the outstanding shares of common stock of the Holding Company, the exercise of any options pursuant to a stock option plan or purchases of common stock of the Holding Company, made by or held by any Tax-Qualified Employee Stock Benefit Plan or Non-Tax Qualified Employee Stock Benefit Plan of the INSTITUTION or the Holding Company (including the Employee Plans) which may be attributable to any Officer or Director. As used herein, the term "negotiated transaction" means a transaction in which the securities are offered and the terms and arrangements relating to any sale are arrived at through direct communications between the seller or any person acting on its behalf and the purchaser or his investment representative. The term "investment representative" shall mean a professional investment advisor acting as agent for the purchaser and independent of the seller and not acting on behalf of the seller in connection with the transaction. 15. PAYMENT FOR CONVERSION STOCK All payments for Conversion Stock subscribed for in the Subscription, Community, Public and Syndicated Public Offerings must be delivered in full to the INSTITUTION, together with a properly completed and executed Order Form, or Purchase Order in the case of the Public or Syndicated Public Offering, on or prior to the expiration date specified on the Order Form or Purchase Order, as the case may be, unless such date is extended by the INSTITUTION; provided, however, that if the Employee Plans subscribes for shares during the Subscription Offering, the Employee Plan will not be required to pay for the shares at the time they subscribe but rather may pay for such shares of Conversion Stock upon consummation of the Conversion. The INSTITUTION may make scheduled discretionary contributions to an Employee Plan provided such contributions do not cause the INSTITUTION to fail to meet its regulatory capital requirement. Notwithstanding the foregoing, the INSTITUTION and the Holding Company shall have the right, in their sole discretion, to permit institutional investors to submit contractually irrevocable orders in the Community Offering, Public Offering or Syndicated Public Offering and to thereafter submit payment A-13 for the Conversion Stock for which they are subscribing in the Community Offering, Public Offering or Syndicated Public Offering at any time prior to the completion of the Conversion. Payment for Conversion Stock subscribed for shall be made either in cash (if delivered in person), check or money order. Alternatively, subscribers in the Offerings may pay for the shares subscribed for by authorizing the INSTITUTION on the Order Form or Purchase Order to make a withdrawal from the subscriber's Savings Account at the INSTITUTION in an amount equal to the purchase price of such shares. Such authorized withdrawal, whether from a savings passbook or certificate account, shall be without penalty as to premature withdrawal. If the authorized withdrawal is from a certificate account, and the remaining balance does not meet the applicable minimum balance requirement, the certificate shall be canceled at the time of withdrawal, without penalty, and the remaining balance will earn interest at the passbook rate. Funds for which a withdrawal is authorized will remain in the subscriber's Savings Account but may not be used by the subscriber until the Conversion Stock has been sold or the 45-day period (or such longer period as may be approved by the OTS) following the Subscription Offering has expired, whichever occurs first. Thereafter, the withdrawal will be given effect only to the extent necessary to satisfy the subscription (to the extent it can be filled) at the Purchase Price per share. Interest will continue to be earned on any amounts authorized for withdrawal until such withdrawal is given effect. Interest will be paid by the INSTITUTION at not less than the passbook annual rate on payments for Conversion Stock received in cash or by money order or check. Such interest will be paid from the date payment is received by the INSTITUTION until consummation or termination of the conversion. If for any reason the Conversion is not consummated, all payments made by subscribers in the Offerings will be refunded to them with interest. In case of amounts authorized for withdrawal from Savings Accounts, refunds will be made by canceling the authorization for withdrawal. 16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS As soon as practicable after the Prospectus prepared by the Holding Company and INSTITUTION has been declared effective by the OTS and the SEC, Order Forms will be distributed to the Participants at their last known addresses appearing on the records of the INSTITUTION for the purpose of subscribing to shares of Conversion Stock in the Subscription Offering and will be made available for use in the Community Offering. Notwithstanding the foregoing, the INSTITUTION may elect to send Order Forms only to those Persons who request them after such notice as is approved by the OTS and is adequate to apprise the Participants of the pendency of the Subscription Offering has been given. Such notice may be included with the proxy statement for the Special Meeting of Members and may also be included in a notice of the pendency of the conversion and the Special Meeting of Members sent to all Eligible Account Holders in accordance with regulations of the OTS. Each Order Form or Purchase Order will be preceded or accompanied by the Prospectus (if a holding company form of organization is utilized) or the Offering Circular (if the holding company form of organization is not utilized) describing the Holding Company (if utilized), the INSTITUTION, the Conversion Stock and the Offerings. Each Order Form or Purchase Order will contain, among other things, the following: A. A specified date by which all Order Forms and Purchase Orders must be received by the INSTITUTION, which date shall be not less than twenty (20), nor more than forty-five (45) days, following the date on which the Order Forms are mailed by the INSTITUTION, and which date will constitute the termination of the Subscription Offering; A-14 B. The purchase price per share for shares of Conversion Stock to be sold in the Offerings; C. A description of the minimum and maximum number of shares of Conversion Stock which may be subscribed for pursuant to the exercise of Subscription Rights or otherwise purchased in the Community Offering, Public Offering or Syndicated Public Offering; D. Instructions as to how the recipient of the Order Form or Purchase Order is to indicate thereon the number of shares of Conversion Stock for which such person elects to subscribe and the available alternative methods of payment therefor; E. An acknowledgment that the recipient of the Order Form or Purchase Order has received a final copy of the Prospectus or Offering Circular, as the case may be, prior to execution of the Order Form or Purchase Order. F. A statement to the effect that all subscription rights are nontransferable, will be void at the end of the Subscription Offering, and can only be exercised by delivering within the subscription period such properly completed and executed Order Form, together with cash (if delivered in person), check or money order in the full amount of the purchase price as specified in the Order Form for the shares of Conversion Stock for which the recipient elects to subscribe in the Subscription Offering (or by authorizing on the Order Form that the INSTITUTION withdraw said amount from the subscriber's Savings Account at the INSTITUTION) to the INSTITUTION; and G. A statement to the effect that the executed Order Form or Purchase Order, once received by the INSTITUTION, may not be modified or amended by the subscriber without the consent of the INSTITUTION. Notwithstanding the above, the INSTITUTION and the Holding Company reserve the right in their sole discretion to accept or reject orders received on photocopied or facsimiled order forms or whose payment is to be made by wire transfer. 17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT PAYMENT In the event Order Forms (a) are not delivered and are returned to the INSTITUTION by the United States Postal Service or the INSTITUTION is unable to locate the addressee, (b) are not received back by the INSTITUTION or are received by the INSTITUTION after the expiration date specified thereon, (c) are defectively filled out or executed, (d) are not accompanied by the full required payment, or, in the case of institutional investors in the Community Offering, Public Offering or Syndicated Public Offering, by delivering irrevocable orders together with a legally binding commitment to pay in cash, check, money order or wire transfer the full amount of the purchase price prior to 48 hours before the completion of the conversion for the shares of Conversion Stock subscribed for (including cases in which savings accounts from which withdrawals are authorized are insufficient to cover the amount of the required payment), or (e) are not mailed pursuant to a "no mail" order placed in effect by the account holder, the subscription rights of the person to whom such rights have been granted will lapse as though such person failed to return the completed Order Form within the time period specified thereon; provided, however, that the INSTITUTION may, but will not be required to, waive any immaterial irregularity on any Order Form or Purchase Order or require the submission of corrected Order Forms or Purchase Orders or the remittance of full payment for subscribed shares by such date as the INSTITUTION may A-15 specify. The interpretation of the INSTITUTION of terms and conditions of the Plan and of the Order Forms or Purchase Orders will be final, subject to the authority of the OTS. 18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION A. All shares of Conversion Stock purchased by Directors or Officers of the INSTITUTION or the Holding Company in the conversion shall be subject to the restriction that, except as provided in Section 18B, below, or as may be approved by the OTS, no interest in such shares may be sold or otherwise disposed of for value for a period of one (1) year following the date of purchase. B. The restriction on disposition of shares of Conversion Stock set forth in Section 18A above shall not apply to the following: (i) Any exchange of such shares in connection with a merger or acquisition involving the INSTITUTION or the Holding Company, which has been approved by the OTS; and (ii) Any disposition of such shares following the death of the person to whom such shares were initially sold under the terms of the Plan. C. With respect to all shares of Conversion Stock subject to restrictions on resale or subsequent disposition, each of the following provisions shall apply; (i) Each certificate representing shares restricted within the meaning of Section 18A, above, shall bear a legend prominently stamped on its face giving notice of the restriction; (ii) Instructions shall be issued to the stock transfer agent for the Holding Company not to recognize or effect any transfer of any certificate or record of ownership of any such shares in violation of the restriction on transfer; and (iii) Any shares of capital stock of the Holding Company issued with respect to a stock dividend, stock split, or otherwise with respect to ownership of outstanding shares of Conversion Stock subject to the restriction on transfer hereunder shall be subject to the same restriction as is applicable to such Conversion Stock. 19. VOTING RIGHTS OF STOCKHOLDERS Upon conversion, the holders of the capital stock of the INSTITUTION shall have the exclusive voting rights with respect to the INSTITUTION as specified in its charter. The holders of the common stock of the Holding Company shall have the exclusive voting rights with respect to the Holding Company. 20. ESTABLISHMENT OF LIQUIDATION ACCOUNT The INSTITUTION shall establish at the time of conversion a liquidation account in an amount equal to its net worth as of the latest practicable date prior to conversion. The liquidation account will be maintained by the INSTITUTION for the benefit of the Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain their Savings Accounts at the INSTITUTION. Each Eligible Account Holder and Supplemental Eligible Account Holder shall, with respect to his Savings A-16 Account, hold a related inchoate interest in a portion of the liquidation account balance, in relation to his Savings Account balance at the Eligibility Record Date and Supplemental Eligibility Record Date or to such balance as it may be subsequently reduced, as hereinafter provided. In the unlikely event of a complete liquidation of the INSTITUTION (and only in such event), following all liquidation payments to creditors (including those to Account Holders to the extent of their Savings Accounts) each Eligible Account Holder and Supplemental Eligible Account Holder shall be entitled to receive a liquidating distribution from the liquidation account, in the amount of the then adjusted subaccount balance for his Savings Account then held, before any liquidation distribution may be made to any holders of the INSTITUTION's capital stock. No merger, consolidation, purchase of bulk assets with assumption of Savings Accounts and other liabilities, or similar transactions with an FDIC institution, in which the INSTITUTION is not the surviving institution, shall be deemed to be a complete liquidation for this purpose. In such transactions, the liquidation account shall be assumed by the surviving institution. The initial subaccount balance for a Savings Account held by an Eligible Account Holder or Supplemental Eligible Account Holder shall be determined by multiplying the opening balance in the liquidation account by a fraction, the numerator of which is the amount of such Eligible Account Holder's and Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of which is the total amount of all Qualifying Deposits of all Eligible Account Holders and Supplemental Eligible Account Holders in the INSTITUTION. Such initial subaccount balance shall not be increased, but shall be subject to downward adjustment as described below. If, at the close of business on any annual closing date, commencing on or after the effective date of conversion, the deposit balance in the Savings Account of an Eligible Account Holder or Supplemental Eligible Account Holder is less than the lesser of (i) the balance in the Savings Account at the close of business on any other annual closing date subsequent to the Eligibility Record Date or Supplemental Eligibility Record Date, as applicable, or (ii) the amount of the Qualifying Deposit in such Savings Account, the subaccount balance of such Savings Account shall be adjusted by reducing such subaccount balance in an amount proportionate to the reduction in such deposit balance. In the event of such downward adjustment, the subaccount balance shall not be subsequently increased, notwithstanding any subsequent increase in the deposit balance of the related Savings Account. If any such Savings Account is closed, the related subaccount shall be reduced to zero. The creation and maintenance of the liquidation account shall not operate to restrict the use or application of any of the net worth accounts of the INSTITUTION. 21. TRANSFER OF SAVINGS ACCOUNTS Each person holding a Savings Account at the INSTITUTION at the time of conversion shall retain an identical Savings Account at the INSTITUTION following conversion in the same amount and subject to the same terms and conditions (except as to voting and liquidation rights). A-17 22. RESTRICTIONS ON ACQUISITION OF THE INSTITUTION AND HOLDING COMPANY A. In accordance with OTS regulations, for a period of three years from the date of consummation of conversion, no Person, other than the Holding Company, shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of an equity security of the INSTITUTION without the prior written consent of the OTS. B.1. The charter of the INSTITUTION contains a provision stipulating that no person, except the Holding Company, for a period of five years following the date of conversion shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of an equity security of the INSTITUTION, without the prior written approval of the OTS. In addition, such charter may also provide that for a period of five years following the conversion, shares beneficially owned in violation of the above-described charter provision shall not be entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matter submitted to stockholders for a vote. In addition, special meetings of the stockholders relating to changes in control or amendment of the charter may only be called by the Board of Directors, and shareholders shall not be permitted to cumulate their votes for the election of directors. B.2. The Certificate of Incorporation of the Holding Company will contain a provision stipulating that in no event shall any record owner of any outstanding shares of the Holding Company's common stock who beneficially owns in excess of 10% of such outstanding shares be entitled or permitted to any vote in respect to any shares held in excess of 10%. In addition, the Certificate of Incorporation and Bylaws of the Holding Company provide for staggered terms of the directors, noncumulative voting for directors, limitations on the calling of special meetings, a fair price provision for certain business combinations and certain notice requirements. C. For the purposes of this Section 22, B.1.: (i) The term "person" includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities of an insured institution; (ii) The term "offer" includes every offer to buy or acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or interest in a security for value; (iii) The term "acquire" includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise; and (iv) The term "security" includes non-transferable subscription rights issued pursuant to a plan of conversion as well as a "security" as defined in 15 U.S.C. (S)78c(a)(10). A-18 23. PAYMENT OF DIVIDENDS AND REPURCHASES OF STOCK The INSTITUTION shall not declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect thereof would cause its regulatory capital to be reduced below (i) the amount required for the Liquidation Account or (ii) the federal regulatory capital requirement in Section 567.2 of the Rules and Regulations of the OTS. Otherwise, the INSTITUTION may declare dividends or make capital distributions in accordance with applicable law and regulations. 24. AMENDMENT OF PLAN If deemed necessary or desirable, the Plan may be substantively amended at any time prior to solicitation of proxies from Members to vote on the Plan by a two-thirds vote of the INSTITUTION's Board of Directors, and at any time thereafter by such vote of such Board of Directors with the concurrence of the OTS. Any amendment to the Plan made after approval by the Members with the approval of the OTS shall not necessitate further approval by the Members unless otherwise required by the OTS. The Plan may be terminated by majority vote of the INSTITUTION's Board of Directors at any time prior to the Special Meeting of Members to vote on the Plan, and at any time thereafter with the concurrence of the OTS. By adoption of the Plan, the Members of the INSTITUTION authorize the Board of Directors to amend or terminate the Plan under the circumstances set forth in this Section. 25. CHARTER AND BYLAWS By voting to adopt the Plan, members of the INSTITUTION will be voting to adopt a charter and bylaws to read in the form of charter and bylaws for a federally chartered stock institution. The effective date of the INSTITUTION's amended charter and bylaws shall be the date of issuance and sale of the Conversion Stock as specified by the OTS. 26. CONSUMMATION OF CONVERSION The conversion of the INSTITUTION shall be deemed to take place and be effective upon the completion of all requisite organizational procedures for obtaining the federal stock charter for the INSTITUTION and sale of all Conversion Stock. 27. REGISTRATION AND MARKETING Within the time period required by applicable laws and regulations, the Holding Company will register the securities issued in connection with the conversion pursuant to the Securities Exchange Act of 1934 and will not deregister such securities for a period of at least three years thereafter, except that the maintenance of registration for three years requirement may be fulfilled by any successor to the Holding Company. In addition, the Holding Company will use its best efforts to encourage and assist a market-maker to establish and maintain a market for the Conversion Stock and to list those securities on a national or regional securities exchange or the NASDAQ System. A-19 28. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES The INSTITUTION will make reasonable efforts to comply with the securities laws of all States in the United States in which Persons entitled to subscribe for shares of Conversion Stock pursuant to the Plan reside. However, no such Person will be issued subscription rights or be permitted to purchase shares of Conversion Stock in the Subscription Offering if such Person resides in a foreign country or in a state of the United States with respect to which any of the following apply: (i) a small number of Persons otherwise eligible to subscribe for shares under the Plan reside in such state; (ii) the issuance of subscription rights or the offer or sale of shares of Conversion Stock to such Persons would require the INSTITUTION or the Holding Company, as the case may be, under the securities laws of such state, to register as a broker, dealer, salesman or agent or to register or otherwise qualify its securities for sale in such state; or (iii) such registration or qualification would be impracticable for reasons of cost or otherwise. 29. EXPENSES OF CONVERSION The INSTITUTION shall use its best efforts to assure that expenses incurred by it in connection with the conversion shall be reasonable. 30. CONDITIONS TO CONVERSION The conversion of the INSTITUTION pursuant to this Plan is expressly conditioned upon the following: (a) Prior receipt by the INSTITUTION of rulings of the United States Internal Revenue Service and the State of West Virginia taxing authorities, or opinions of counsel, substantially to the effect that the conversion will not result in any adverse federal or state tax consequences to Eligible Account Holders or the INSTITUTION and the Holding Company before or after the conversion; (b) The sale of all of the Conversion Stock offered in the conversion; and (c) The completion of the conversion within the time period specified in Section 3 of this Plan. 31. INTERPRETATION All interpretations of this Plan and application of its provisions to particular circumstances by a majority of the Board of Directors of the INSTITUTION shall be final, subject to the authority of the OTS. A-20 EX-3.I 3 EXHIBIT 3(I) CERTIFICATE OF INCORPORATION OF ADVANCE FINANCIAL BANCORP ARTICLE I NAME The name of the corporation is Advance Financial Bancorp (herein the "Corporation"). ARTICLE II REGISTERED OFFICE The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Corporation Trust Center, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE III POWERS The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the Delaware General Corporation Law. ARTICLE IV TERM The Corporation is to have perpetual existence. ARTICLE V INCORPORATOR The name and mailing address of the incorporator is as follows: Name Mailing Address ---- --------------- Stephen Gagliardi 1015 Commerce Street Wellsburg, West Virginia 26070 ARTICLE VI CAPITAL STOCK The aggregate number of shares of all classes of capital stock which the Corporation has authority to issue is 2,500,000 of which 2,000,000 are to be shares of common stock, $0.10 par value per share, and of which 500,000 are to be shares of serial preferred stock, $0.10 par value per share. The shares may be issued by the Corporation without the approval of stockholders except as otherwise provided in this Article VI or the rules of a national securities exchange, if applicable. The consideration for the issuance of the shares shall be paid to or received by the Corporation in full before their issuance and shall not be less than the par value per share. The consideration for the issuance of the shares shall be cash, services rendered, personal property (tangible or intangible), real property, leases of real property or any combination of the foregoing. In the absence of actual fraud in the transaction, the judgment of the board of directors as to the value of such consideration shall be conclusive. Upon payment of such consideration such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, the part of the surplus of the Corporation which is transferred to stated capital upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. A description of the different classes and series (if any) of the Corporation's capital stock, and a statement of the relative powers, designations, preferences and rights of the shares of each class and series (if any) of capital stock, and the qualifications, limitations or restrictions thereof, are as follows: A. Common Stock. Except as provided in this Certificate, the holders of ------------- the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holders. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and sinking fund or retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock, and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends, but only when as declared by the board of directors of the Corporation. In the event of any liquidation, dissolution or winding up of the Corporation, after there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class having preference over the common stock in any event, the full preferential amounts to which they are respectively entitled, the holders of the common stock and of any class or series of stock entitled to participate therewith, in whole or in part, as to distribution of assets shall be entitled, after payment or provision for payment of all debts and liabilities of the Corporation, to receive the remaining assets of the Corporation available for distribution, in cash or in kind. Each share of common stock shall have the same relative powers, preferences and rights as, and shall be identical in all respects with, all the other shares of common stock of the Corporation. B. Serial Preferred Stock. Except as provided in this Certificate, the ----------------------- board of directors of the Corporation is authorized, by resolution or resolutions from time to time adopted, to provide for the issuance of serial preferred stock in series and to fix and state the powers, designations, preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations, or restrictions thereof, including, but not limited to determination of any of the following: 1. the distinctive serial designation and the number of shares constituting such series; and 2. the dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends; and 2 3. the voting powers, full or limited, if any, of the shares of such series; and 4. whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions upon which such shares may be redeemed; and 5. the amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Corporation; and 6. whether the shares of such series shall be entitled to the benefits of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and, if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such funds; and 7. whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation and, if so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; and 8. the subscription or purchase price and form of consideration for which the shares of such series shall be issued; and 9. whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock. Each share of each series of serial preferred stock shall have the same relative powers, preferences and rights as, and shall be identical in all respects with, all the other shares of the Corporation of the same series. ARTICLE VII PREEMPTIVE RIGHTS No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series, or any unissued bonds, certificates of indebtedness, debentures, or other securities convertible into or exchangeable for stock of any class or series or carrying any right to purchase stock of any class or series; but any such unissued stock, bonds, certificates of indebtedness, debentures, or other securities convertible into or exchangeable for stock or carrying any right to purchase stock may be issued pursuant to resolution of the board of directors of the Corporation to such persons, firms, corporations, or associations, whether or not holders thereof, and upon such terms as may be deemed advisable by the board of directors in the exercise of its sole discretion. 3 ARTICLE VIII REPURCHASE OF SHARES The Corporation may from time to time, pursuant to authorization by the board of directors of the Corporation and without action by the stockholders, purchase or otherwise acquire shares of any class, bonds, debentures, notes, scrip, warrants, obligations, evidences of indebtedness, or other securities of the Corporation in such manner, upon such terms, and in such amounts as the board of directors shall determine; subject, however, to such limitations or restrictions, if any, as are contained in the express terms of any class of shares of the Corporation outstanding at the time of the purchase or acquisition in question or as are imposed by law or regulation. ARTICLE IX MEETINGS OF STOCKHOLDERS; CUMULATIVE VOTING; PROXIES A. Notwithstanding any other provision of this Certificate or the Bylaws of the Corporation, no action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. B. Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time by a majority of the board of directors of the Corporation, or by a committee of the board of directors which has been duly designated by the board of directors and whose powers and authorities, as provided in a resolution of the board of directors or in the Bylaws of the Corporation, include the power and authority to call such meetings, but such special meetings may not be called by any other person or persons. C. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after 11 months from its date, unless the proxy provides for a longer period. Without limiting the manner in which a stockholder may authorize another person or persons to act for him as proxy, the following shall constitute a valid means by which a stockholder may grant such authority. 1. A stockholder may execute a writing authorizing another person or persons to act for him as proxy. Execution may be accomplished by the stockholder or his authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, facsimile signature. 2. A stockholder may authorize another person or persons to act for him as proxy by transmitting or authorizing the transmission of a facsimile telecommunication, telegram, cablegram, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such facsimile telecommunication, telegram, cablegram or other means of electronic transmission, must either set forth or be submitted with information from which it can be determined that the facsimile telecommunication, telegram, cablegram, or other electronic transmission was authorized by the stockholder. If it is determined that such facsimile telecommunications, telegrams, cablegrams, or other electronic transmission are valid, the 4 inspectors or, if there are no inspectors, such other persons making that determination shall specify the information upon which they relied. 3. Any copy, facsimile telecommunication, or other reliable reproduction of the writing or transmission created pursuant to this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication, or other reproduction shall be a complete reproduction of the entire original writing or transmission. D. There shall be no cumulative voting by stockholders of any class or series in the election of directors of the Corporation. E. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. ARTICLE X NOTICE FOR NOMINATIONS AND PROPOSALS Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation. ARTICLE XI DIRECTORS A. Number; Vacancies. The number of directors of the Corporation shall be ------------------ such number, not less than three nor more than 15 (exclusive of directors, if any, to be elected by holders of preferred stock of the Corporation, voting separately as a class), as shall be provided from time to time in or in accordance with the Bylaws of the Corporation, provided that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director, and provided further that no action shall be taken to decrease or increase the number of directors from time to time unless at least two-thirds of the directors then in office shall concur in said action. Vacancies in the board of directors of the Corporation, however caused, and newly created directorships shall be filled by a vote of two-thirds of the directors then in office, whether or not a quorum, and any director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which the director has been chosen expires and when the director's successor is elected and qualified. B. Classified Board. The board of directors of the Corporation shall be ----------------- divided into three classes of directors which shall be designated Class I, Class II, and Class III. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. Such classes shall be as nearly equal in number as the then total number of directors constituting the entire board of directors shall permit, with the terms of office of all members of one class expiring each year. At the first annual meeting of stockholders, directors in Class I shall be elected to hold office for a term expiring at the third succeeding annual meeting thereafter. At the second annual meeting of stockholders, directors of Class II shall be elected to hold office for a term expiring at the third succeeding meeting thereafter. At the third annual meeting of stockholders, directors of Class III shall be elected to hold office for a term expiring at the third succeeding annual meeting thereafter. Thereafter, at each succeeding annual 5 meeting, a director whose term shall expire at any annual meeting shall continue to serve until such time as his successor shall have been duly elected and shall have qualified unless his position on the board of directors shall have been abolished by action taken to reduce the size of the board of directors prior to said meeting. Should the number of directors of the Corporation be reduced, the directorship(s) eliminated shall be allocated among classes as appropriate so that the number of directors in each class is as specified in the immediately preceding paragraph. The board of directors shall designate, by the name of the incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Should the number of directors of the Corporation be increased, the additional directorships shall be allocated among classes as appropriate so that the number of directors in each class is as specified in the immediately preceding paragraph. C. Initial Board of Directors. The initial board of directors shall --------------------------- consist of the following individuals divided into the following classes pursuant to Subsection B. of this Article XI.
Class I Class II Class III - ------- -------- --------- Stephen M. Gagliardi George H. Johnson John R. Sperlazza James R. Murphy William E. Watson Noreen Mechling Gary Young
D. Voting as a Class in the Election of Directors. Whenever the holders of ----------------------------------------------- any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the board of directors shall consist of said directors so elected in addition to the number of directors fixed as provided above in this Article XI. Notwithstanding the foregoing, and except as otherwise may be required by law, whenever the holders of any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders. ARTICLE XII REMOVAL OF DIRECTORS Notwithstanding any other provision of this Certificate or the Bylaws of the Corporation, no member of the board of directors of the Corporation may be removed except for cause, and then only by the affirmative vote of at least 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose. Notwithstanding the foregoing, whenever the holders of any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the preceding provisions of this Article XII shall not apply with respect to the director or directors elected by such holders of preferred stock. 6 ARTICLE XIII CERTAIN LIMITATIONS ON VOTING RIGHTS A. Notwithstanding any other provision of this Certificate, in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of stockholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of the shares held in excess of the Limit. The number of votes which may be cast by any record owner by virtue of the provisions hereof in respect of Common Stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal to the total number of votes which a single record owner of all Common Stock owned by such person would be entitled to cast, multiplied by a fraction, the numerator of which is the number of shares of such class or series which are both beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of Common Stock beneficially owned by such Person owning shares in excess of the Limit. Further, for a period of five years from the completion of the conversion of Advance Financial Savings Bank, F.S.B. from mutual to stock form, no Person shall directly or indirectly Offer to acquire or acquire the beneficial ownership of more than 10% of any class of any equity security of the Corporation. B. The following definitions shall apply to this Article XIII. 1. "Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of this Certificate. 2. "Beneficial Ownership" (including "Beneficially Owned") shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or provision thereto, pursuant to said Rule 13d- 3 as in effect on the date of filing of this Certificate; provided, however, that a Person shall, in any event, also be deemed the "beneficial owner" of any Common Stock: (a) which such Person or any of its Affiliates owns, directly or indirectly; or (b) which such Person or any of its Affiliates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the Beneficial Owner of any voting shares solely by reason of an agreement, contract, or other arrangement with this Corporation to effect any transaction which is described in any one or more of Sections 1 through 5 of Section A of Article XIV) or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (ii) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the Beneficial Owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation 7 of proxies for such meeting, with respect to shares of which neither such Person nor any such Affiliate is otherwise deemed the Beneficial Owner); or (c) which are owned directly or indirectly, by any other Person with which such first mentioned Person or any of its Affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of this Corporation; and provided further, however, that (1) no director or officer of this Corporation (or any Affiliate of any such director or officer) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to Beneficially Own any Common Stock Beneficially Owned by any other such director or officer (or any Affiliate thereof), and (2) neither any employee stock ownership or similar plan of this Corporation or any subsidiary of this Corporation, nor any trustee with respect thereto or any Affiliate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes hereof, to Beneficially Own any Common Stock held under any such plan. For purposes of computing the percentage Beneficial Ownership of Common Stock of a Person, the outstanding Common Stock shall include shares deemed owned by such Person through application of this subsection but shall not include any other Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding Common Stock shall include only Common Stock then outstanding and shall not include any Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise. 3. The term "Offer" shall mean every written offer to buy or acquire, solicitation of an offer to sell, tender offer or request or invitation for tender of, a security or interest in a security for value; provided that the term "Offer" shall not include (i) inquiries directed solely to the management of the Corporation and not intended to be communicated to stockholders which are designed to elicit an indication of management's receptivity to the basic structure of a potential acquisition with respect to the amount of cash and or securities, manner of acquisition and formula for determining price, or (ii) binding expressions of understanding or letters of intent with the management of the Corporation regarding the basic structure of a potential acquisition with respect to the amount of cash and/or securities, manner of acquisition and formula for determining price. 4. A "Person" shall mean any individual, firm, corporation, or other entity. C. The board of directors shall have the power to construe and apply the provisions of this Article XIII and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (i) the number of shares of Common Stock Beneficially Owned by any Person, (ii) whether a Person is an Affiliate of another, (iii) whether a Person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of Beneficial Ownership, (iv) the application of any other definition or operative provision of the section to the given facts, or (v) any other matter relating to the applicability or effect of this Article XIII. D. The board of directors shall have the right to demand that any Person who is reasonably believed to Beneficially Own Common Stock in excess of the Limit (or holders of record of Common Stock Beneficially Owned by any Person in excess of the Limit) supply the Corporation with complete 8 information as to (i) the record owner(s) of all shares Beneficially Owned by such Person who is reasonably believed to own shares in excess of the Limit and (ii) any other factual matter relating to the applicability or effect of this Article XIII as may reasonably be requested of such Person. E. Except as otherwise provided by law or expressly provided in this Article XIII, the presence in person or by proxy of the holders of record of shares of capital stock of the Corporation entitling the holders thereof to cast a majority of the votes (after giving effect, if required, to the provisions of this Article XIII) entitled to be cast by the holders of shares of capital stock of the Corporation entitled to vote shall constitute a quorum at all meetings of the stockholders, and every reference in this Certificate of Incorporation to a majority or other proportion of capital stock (or the holders thereof) for purposes of determining any quorum requirement or any requirement for stockholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock. F. The provisions of this Article XIII shall not be applicable to any tax- qualified defined benefit plan or defined contribution plan of the Corporation or its subsidiaries or to the acquisition of more than 10% of any class of equity security of the Corporation if such acquisition has been approved by a majority of the Continuing Directors, as defined in Article XIV of this Certificate; provided, however, that such approval shall only be effective if such Continuing Directors shall have the power to construe and apply the provisions of this Article XIII and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (a) the number of shares Beneficially Owned by any Person, (b) whether a Person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of Beneficial Ownership, (c) the application of any other material fact relating to the applicability or effect of this Article XIII. Any constructions, applications, or determinations made by the Continuing Directors pursuant to this Article XIII in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Corporation and its stockholders. G. In the event any provision (or portion thereof) of this Article XIII shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Article XIII shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of this Corporation and its stockholders that each such remaining provision (or portion thereof) of this Article XIII remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders, including stockholders owning an amount of stock over the Limit, notwithstanding any such finding. ARTICLE XIV APPROVAL OF BUSINESS COMBINATIONS A. General Requirement. The affirmative vote of the holders of not less than ------------------- eighty percent (80%) of the outstanding shares of "Voting Stock" (as hereinafter defined) shall be required for the approval or authorization of any "Business Combination," as defined and set forth below: 1. Any merger, reorganization, or consolidation of the Corporation or any of its "Affiliates" (as defined in Subsection B of Article XIII of this Certificate) with or into any Principal Shareholder (as hereinafter defined); 9 2. Any sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one transaction or in a series of related transactions) of all or a "Substantial Part" (as hereinafter defined) of the assets of the Corporation or any of its Affiliates to any Principal Shareholder; 3. Any sale, lease, exchange, or other transfer (in one transaction or in a series of related transactions) by any Principal Shareholder to the Corporation or any of the Corporation's Affiliates of any assets, cash, or securities in exchange for shares of Voting Stock (or of shares of stock of any of the Corporation's Affiliates entitled to vote in the election of directors of such Affiliate or securities convertible into or exchangeable for shares of Voting Stock or such stock of an Affiliate, or options, warrants, or rights to purchase shares of Voting Stock or such stock of an Affiliate); 4. The adoption at any time when there exists any Principal Shareholder of any plan or proposal for the liquidation or dissolution of the Corporation; and 5. Any reclassification of securities (including any reverse stock split), recapitalization, or other transaction at any time when there exists any Principal Shareholder if such reclassification, recapitalization, or other transaction would result in a decrease in the number of holders of the outstanding shares of Voting Stock. The affirmative vote required by this Article XIV shall be in addition to the vote of the holders of any class or series of stock of the Corporation otherwise required by law, by any other Article of this Certificate, as amended, by any resolution of the board of directors providing for the issuance of a class or series of stock, or by any agreement between the Corporation and any national securities exchange. B. Certain Definitions. For the purposes of this Article XIV: ------------------- 1. The term "Principal Shareholder" shall mean and include any individual, corporation, partnership, or other person or entity which, together with its "Affiliates" and "Associates" (as defined at Rule 12b-2 under the Securities Exchange Act of 1934), "beneficially owns" (as hereinafter defined) in the aggregate ten percent (10%) or more of the outstanding shares of Voting Stock, and any Affiliate or Associate of any such individual, corporation, partnership, or other person or entity. 2. The term "Substantial Part" shall mean more than twenty-five percent (25%) of the fair market value of the total assets of the Corporation, as of the end of its most recent fiscal quarter ending prior to the time the determination is being made. 3. The term "Voting Stock" shall mean the stock of the Corporation entitled to vote in the election of directors. 4. Any corporation, partnership, person, or entity will be deemed to be a "Beneficial Owner" of or to own beneficially any share or shares of stock of the Corporation: (a) which it owns directly, whether or not of record; or (b) which it has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement or arrangement or understanding or upon exercise of conversion rights, exchange rights, warrants or options, or otherwise, or which it has the right to vote pursuant to any agreement, arrangement, or understanding; or (c) which are owned directly or indirectly (including shares 10 deemed to be owned through application of clause (b) above) by any Affiliate or Associate; or (d) which are owned directly or indirectly (including shares deemed to be owned through application of clause (b) above) by any other corporation, person, or entity with which it or any of its Affiliates or Associates have any agreement or arrangement or understanding for the purpose of acquiring, holding, voting, or disposing of Voting Stock. For the purpose only of determining the percentage of the outstanding shares of Voting Stock which any corporation, partnership, person, or other entity beneficially owns, directly or indirectly, the outstanding shares of Voting Stock will be deemed to include any shares of Voting Stock which such corporation, partnership, person or other entity beneficially owns pursuant to the foregoing provisions of this subsection (whether or not such shares of Voting Stock are in fact issued or outstanding), but shall not include any other shares of Voting Stock which may be issuable either immediately or at some future date pursuant to any agreement, arrangement, or understanding or upon exercise of conversion rights, exchange rights, warrants, options, or otherwise. C. Exceptions. The provisions of this Article XIV shall not apply to a ---------- Business Combination that is approved by two-thirds of those members of the board of directors who were directors prior to the time when the Principal Shareholder became a Principal Shareholder (the "Continuing Directors"). The provisions of this Article XIV also shall not apply to a Business Combination which (a) does not change any shareholder's percentage ownership in the shares of stock entitled to vote in the election of directors of any successor of the Corporation from the percentage of the shares of Voting Stock owned by such shareholder; (b) provides for the provisions of this Article XIV, without any amendment, change, alteration, or deletion, to apply to any successor to the Corporation; and (c) does not transfer all or a Substantial Part of the Corporation's assets other than to a wholly-owned subsidiary of the Corporation. D. Additional Provisions. Nothing contained in this Article XIV, shall be --------------------- construed to relieve a Principal Shareholder from any fiduciary obligation imposed by law. In addition, nothing contained in this Article XIV shall prevent any shareholders of the Corporation from objecting to any Business Combination and from demanding any appraisal rights which may be available to such Principal Shareholder. E. Notwithstanding Article XX or any provisions of this Certificate or the Bylaws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate or the Bylaws of the Corporation), the affirmative vote of the holders of at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series is entitled to vote thereon separately, the affirmative vote of the holders of at least 80% of the outstanding shares of each such class or series) shall be required to amend or repeal this Article XIV or adopt any provisions inconsistent with this Article XIV. ARTICLE XV FAIR PRICE REQUIREMENTS A. General Requirement. No "Business Combination" (as defined in Article ------------------- XIV) shall be effected unless all of the following conditions, to the extent applicable, are fulfilled. 11 1. The ratio of (a) the aggregate amount of the cash and the fair market value of the other consideration to be received per share by the holders of the common stock of the Corporation in the Business Combination to (b) the "Market Price" (as hereinafter defined) of the common stock of the Corporation immediately prior to the announcement of the Business Combination or the solicitation of the holders of the common stock of the Corporation regarding the Business Combination, whichever is first, shall be at least as great as the ratio of (x) the highest price per share previously paid by the "Principal Shareholder" (as hereinafter defined) (whether before or after it became a Principal Shareholder) for any of the shares of common stock of the Corporation at any time Beneficially Owned, directly, or indirectly, by the Principal Shareholder to (y) the Market Price of the common stock of the Corporation on the trading date immediately prior to the earliest date on which the Principal Shareholder (whether before or after it became a Principal Shareholder) purchased any shares of common stock of the Corporation during the two year period prior to the date on which the Principal Shareholder acquired the shares of common stock of the Corporation at any time owned by it for which it paid the highest price per share (or, if the Principal Shareholder did not purchase any shares of common stock of the Corporation during the two year period, the Market Price of the common stock of the Corporation on the date of two years prior to the date on which the Principal Shareholder acquired the shares of common stock of the Corporation at any time owned by it for which it paid the highest price per share). 2. The aggregate amount of the cash and the fair market value of the other consideration to be received per share by the holders of the common stock of the Corporation in the Business Combination shall be not less than the highest price per share previously paid by the Principal Shareholder (whether before or after it became a Principal Shareholder) for any of the shares of common stock of the Corporation at any time Beneficially Owned, directly or indirectly, by the Principal Shareholder. 3. The consideration to be received by the holders of the common stock of the Corporation in the Business Combination shall be in the same form and of the same kind as the consideration paid by the Principal Shareholder in acquiring the majority of the shares of common stock of the Corporation already Beneficially Owned, directly or indirectly, by the Principal Shareholder. The conditions imposed by this Article XV shall be in addition to all other conditions (including, without limitation, the vote of the holders of any class or series of stock of the Corporation) otherwise imposed by law, by any other Article of this Certificate, by any resolution of the board of directors providing for the issuance of a class or series of stock, or by any agreement between the Corporation and any national securities exchange. B. Certain Definitions. For the purpose of this Article XV, the ------------------- definitions of "Business Combination," "Principal Shareholder," "Substantial Part," "Voting Stock," and "Beneficial Owner" set forth in Article XIV will apply to this Article XV. The "Market Price" of the common stock of the Corporation shall be the mean between the high "bid" and the low "asked" prices of the common stock in the over-the-counter market on the day on which such value is to be determined or, if no shares were traded on such date, on the next preceding day on which such shares were traded, as reported by the National Association of Securities Dealers Automated Quotation System ("Nasdaq") or other national quotation service. If the common stock of the 12 Corporation is not regularly traded in the over-the-counter market but is registered on a national securities exchange or traded in the national over-the- counter market, the market value of the common stock shall mean the closing price of the common stock on such national securities exchange or market on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by National Quotation Bureau, Incorporated or other national quotation service. If no such quotations are available, the fair market value of the date in question of a share of such stock as determined by the board of directors in good faith; and in the case of property other than cash or stock, the fair market value of such property other than cash or stock, the fair market value of such property on the date in question as determined by the board of directors in good faith. C. Exceptions. The provisions of this Article XV shall not apply to a ---------- Business Combination which was approved by two-thirds of those members of the board of directors of the Corporation who were directors prior to the time when the Principal Shareholder became a Principal Shareholder. The provisions of which this Article XV also shall not apply to a Business Combination which (a) does not change any shareholder's percentage ownership in the shares of stock entitled to vote in the election of directors of any successor of the Corporation from the percentage of the shares of Voting Stock Beneficially Owned by such shareholder; (b) provides for the provisions of this Article XV, without any amendment, change alteration, or deletion, to apply to any successor to the Corporation; and (c) does not transfer all or a Substantial Part of the Corporation's assets other than to a wholly-owned subsidiary of the Corporation; provided, however, that nothing contained in this Article XV shall permit the Corporation to issue any of its shares of Voting Stock or to transfer any of its assets to a wholly-owned subsidiary of the Corporation if such issuance of shares of Voting Stock or transfer of assets is part of a plan to transfer such shares of Voting Stock or assets to a Principal Shareholder. D. Additional Provisions. Nothing contained in this Article XV shall be --------------------- construed to relieve a Principal Shareholder from any fiduciary obligation imposed by law. In addition, nothing contained in this Article XV shall prevent any shareholders of the Corporation from objecting to any Business Combination and from demanding any appraisal rights which may be available to such shareholders. E. Notwithstanding Article XX or any other provisions of this Certificate or the Bylaws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate or the Bylaws of the Corporation), the affirmative vote of the holders of at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series is entitled to vote thereon separately, the affirmative vote of the holders of at least 80% of the outstanding shares of each such class or series) shall be required to amend or repeal or adopt any provisions inconsistent with this Article XV. ARTICLE XVI EVALUATION OF OFFERS The board of directors of the Corporation, when evaluating any offer to (A) make a tender or exchange offer for any equity security of the Corporation, (B) merge or consolidate the Corporation with another corporation or entity, or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, may, in connection with the exercise of its judgment in determining what is in the best interest of the Corporation and its stockholders, give due consideration to all relevant factors, including, without limitation, the social and economic effect of acceptance of such offer: on the Corporation's present and future customers and employees and those of its subsidiaries; on the communities in which the Corporation and its subsidiaries operate or are located; on the ability of the 13 Corporation to fulfill its corporate objectives as a financial institution holding company; and on the ability of its subsidiary financial institution(s) to fulfill the objectives of a federally insured financial institution under applicable statutes and regulations. ARTICLE XVII ELIMINATION OF DIRECTORS' LIABILITY Directors of the Corporation shall have no liability to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this Article XVIII shall not eliminate liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not made in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which a director derived an improper personal benefit. If the Delaware General Corporation Law is amended after the effective date of this Certificate to further eliminate or limit the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE XVIII INDEMNIFICATION A. Persons. The Corporation shall indemnify, to the extent provided in -------- Subsection B, D, or F of this Article XVIII: 1. any person who is or was a director, officer, or employee of the Corporation; and 2. any person who serves or served at the Corporation's request as a director, officer, employee, partner, or trustee of another corporation, partnership, joint venture, trust, or other enterprise. B. Extent -- Derivative Suits. In case of a threatened, pending or --------------------------- completed action or suit by or in the right of the Corporation against a person named in Subsection A of this Article XVIII by reason of the person holding a position named in Subsection A of this Article XVIII, the Corporation shall indemnify the person if the person satisfies the standard in Subsection C of this Article XVIII, for expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of the action or suit. C. Standard -- Derivative Suits. In case of a threatened, pending, or ----------------------------- completed action or suit by or in the right of the Corporation, a person named in Subsection A of this Article XVIII shall be indemnified only if: 1. the person is successful on the merits or otherwise; or 2. the person acted in good faith in the transaction which is the subject of the suit or action, and in a manner the person reasonably believed to be in, or not opposed to, the best 14 interest of the Corporation, including, but not limited to, the taking of any and all actions in connection with the Corporation's response to any tender offer or any offer or proposal of another party to engage in a Business Combination (as defined in Article XIV of this Certificate) not approved by the board of directors. However, the person shall not be indemnified in respect of any claim, issue, or matter as to which the person has been adjudged liable to the Corporation unless (and only to the extent that) the Court of Chancery or the court in which the suit was brought shall determine, upon application, that despite the adjudication but in view of all the circumstances, the person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. D. Extent -- Nonderivative Suits. In case of a threatened, pending, or ------------------------------ completed suit, action, or proceeding (whether civil, criminal, administrative, or investigative), other than a suit by or in the right of the Corporation, together hereafter referred to as a nonderivative suit, against a person named in Subsection A of this Article XVIII by reason of the person holding a position named in Subsection A of this Article XVIII, the Corporation shall indemnify the person if the person satisfies the standard in Subsection E of this Article XVIII, for amounts actually and reasonably incurred by the person in connection with the defense or settlement of the nonderivative suit, including, but not limited to (i) expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii) judgments, and (iv) fines. E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a -------------------------------- person named in Subsection A of this Article XVIII shall be indemnified only if: 1. the person is successful on the merits or otherwise; or 2. the person acted in good faith in the transaction which is the subject of the nonderivative suit and in a manner the person reasonably believed to be in, or not opposed to, the best interests of the Corporation, including, but not limited to, the taking of any and all actions in connection with the Corporation's response to any tender offer or any offer or proposal of another party to engage in a Business Combination (as defined in Article XIV of this Certificate) not approved by the board of directors and, with respect to any criminal action or proceeding, the person had no reasonable cause to believe the person's conduct was unlawful. The termination of a nonderivative suit by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, in itself, create a presumption that the person failed to satisfy the standard of this Subsection E.2. F. Determination That Standard Has Been Met. A determination that the ----------------------------------------- standard of Subsection C or E of this Article XVIII has been satisfied may be made by a court, or, except as stated in Subsection C.2 of this Article XVIII (second sentence), the determination may be made by: 1. the board of directors by a majority vote of directors of the Corporation who were not parties to the action, suit, or proceeding, even though less than a quorum; or 2. independent legal counsel (appointed by a majority of the disinterested directors of the Corporation, whether or not a quorum) in a written opinion; or 3. the stockholders of the Corporation. 15 G. Proration. Anyone making a determination under Subsection F of this --------- Article XVIII may determine that a person has met the standard as to some matters but not as to others, and may reasonably prorate amounts to be indemnified. H. Advance Payment. The Corporation may pay in advance any expenses ---------------- (including attorneys' fees) which may become subject to indemnification under Subsections A through G of this Article XVIII if the person receiving the payment undertakes in writing to repay the same if it is ultimately determined that the person is not entitled to indemnification by the Corporation under Subsections A through G of this Article XVIII. I. Nonexclusive. The indemnification and advancement of expenses provided ------------- by Subsections A through H of this Article XVIII or otherwise granted pursuant to Delaware law shall not be exclusive of any other rights to which a person may be entitled by law, bylaw, agreement, vote of stockholders, or disinterested directors, or otherwise. J. Continuation. The indemnification and advance payment provided by ------------- Subsections A through H of this Article XVIII shall continue as to a person who has ceased to hold a position named in Subsection A of this Article XVIII and shall inure to the person's heirs, executors, and administrators. K. Insurance. The Corporation may purchase and maintain insurance on ---------- behalf of any person who holds or who has held any position named in Subsection A of this Article XVIII, against any liability asserted against the person and incurred by the person in any such position, or arising out of the person's status as such, whether or not the Corporation would have power to indemnify the person against such liability under Subsections A through H of this Article XVIII. L. Savings Clause. If this Article XVIII or any portion hereof shall be --------------- invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director, officer, employee, and agent of the Corporation as to costs, charges, and expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement with respect to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including an action by or in the right of the Corporation to the full extent permitted by any applicable portion of this Article XVIII that shall not have been invalidated and to the full extent permitted by applicable law. If Delaware law is amended to permit further indemnification of the directors, officers, employees, and agents of the Corporation, then the Corporation shall indemnify such persons to the fullest extent permitted by Delaware law, as so amended. Any repeal or modification of this Article XVIII by the stockholders of the Corporation shall not adversely affect any right or protection of a director, officer, employee or agent existing at the time of such repeal or modification. ARTICLE XIX AMENDMENT OF BYLAWS OF THE CORPORATION In furtherance and not in limitation of the powers conferred by statute, a majority of the board of directors of the Corporation is expressly authorized to make, repeal, alter, amend, and rescind the Bylaws of the Corporation. Notwithstanding any other provision of this Certificate or the Bylaws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law), the Bylaws of the Corporation shall not be made, repealed, altered, amended, or rescinded by the stockholders of the Corporation except by the vote of the holders of not less than 80% of the outstanding 16 shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment, or rescission is included in the notice of such meeting), or, as set forth above, by the board of directors. ARTICLE XX AMENDMENT OF CERTIFICATE OF INCORPORATION The Corporation reserves the right to repeal, alter, amend, or rescind any provision contained in this Certificate in the manner now or hereafter prescribed by law, and all rights conferred on stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles IX, X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII, XIX, and this Article XX of this Certificate may not be repealed, altered, amended, or rescinded in any respect unless the same is approved by the affirmative vote of the holders of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as a single class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment, or rescission is included in the notice of such meeting). ARTICLE XXI Section 203 of the Delaware General Corporation Law, "Business Combinations with Interested Shareholders," shall not apply to the Corporation. 17 EX-3.II 4 EXHIBIT 3(II) Exhibit 3(ii) BYLAWS OF ADVANCE FINANCIAL BANCORP ARTICLE I PRINCIPAL OFFICE The home office of Advance Financial Bancorp (the "Company") shall be at 1015 Commerce Street in the City of Wellsburg, County of Brooke, in the State of West Virginia or at such other place within or without the State of West Virginia as the board of directors shall from time to time determine. The Company may also have offices at such other places within or without the State of West Virginia as the board of directors shall from time to time determine. ARTICLE II STOCKHOLDERS SECTION 1. Place of Meetings. All annual and special meetings of ----------------- stockholders shall be held at the principal office of the Company or at such other place within or without the State of West Virginia as the board of directors may determine and as designated in the notice of such meeting. SECTION 2. Annual Meeting. A meeting of the stockholders of the Company -------------- for the election of directors and for the transaction of any other business of the Company shall be held annually at such date and time as the board of directors may determine. SECTION 3. Special Meetings. Special meetings of the stockholders for ---------------- any purpose or purposes may be called at any time by the president or by a majority of the board of directors or by a committee of the board of directors, whose members will be designated from time to time by the board of directors, and which committee will have been delegated the power and authority to call such meetings. SECTION 4. Conduct of Meetings. Annual and special meetings shall be ------------------- conducted in accordance with the rules and procedures established by the board of directors. The board of directors shall designate, when present, any director or the president to preside at such meetings. SECTION 5. Notice of Meetings. Written notice stating the place, day, ------------------ and hour of the meeting and the purpose or purposes for which the meeting is called shall be mailed by the secretary or the officer performing such duties, not less than ten days nor more than sixty days before the meeting to each stockholder of record entitled to vote at such meeting. If mailed, notice shall be deemed to be delivered when deposited in the United States mail, addressed to the stockholder at the address as it appears on the stock transfer books or records of the Company as of the record date prescribed in Section 6 of this Article II, with postage thereon prepaid. If a stockholder is present at a meeting, or in writing waives notice thereof before or after the meeting, notice of the meeting to such stockholder shall be unnecessary. When any stockholders' meeting, either annual or special, is adjourned for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for thirty days or less or of the business to be transacted at such adjourned meeting, other than an announcement at the meeting at which such adjournment is taken. SECTION 6. Fixing of Record Date. For the purpose of determining --------------------- stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of stockholders. Such date in any case shall be not more than sixty days, and in case of a meeting of stockholders, not less than ten days prior to the date on which the particular action, requiring such determination of stockholders, is to be taken. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof; provided, however, that the board of directors may fix a new record date for the adjourned meeting. SECTION 7. Voting Lists. The officer or agent having charge of the stock ------------ transfer books for shares of the Company shall make, at least ten days before each meeting of stockholders, a complete record of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each. The record, for a period of ten days before such meeting, shall be kept on file at the principal office of the Company, and shall be subject to inspection by any stockholder for any purpose germane to the meeting at any time during usual business hours. Such record shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder for any purpose germane to the meeting during the whole time of the meeting. The original stock transfer books shall be the only evidence as to who are the stockholders entitled to examine such record or transfer books or to vote at any meeting of stockholders. SECTION 8. Quorum. A majority of the outstanding shares of the Company ------ entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time, subject to the notice requirements of Section 5 of this Article II. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 9. Proxies. At all meetings of stockholders, a stockholder may ------- vote by proxy executed by the stockholder in the manner provided by the Certificate of Incorporation. Proxies solicited on behalf of the management shall be voted as directed by the stockholder or, in the absence of such direction, as determined by a majority of the board of directors or by a majority of a committee of the board of directors, whose members will be designated from time to time by the board of directors, and which committee will have been delegated the power and authority to act on behalf of the board of directors. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. SECTION 10. Voting. At each election for directors every stockholder ------ entitled to vote at such election shall be entitled to one vote for each share of stock held by him. Directors shall be elected by a plurality of votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Unless otherwise provided in the Certificate of Incorporation, by statute, or by these Bylaws, in matters other than the election of directors, a majority of the shares present in person or represented by proxy at a lawful meeting and entitled to vote on the subject matter, shall be sufficient to pass on a transaction or matter. -2- SECTION 11. Voting of Shares in the Name of Two or More Persons. When --------------------------------------------------- ownership of stock stands in the name of two or more persons, in the absence of written directions to the Company to the contrary, at any meeting of the stockholders of the Company, any one or more of such stockholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which these persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. SECTION 12. Voting of Shares by Certain Holders. Shares standing in the ----------------------------------- name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, trustee, or conservator may be voted by such person, either in person or by proxy, without a transfer of such shares into such person's name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into such receiver's name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter, the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Company, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Company, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. SECTION 13. Inspectors of Election. In advance of any meeting of ---------------------- stockholders, the board of directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. The number of inspectors shall be either one or three. If the board of directors so appoints either one or three inspectors, that appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board of directors or the president may make such appointment at the meeting. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the meeting or the president. Unless otherwise prescribed by applicable law, the duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares of stock represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all stockholders. SECTION 14. Nominating Committee. The board of directors, or a committee -------------------- of the board of directors delegated such power and authority by the board of directors, shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least twenty days prior to the date of the annual meeting. Provided such committee makes such nominations, no nominations for directors except -3- those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by stockholders are made in writing and delivered to the secretary of the Company in accordance with the provisions of Article II, Section 15 of these Bylaws. SECTION 15. Notice for Nominations and Proposals. Nominations of ------------------------------------ candidates for election as directors at any annual meeting of stockholders may be made (a) by, or at the direction of, a majority of the board of directors or a committee thereof in accordance with Section 14 of these Bylaws or (b) by any stockholder entitled to vote at such annual meeting. Only persons nominated in accordance with the procedures set forth in this Section 15 shall be eligible for election as directors at an annual meeting. Ballots bearing the names of all the persons who have been nominated for election as directors at an annual meeting in accordance with the procedures set forth in this Section 15 shall be provided for use at the annual meeting. Nominations, other than those made in accordance with Section 14 of these Bylaws, shall be made pursuant to timely notice in writing to the Secretary of the Company as set forth in this Section 15. To be timely, a stockholder's notice shall be delivered to, or mailed and received at, the principal office of the Company not less than 60 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Company; provided, however, that with respect to the first scheduled annual meeting, notice by the stockholder must be so delivered or received no later than the close of business on the tenth day following the day on which notice of the date of the scheduled meeting must be delivered or received no later than the close of business on the fifth day preceding the date of the meeting. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director and as to the stockholder giving the notice (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of Company stock which are Beneficially Owned (as defined in Article XIII of the Certificate of Incorporation) by such person on the date of such stockholder notice, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as directors, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, but not limited to, information required to be disclosed by Items 4, 5, 6 and 7 of Schedule 14A to be filed with the Securities and Exchange Commission (or any successors of such items or schedule or, if no successor to such items exists, then in accordance with these items as they existed upon the date of the adoption of these Bylaws); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Company's books, of such stockholder and any other stockholders known by such stockholder to be supporting such nominees and (ii) the class and number of shares of Company stock which are Beneficially Owned by such stockholder on the date of such stockholder notice and, to the extent known, by any other stockholders known by such stockholder to be supporting such nominees on the date of such stockholder notice. At the request of the board of directors, any person nominated by, or at the direction of, the Board for election as a director at an annual meeting shall furnish to the Secretary of the Company that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. Proposals, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the Secretary of the Company as set forth in this Section 15. For stockholder proposals to be included in the Company's proxy materials, the stockholder must comply with all the timing and informational requirements of Rule 14a-8 of the Exchange Act (or any successor regulation or, if no successor regulation exists, then in accordance with the regulation as it existed upon the date of the adoption of these Bylaws). With respect to stockholder proposals to be considered at the annual meeting of stockholders but not included in the Company's proxy materials, the stockholder's notice shall be delivered to, or mailed and received at, the principal office of the Company not less than -4- 60 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Company. Such stockholder's notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Company's books, of the stockholder proposing such business and, to the extent known, any other stockholders known by such stockholder to be supporting such proposal, (c) the class and number of shares of the Company stock which are Beneficially Owned by the stockholder on the date of such stockholder notice and, to the extent known, by any other stockholders known by such stockholder to be supporting such proposal on the date of such stockholder notice, and (d) any financial interest of the stockholder in such proposal (other than interests which all stockholders would have). The board of directors may reject any nomination by a stockholder or stockholder proposal not timely made in accordance with the requirements of this Section 15. If the board of directors, or a designated committee thereof, determines that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 15 in any respect, the Secretary of the Company shall notify such stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five days from the date such deficiency notice is given to the stockholder, as the board of directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the board of directors or such committee reasonably determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of this Section 15 in any respect, then the board of directors may reject such stockholder's nomination or proposal. The Secretary of the Company shall notify a stockholder in writing whether such stockholder's nomination or proposal has been made in accordance with the time and informational requirements of this Section 15. Notwithstanding the procedures set forth in this paragraph, if neither the board of directors nor such committee makes a determination as to the validity of any nominations or proposals by a stockholder, the presiding officer of the annual meeting shall determine and declare at the annual meeting whether the nomination or proposal was made in accordance with the terms of this Section 15. If the presiding officer determines that a nomination or proposal was made in accordance with the terms of this Section 15, the presiding officer shall so declare at the annual meeting and ballots shall be provided for use at the meeting with respect to such nominee or proposal. If the presiding officer determines that a nomination or proposal was not made in accordance with the terms of this Section 15, the presiding shall so declare at the annual meeting and the defective nomination or proposal shall be disregarded. ARTICLE III BOARD OF DIRECTORS SECTION 1. General Powers. The business and affairs of the Company shall -------------- be under the direction of its board of directors. The board of directors shall annually elect a president from among its members and may also elect a chairman of the board from among its members. The board of directors shall designate, when present, any director or the president to preside at its meetings. SECTION 2. Number, Term, and Election. The board of directors shall -------------------------- initially consist of seven (7) members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected or qualified. The board of directors shall be classified in accordance with the provisions of the Company's Certificate of Incorporation. The board of directors may increase the number of members of the board of directors but in no event shall the number of directors be increased in excess of fifteen. -5- SECTION 3. Place of Meetings. All annual and special meetings of the ----------------- board of directors shall be held at the principal office of the Company or at such other place within or without the State of West Virginia as the board of directors may determine and as designated in the notice of such meeting, if necessary. SECTION 4. Regular Meetings. A regular meeting of the board of directors ---------------- shall be held without other notice than this Bylaw at such time and date as the board of directors may determine. SECTION 5. Special Meetings. Special meetings of the board of directors ---------------- may be called by or at the request of the president, the chairman of the board of directors, or by one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place within or without the State of West Virginia as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. SECTION 6. Notice. Written notice of any special meeting shall be given ------ to each director at least two days previous thereto delivered personally or by telegram or at least five days previous thereto delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid if mailed or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the secretary before, during, or after the meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. SECTION 7. Quorum. A majority of the number of directors fixed by ------ Section 2 of Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of Article III. SECTION 8. Manner of Acting. The act of the majority of the directors ---------------- present at a meeting at which a quorum is present shall be the act of the entire board of directors, unless a greater number is prescribed by these Bylaws, the Certificate of Incorporation, or the laws of Delaware. SECTION 9. Action Without a Meeting. Any action required or permitted to ------------------------ be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. SECTION 10. Resignation. Any director may resign at any time by sending a ----------- written notice of such resignation to the principal office of the Company addressed to the president. Unless otherwise specified herein such resignation shall take effect upon receipt thereof by the president. -6- SECTION 11. Vacancies. Any vacancy occurring in the board of directors --------- shall be filled in accordance with the provisions of the Company's Certificate of Incorporation. Any directorship to be filled by reason of an increase in the number of directors may be filled by the affirmative vote of two-thirds of the directors then in office. The term of such director shall be in accordance with the provisions of the Company's Certificate of Incorporation. SECTION 12. Removal of Directors. Any director or the entire board of -------------------- directors may be removed for cause and then only in accordance with the provisions of the Company's Certificate of Incorporation. SECTION 13. Compensation. Directors, as such, may receive a stated fee ------------ for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine. Nothing herein shall be construed to preclude any director from serving the Company in any other capacity and receiving remuneration therefor. SECTION 14. Presumption of Assent. A director of the Company who is --------------------- present at a meeting of the board of directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless the director's dissent or abstention shall be entered in the minutes of the meeting or unless the director shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Company immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who votes in favor of such action. ARTICLE IV COMMITTEES OF THE BOARD OF DIRECTORS The board of directors may, by resolution passed by a simple majority of a quorum, designate one or more committees, as they may determine to be necessary or appropriate for the conduct of the business of the Company, and may prescribe the duties, constitution, and procedures thereof. Each committee shall consist of one or more directors of the Company. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The board of directors shall have power, by the affirmative vote of a majority of the authorized number of directors, at any time to change the members of, to fill vacancies in, and to discharge any committee of the board. Any member of any such committee may resign at any time by giving notice to the Company provided, however, that notice to the board of directors, the chief executive officer, the chairman of such committee, or the secretary shall be deemed to constitute notice to the Company. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any member of any such committee may be removed at any time, either with or without cause, by the affirmative vote of a majority of the authorized number of directors at any meeting of the board called for that purpose. -7- ARTICLE V OFFICERS SECTION 1. Positions. The officers of the Company shall include a chief --------- executive officer, president, one or more vice presidents, a secretary, and a treasurer, each of whom shall be elected by the board of directors. The offices of the secretary and treasurer may be held by the same person and a vice president may also be either the secretary or the treasurer. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Company may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. SECTION 2. Election and Term of Office. The officers of the Company --------------------------- shall be elected annually by the board of directors at the first meeting of the board of directors held after each annual meeting of the stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor shall have been duly elected and qualified, until death or resignation, or until removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contract rights. The board of directors may authorize the Company to enter into an employment contract with any officer in accordance with state law; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. SECTION 3. Removal. Any officer may be removed by the vote of the ------- majority of the board of directors whenever, in its judgment, the best interests of the Company will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 4. Vacancies. A vacancy in any office because of death, --------- resignation, removal, disqualification, or otherwise, may be filled by the board of directors for the unexpired portion of the term. SECTION 5. Remuneration. The remuneration of the officers shall be fixed ------------ from time to time by the board of directors and no officer shall be prevented from receiving such salary by reason of the fact that the officer is also a director of the Company. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. Contracts. To the extent permitted by applicable law, and --------- except as otherwise prescribed by the Company's Certificate of Incorporation or these Bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Company to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Company. Such authority may be general or confined to specific instances. -8- SECTION 2. Loans. No loans shall be contracted on behalf of the Company ----- and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for ------------------- the payment of money, notes, or other evidences of indebtedness issued in the name of the Company shall be signed by one or more officers, employees, or agents of the Company in such manner as shall from time to time be determined by resolution of the board of directors. SECTION 4. Deposits. All funds of the Company not otherwise employed -------- shall be deposited from time to time to the credit of the Company in any of its duly authorized depositories as the board of directors may select. ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. Certificates for Shares. The shares of the Company shall be ----------------------- represented by certificates signed by the president or a vice president and by the treasurer or by the secretary of the Company, and may be sealed with the seal of the Company or a facsimile thereof. Any or all of the signatures upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Company itself or an employee of the Company. If any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before the certificate is issued, it may be issued by the Company with the same effect as if the person were such officer at the date of its issue. SECTION 2. Form of Share Certificates. All certificates representing -------------------------- shares issued by the Company shall set forth upon the face or back that the Company will furnish to any stockholder upon request and without charge a full statement of the designations, preferences, limitations, and relative rights of the shares of each class authorized to be issued, the variations in the relative rights and preferences between the shares of each such series so far as the same have been fixed and determined, and the authority of the board of directors to fix and determine the relative rights and preferences of subsequent series. Each certificate representing shares shall state upon the face thereof: that the Company is organized under the laws of the State of Delaware; the name of the person to whom issued; the number and class of shares; the date of issue; the designation of the series, if any, which such certificate represents; and the par value of each share represented by such certificate, or a statement that the shares are without par value. Other matters in regard to the form of the certificates shall be determined by the board of directors. SECTION 3. Payment for Shares. No certificate shall be issued for any ------------------ share until such share is fully paid. SECTION 4. Form of Payment for Shares. The consideration for the -------------------------- issuance of shares shall be paid in accordance with the provisions of Delaware law. -9- SECTION 5. Transfer of Shares. Transfer of shares of capital stock of ------------------ the Company shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record thereof or by such person's legal representative, who shall furnish proper evidence of such authority, or by the person's attorney thereunto authorized by power of attorney duly executed and filed with the Company. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Company shall be deemed by the Company to be the owner thereof for all purposes. SECTION 6. Stock Ledger. The stock ledger of the Company shall be the ------------ only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 7 of Article II, or the books of the Company, or to vote in person or by proxy at any meeting of stockholders. SECTION 7. Lost Certificates. The board of directors may direct a new ----------------- certificate to be issued in place of any certificate theretofore issued by the Company alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate, or the owner's legal representative, to give the Company a bond in such sum as it may direct as indemnity against any claim that may be made against the Company with respect to the certificate alleged to have been lost, stolen, or destroyed. SECTION 8. Beneficial Owners. The Company shall be entitled to recognize ----------------- the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not the Company shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VIII FISCAL YEAR; ANNUAL AUDIT The fiscal year of the Company shall end on the last day of June of each year. The Company shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the board of directors. ARTICLE IX DIVIDENDS Subject to the provisions of the Certificate of Incorporation and applicable law, the board of directors may, at any regular or special meeting, declare dividends on the Company's outstanding capital stock. Dividends may be paid in cash, in property, or in the Company's own stock. ARTICLE X CORPORATE SEAL The corporate seal of the Company shall be in such form as the board of directors shall prescribe. -10- ARTICLE XI AMENDMENTS The Bylaws may be altered, amended, or repealed or new Bylaws may be adopted in the manner set forth in the Certificate of Incorporation. -11- EX-4 5 EXHIBIT 4 Exhibit.4 ================================================================================ COMMON STOCK ADVANCE FINANCIAL BANCORP CUSIP CERTIFICATE NO. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT: IS THE OWNER OF: FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.10 PAR VALUE PER SHARE OF Advance Financial Bancorp The shares represented by this certificate are transferable only on the stock transfer books of the corporation by the holder of record hereof in person, or by his duly authorized attorney or legal representative, upon the surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions contained in the corporation's official corporate papers filed with the Secretary of the State of Delaware (copies of which are on file with the Transfer Agent), to all of the provisions the holder by acceptance hereof, assents. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. HIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED. In Witness Whereof, Advance Financial Bancorp has caused this certificate to be executed by the facsimile signatures of its duly authorized officers and has caused a facsimile of its corporate seal to be hereunto affixed. DATED: ____________________________________ _____________________________ PRESIDENT SECRETARY SEAL Incorporated 1996 ================================================================================ ADVANCE FINANCIAL BANCORP The shares represented by this certificate are subject to a limitation contained in the certificate of incorporation of the corporation (the "Certificate") to the effect that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the outstanding shares of common stock ( the "Limit") be entitled or permitted to any vote in respect of shares held in excess of the Limit and may have their voting rights reduced below the Limit. In addition, for five years from the initial sale of the corporation's common stock, no person or entity may offer to acquire or acquire over 10% of the then outstanding shares of any class of equity securities of the corporation. The Board of Directors of the corporation is authorized by resolution(s), from time to time adopted, to provide for the issuance of serial preferred stock in series and to fix and state the voting powers, designations, preferences, and relative, participating, optional, or other special rights of the shares of each such series and the qualifications, limitations, and restrictions thereof. The corporation will furnish to any shareholder upon request and without charge a full description of each class of stock and any series thereof. The shares represented by this certificate may not be cumulatively voted in the election of directors of the corporation. The Certificate also includes a provision the effect of which is to require the approval of not less than 80% of the corporation's voting stock prior to the corporation engaging in certain business combinations (as defined in the Certificate) with a person who is the beneficial owner of 10% or more of the corporation's outstanding voting stock, or with an affiliate or associate of the corporation (a "Principal Stockholder"). This restriction does not apply if certain approvals are obtained from the Board of Directors. The affirmative vote of holders of 80% of the outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors (considered for this purpose as a single class) is required to amend this and certain other provisions of the Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _______________Custodian_______________ (Cus) (Minor) under Uniform Gifts to Minors Act _______________________ (State) TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED ________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ shares of the common stock represented by the within certificate and do hereby irrevocably constitute and appoint ________________________________________________________________________________ Attorney to transfer the said shares on the books of the within named corporation with full power of substitution in the premises. Dated _____________________ X_________________________________________ X_________________________________________ NOTICE: The signatures to this assignment must correspond with the name(s) as written upon the face of the certificate in every particular, without alteration or enlargement or any change whatever. SIGNATURE(S) GUARANTEED: _______________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS, AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15. Countersigned and Registered: Transfer Agent and Registrar ______________________________ Authorized Signature EX-5.1 6 EXHIBIT 5.1 Exhibit 5.1 MALIZIA, SPIDI, SLOANE & FISCH, P.C. ATTORNEYS AT LAW One Franlin Square 1301 K Street, N.W. Washington, D.C. 20005 (202) 434-4660 Facsimile: (202) 434-4661 September 25, 1996 Board of Directors Advance Financial Bancorp Advance Financial Savings Bank, f.s.b. 1015 Commerce Street Wellsburg, West Virginia 26070 Re: Registration Statement Under the Securities Act of 1933 ------------------------------------------------------- Ladies and Gentlemen: This opinion is rendered in connection with the Registration Statement on Form S-1 to be filed with the Securities and Exchange Commission under the Securities Act of 1933 relating to the offer and sale of up to 1,084,450 shares of common stock, par value $0.10 per share (the "Common Stock"), of Advance Financial Bancorp (the "Company"), including shares to be issued to certain employee benefit plans of the Company and its subsidiary. The Common Stock is proposed to be issued pursuant to the Plan of Conversion (the "Plan") of Advance Financial Savings Bank, f.s.b. (the "Savings Bank") in connection with the Savings Bank's conversion from a mutual savings bank form of organization to a stock savings bank form of organization and reorganization into a wholly-owned subsidiary of the Company (the "Conversion"). As special counsel to the Savings Bank and the Company, we have reviewed the corporate proceedings relating to the Plan and the Conversion and such other legal matters as we have deemed appropriate for the purpose of rendering this opinion. Based on the foregoing, we are of the opinion that the shares of Common Stock of the Company covered by the aforesaid Registration Statement will, when issued in accordance with the terms of the Plan against full payment therefor, be validly issued, fully paid, and non-assessable shares of Common Stock of the Company. This opinion is given as of the date hereof and we assume no obligation to advise you of changes that may hereafter be brought to our attention. Board of Directors September 25, 1996 Page 2 We hereby consent to the use of this opinion and to the reference to our firm appearing in the Company's Prospectus under the headings "The Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank - Tax Effects" and "Legal and Tax Matters." We also consent to any references to our legal opinion referred to under the aforementioned headings in the Prospectus. Very truly yours, /S/ MALIZIA, SPIDI, SLOANE & FISCH, P.C. MALIZIA, SPIDI, SLOANE & FISCH, P.C. EX-5.2 7 EXHIBIT 5.2 KELLER & COMPANY, INC. 555 METRO PLACE NORTH SUITE 524 DUBLIN, OHIO 43017 (614) 766-1426 (614) 766-1459 FAX September 25, 1996 Board of Directors Advance Financial Savings Bank, f.s.b. 1015 Commerce Street Wellsburg, WV 02720 Re: Subscription Rights -- Conversion of Advance Financial Savings Bank, f.s.b. Wellsburg, West Virginia Gentlemen: The purpose of this letter is to provide an opinion of the value of the subscription rights of the "to be issued" common stock of Advance Financial Bancorp (the "Corporation"), Wellsburg, West Virginia, in regard to the conversion of Advance Financial Savings Bank, f.s.b. ("Advance") from a federally-chartered mutual savings bank to a federally-chartered stock savings bank. Because the Subscription Rights to purchase shares of Common Stock in the Corporation, which are to be issued to the depositors of Advance and the other members of Advance and will be acquired by such recipients without cost, will be nontransferable and of short duration and will afford the recipients the right only to purchase shares of Common Stock at the same price as will be paid by members of the general public in a Direct Community or Public Offering we are of the opinion that: (1) The Subscription Rights will have no ascertainable fair market value, and; (2) The price at which the Subscription Rights are exercisable will not be more or less than the fair market value of the shares on the date of the exercise. Further, it is our opinion that the Subscription Rights will have no economic value on the date of distribution or at the time of exercise, whether or not a community or public offering takes place. Sincerely, KELLER & COMPANY, INC. /s/Michael R. Keller - ------------------------------------ Michael R. Keller President EX-8.1 8 EXHIBIT 8.1 Exhibit 8.1 MALIZIA, SPIDI, SLOANE & FISCH, P.C. ATTORNEYS AT LAW One Franlin Square 1301 K Street, N.W. Washington, D.C. 20005 (202) 434-4660 Facsimile: (202) 434-4661 September 25, 1996 Board of Directors Advance Financial Savings Bank, f.s.b. 1015 Commerce Street Wellsburg, West Virginia 26070 Re: Federal Income Tax Opinion Relating to the Proposed Conversion of Advance Financial Savings Bank, f.s.b. from a Federally-Chartered Mutual Savings Bank to a Federally-Chartered Stock Savings Bank Pursuant to Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ---------------------------------------------------------------------- Members of the Board: In accordance with your request, set forth hereinbelow is the opinion of this firm relating to certain federal income tax consequences of the proposed conversion (the "Conversion") of Advance Financial Savings Bank, f.s.b. (the "Bank") from a federally-chartered mutual savings bank to a federally-chartered capital stock savings bank (the "Stock Bank"), and formation of a parent holding company (the "Holding Company") which will simultaneously acquire all of the outstanding stock of Stock Bank. As proposed, the Conversion will be implemented pursuant to Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"). We have examined such corporate records, certificates and other documents as we have considered necessary or appropriate for this opinion. In such examination, we have accepted, and have not independently verified, the authenticity of all original documents, the accuracy of all copies, and the genuineness of all signatures. Further, the capitalized terms which are used in this opinion and are not expressly defined herein shall have the meaning ascribed to them in the Bank's Plan of Conversion adopted on September 3, 1996 (the "Plan of Conversion"). STATEMENT OF FACTS ------------------ Based solely upon our review of such documents, and upon such information as the Bank has provided to us (which we have not attempted to verify in any respect), and in reliance upon such documents and information, we understand the relevant facts with respect to the Conversion to be as follows: Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 2 The Bank is a federally-chartered mutual savings bank. As a mutual savings bank, the Bank has no authorized capital stock. Instead, the Bank, in mutual form, has a unique equity structure. A savings depositor of the Bank is entitled to interest income on his or her account balance as declared and paid by the Bank. A savings depositor has no right to a distribution of any earnings of the Bank, but rather these amounts become retained earnings of the Bank. However, a savings depositor has a right to share pro rata, with respect to the --- ---- withdrawal value of his or her respective savings account, in any liquidation proceeds distributed in the event the Bank is ever liquidated. Voting rights in the Bank are held by its members. Each member is entitled to cast one vote for each $100 or a fraction thereof of the withdrawal value of the member's account and each borrower member is entitled to one vote. Each member shall have a maximum of 1,000 votes. All of the interests held by a savings depositor in the Bank cease when such depositor closes his or her account(s) with the Bank. The Board of Directors of the Bank has decided that in order to promote the growth and expansion of the Bank through the raising of additional capital, it would be advantageous for the Bank to: (i) convert from a federally-chartered mutual savings bank to a federally-chartered capital stock savings bank, and (ii) arrange for the Holding Company to simultaneously acquire all of the Stock Bank's stock. The Bank's Board of Directors has determined that in order to provide greater flexibility in future operations of the Bank, including diversification of business opportunities and acquisition, it is advantageous to have the Stock Bank's stock held by the Holding Company. Pursuant to the Plan of Conversion, the Bank's certificate of incorporation to operate as a mutual savings bank be amended and a new certificate of incorporation be acquired to allow it to continue its operations in the form of a federally-chartered capital stock savings bank. The Plan of Conversion provides for the conversion of the Bank from mutual-to-stock form, and an appraisal of the pro forma market value --- ----- of the stock of the Stock Bank, which will be owned solely by the Holding Company. The Plan of Conversion must be approved by the Office of Thrift Supervision ("OTS"), and by an affirmative vote of at least a majority of the total votes eligible to be cast at a special meeting of the Bank's members called to vote on the Plan of Conversion. The Holding Company is being formed under the laws of the State of Delaware for the purpose of the proposed transaction described herein, to engage in business as a savings and loan holding company and to hold all of the stock of the Stock Bank. The Holding Company will issue shares of its voting common stock ("Holding Company Stock") upon completion of the Conversion, as described below, to persons purchasing such shares through a Subscription Offering and to the general public in a Public Offering. Following appropriate regulatory approval, the Plan of Conversion provides for the issuance of shares of Holding Company Stock to eligible depositors and borrowers of the Bank and others as described below and set forth in the Plan of Conversion. The aggregate purchase price at which all shares of Holding Company Stock will be offered and sold pursuant to the Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 3 Plan of Conversion will be equal to the estimated pro forma market value of the --- ----- Bank at the time of the Conversion as held as a subsidiary of the Holding Company. The estimated pro forma market value will be determined by an --- ----- independent appraiser. Pursuant to the Plan of Conversion, all such shares of Holding Company Stock will be issued and sold at a uniform price per share. The Conversion and the sale of newly issued shares of the Stock Bank's stock to the Holding Company will be deemed effective concurrently with the closing of the sale of Holding Company Stock. As required by OTS regulations, shares of Holding Company Stock will be offered pursuant to non-transferable subscription rights on the basis of preference categories. All shares must be sold and to the extent that Holding Company Stock is available, no subscriber will be allowed to purchase less than 25 shares of Holding Company Stock, provided that the aggregate purchase price does not exceed $500. The Bank has established various preference categories under which shares of Holding Company Stock may be purchased and a public offering category for the sale of shares not purchased under the preference categories. If the third preference category is determined to be inappropriate to the Conversion, then there will only be three preference categories consisting of the first, second, and fourth preference categories set forth below, and all references herein to Supplemental Eligible Account Holder and the Supplemental Eligibility Record Date shall not be applicable to the subject transaction. The first preference category is reserved for the Bank's Eligible Account Holders. The Plan of Conversion defines "Eligible Account Holder" as any person holding a Qualifying Deposit. The Plan of Conversion defines "Qualifying Deposit" as the aggregate balance of all savings accounts of an Eligible Account Holder in the Bank at the close of business on August 31, 1995, which is at least equal to $50.00. If a savings account holder of the Bank qualifies as an Eligible Account Holder, he or she will receive, without payment, non- transferable subscription rights to purchase Holding Company Stock. The number of shares that each Eligible Account Holder may subscribe to is equal to the greater of (a) the maximum purchase limitation established for the Public Offering; (b) one tenth of one percent of the total offering of shares; or (c) fifteen times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Holding Company Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of the Qualifying Deposits of all Eligible Account Holders. If there is an oversubscription, shares will be allocated among subscribing Eligible Account Holders so as to permit each account holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation equal to 100 shares. Any shares not then allocated shall be allocated among the subscribing Eligible Account Holders on an equitable basis, related to the amounts of their respective deposits as compared to the total deposits of Eligible Account Holders on the Eligibility Record Date. Non-transferable subscription rights to purchase Holding Company Stock received by officers and directors of the Bank and their associates based on their increased deposits in the Bank in the one year period Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 4 preceding the Eligibility Record Date shall be subordinated to all other subscriptions involving the exercise of nontransferable subscription rights to purchase shares of Holding Company Stock under the first preference category. The second preference category is reserved for tax-qualified employee stock benefit plans of the Stock Bank. The Plan of Conversion defines "tax qualified employee stock benefit plans" as any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which, with its related trust meets the requirements to be "qualified" under Section 401 of the Code. Under the Plan of Conversion, the Stock Bank's tax-qualified employee stock benefit plans may subscribe for up to 10% of the shares of Holding Company Stock to be offered in the Conversion. The third preference category is reserved for the Bank's Supplemental Eligible Account Holders. The Plan of Conversion defines "Supplemental Eligible Account Holder" as any person (other than officers or directors of the Bank and their associates) holding a deposit in the Bank on the last day of the calendar quarter preceding the approval of the Plan of Conversion by the OTS ("Supplemental Eligibility Record Date"). This third preference category will only be used in the event that the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application for Approval of Conversion on Form AC filed prior to approval by the OTS. The third preference category provides that each Supplemental Eligible Account Holder will receive, without payment, nontransferable subscription rights to purchase Holding Company Stock to the extent that such shares of Holding Company Stock are available after satisfying subscriptions for shares in the first and second preference categories above. The number of shares to which a Supplemental Eligible Account Holder may subscribe to is the greater of (a) the maximum purchase limitation established for the Public Offering; (b) one-tenth of one percent of the total offering of shares; or (c) fifteen times the product (rounded down to the next whole number) obtained by multiplying the total number of the shares of Holding Company Stock to be issued by a fraction of which the numerator is the amount of the deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of the deposits of all Supplemental Eligible Account Holders on the Supplemental Eligibility Record Date. Subscription rights received pursuant to the third preference category shall be subordinated to all rights under the first and second preference categories. Non-transferable subscription rights to be received by a Supplemental Eligible Account Holder in the third preference category shall be reduced by the subscription rights received by such account holder as an Eligible Account Holder under the first and second preference categories. In the event of an oversubscription, shares will be allocated so as to enable each Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation, including shares previously allocated in the first and second preference categories, equal to 100 shares or the total amount of his subscription, whichever is less. Any shares not then allocated shall be allocated among the subscribing Supplemental Eligible Account Holders Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 5 on an equitable basis related to the amount of their respective deposits as compared to the total deposits of Supplemental Eligible Account Holders on the Supplemental Eligibility Record Date. If there is no oversubscription of the Holding Company Stock in the first, second, and third preference categories, the fourth preference category becomes operable. In the fourth preference category, members of the Bank entitled to vote at the special meeting of members to approve the Plan of Conversion who are not Eligible Account Holders or Supplemental Eligible Account Holders ("Other Members") will receive, without payment, non-transferable subscription rights entitling them to purchase Holding Company Stock. Other Members shall each receive subscription rights to purchase up to the maximum purchase limitation established for the Public Offering or one-tenth of one percent of the total offering of shares, to the extent that Holding Company Stock is available. In the event of an oversubscription by Other Members, Holding Company Stock will be allocated pro rata according to the number of shares subscribed for by each -------- Other Member. The Plan of Conversion further provides for limitations upon purchases of Holding Company Stock. Specifically, any person by himself or herself or with an associate or a group of persons acting in concert may subscribe for not more than $100,000 of Holding Company Stock offered pursuant to the Plan of Conversion, except that Tax-Qualified Employee Stock Benefit Plans may purchase up to 10% of the total shares of Holding Company Stock issued. Subject to any required regulatory approval and the requirements of applicable laws and regulations, the Bank may increase or decrease any of the purchase limitations set forth herein at any time. The Board of Directors of the Bank may, in its sole discretion, increase the maximum purchase limitation up to 5.0%. Requests to purchase additional shares of Holding Company Stock under this provision will be allocated by the Board of Directors on a pro rata basis giving priority in -------- accordance with the priority rights set forth in the Plan of Conversion. Officers and directors of the Bank and their associates may not purchase in the aggregate more than 34% of the Holding Company Stock issued pursuant to the Conversion. Directors of the Bank will not be deemed associates or a group acting in concert solely as a result of their membership on the board of directors of the Bank. All of the shares of Holding Company Stock purchased by officers and directors will be subject to certain restrictions on sale for a period of one year. The Plan of Conversion provides that no person will be issued any subscription rights or be permitted to purchase any Holding Company Stock if such person resides in a foreign country or in a state of the United States with respect to which all of the following apply: (a) a small number of persons otherwise eligible to subscribe for shares under the Plan of Conversion reside in such state; (b) the issuance of subscription rights or the offer or sale of the Holding Company Stock in such state, would require the Bank or the Holding Company under the securities law of such state to register as a broker or dealer or to register or otherwise qualify its securities for Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 6 sale in such state; and (c) such registration or qualification would be impracticable for reasons of cost or otherwise. The Plan of Conversion also provides for the establishment of a Liquidation Account by Stock Bank for the benefit of all Eligible Account Holders and Supplemental Eligible Account Holders (if applicable). The Liquidation Account will be equal in amount to the net worth of Bank as of the time of the Conversion. The establishment of the Liquidation Account will not operate to restrict the use or application of any of the net worth accounts of the Stock Bank, except that the Stock Bank will not declare or pay cash dividends on or repurchase any of its stock if the result thereof would be to reduce its net worth below the amount required to maintain the Liquidation Account. The Liquidation Account will be for the benefit of the Bank's Eligible Account Holders and Supplemental Eligible Account Holders who maintain accounts in the Bank at the time of the Conversion. All such account holders, including those not entitled to subscription rights for reasons of foreign or out-of-state residency (as described above), will have an interest in the Liquidation Account. The interest an Eligible Account Holder and Supplemental Eligible Account Holder will have a right to receive, in the event of a complete liquidation of the Stock Bank, is a distribution from the Liquidation Account in the amount of the then current adjusted subaccount balances for savings accounts then held, which will be made prior to any liquidation distribution with respect to the capital stock of the Stock Bank. The initial subaccount balance for a savings account held by an Eligible Account Holder and/or Supplemental Eligible Account Holder shall be determined by multiplying the opening balance in the Liquidation Account by a fraction of which the numerator is the amount of the qualifying deposit in the savings account, and the denominator is the total amount of qualifying deposits of all Eligible Account Holders and Supplemental Eligible Account Holders in the Stock Bank. The initial subaccount balance will never be increased, but may be decreased if the deposit balance in any qualifying savings account of any Eligible Account Holder or any savings account of any Supplemental Eligible Account Holder on any annual closing date subsequent to the Eligibility Record Date or Supplemental Eligibility Record Date, whichever is applicable, is less than the lesser of (1) the deposit balance in the savings account at the close of business on any other annual closing date subsequent to the Eligibility Record Date or the Supplemental Eligibility Record Date, or (2) the amount of the qualifying deposit in such savings account. In such event, the subaccount balance for the savings account will be adjusted by reducing each subaccount balance in an amount proportionate to the reduction in the savings account balance. Once decreased, the Plan of Conversion provides that the subaccount balance will never be subsequently increased, and if the savings account of an Eligible Account Holder or Supplemental Eligible Account Holder is closed, the related subaccount balance in the Liquidation Account will be reduced to zero. The net proceeds from the sale of the shares of Holding Company Stock will become the permanent capital of Holding Company, and the Holding Company will in turn purchase 100% Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 7 of the stock issued by Stock Bank, in exchange for up to 50% of the Holding Company's stock offering net proceeds or such other percentage as is approved by the Board of Directors with the concurrence of the OTS. Following the Conversion, voting rights in Stock Bank will rest exclusively in the Holding Company. Voting rights in the Holding Company will rest exclusively in the stockholders of the Holding Company. The Conversion will not interrupt the business of the Bank, and its business will continue as usual under the Stock Bank. Each depositor will retain a withdrawable savings account or accounts equal in amount to the withdrawable account or accounts at the time of the Conversion. Mortgage loans of the Bank will remain unchanged and retain their same characteristics in the Stock Bank after the Conversion. The Stock Bank will continue membership in the Federal Home Loan Bank System, and will remain subject to the regulatory authority of the OTS. Deposits in Stock Bank will continue to be insured by the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation up to applicable limits of insurance coverage. Immediately prior to the Conversion, the Bank will have a positive net worth in accordance with generally accepted accounting principles. The savings account holders of the Bank will pay expenses of the Conversion solely attributable to them, if any. Further, the Bank will pay its own expenses of the Conversion and will not pay any expenses solely attributable to the Bank's savings account holders or to the purchasers of Holding Company Stock. REPRESENTATIONS BY MANAGEMENT ----------------------------- In connection with the Conversion, the following statements, representations and declarations have been made to us by management of the Bank: 1. The Conversion will be implemented in accordance with the terms of the Plan of Conversion and all conditions precedent contained in the Plan of Conversion shall be performed prior to the consummation of the Conversion. 2. The fair market value of the withdrawable savings accounts plus interests in the Liquidation Account to be constructively received under the Plan of Conversion will in each instance be equal to the fair market value of each savings account of the Bank plus the interest in the residual equity of the Bank surrendered in exchange therefor. All proprietary rights in the Bank form an integral part of the withdrawable savings accounts being surrendered in the Conversion. Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 8 3. The Holding Company and the Stock Bank each have no plan or intention to redeem or otherwise acquire any of the Holding Company Stock issued in the proposed transaction. 4. To the best of the knowledge of the management of the Bank, there is not now nor will there be at the time of the Conversion, any plan or intention, on the part of the depositors in the Bank to withdraw their deposits following the Conversion. Deposits withdrawn immediately prior to or immediately subsequent to the Conversion (other than maturing deposits) are considered in making these assumptions. 5. Immediately following the consummation of the proposed transaction, the Stock Bank will possess the same assets and liabilities as the Bank held immediately prior to the proposed transaction, plus substantially all of the net proceeds from the sale of its stock to the Holding Company (except for assets used to pay expenses in the Conversion). Assets used to pay expenses of the Conversion (without reference to the expenses of the Subscription Offering and the Public Offering) and all distributions (except for regular normal interest payments made by the Bank immediately preceding the transaction) will in the aggregate constitute less than one percent (1%) of the assets of the Bank, net of liabilities associated with such assets, and will be paid by the Bank and the Holding Company from the proceeds of the Subscription Offering and Public Offering. 6. Following the Conversion, Stock Bank will continue to engage in its business in substantially the same manner as engaged in by the Bank prior to the Conversion. The Stock Bank has no plan or intention to sell or otherwise dispose of any of its assets, except in the ordinary course of business. 7. No cash or property will be given to any member of the Bank in lieu of subscription rights or an interest in the Liquidation Account of the Stock Bank. 8. None of the compensation to be received by any deposit account holder- employees of the Bank or the Holding Company will be separate consideration for, or allocable to, any of their deposits in the Bank. No interest in the Liquidation Account of the Stock Bank will be received by any deposit account holder-employees as separate consideration for, or will otherwise be allocable to, any employment agreement, and the compensation paid to each deposit account holder-employee, during the twelve month period preceding or subsequent to the Conversion, will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. No shares of Holding Company Stock will be issued to or purchased by any deposit account holder-employee of the Bank or the Holding Company at a discount or as compensation in the Conversion. Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 9 9. The aggregate fair market value of the Qualifying Deposits held by Eligible Account Holders or Supplemental Eligible Account Holders (if applicable) as of the close of business on the Eligibility Record Date or Supplemental Eligibility Record Date (if applicable) entitled to interests in the Liquidation Account to be established by Stock Bank equalled or exceeded 99% of the aggregate fair market value of all savings accounts (including those accounts of less than $50.00) in the Bank as of the close of business on such date. 10. There is no plan or intention for the Stock Bank to be liquidated or merged with another corporation following the consummation of the Conversion. 11. For taxable years prior to January 1, 1996, the Bank utilized the reserve method of accounting for bad debts in accordance with Section 593 of the Code. Pursuant to the Small Business Job Protection Act of 1996, which was signed by the President on August 20, 1996, the Stock Bank shall utilize a reserve for bad debts in accordance with Section 585 of the Code (following the Conversion). 12. The Bank and the Stock Bank are corporations within the meaning of Section 7701(a)(3) of the Code. 13. The Holding Company has no plan or intention to sell or otherwise dispose of the stock of the Stock Bank received by it in the proposed transaction. 14. Both the Stock Bank and the Holding Company have no plan or intention, either currently or at the time of the Conversion, to issue additional shares of common stock following the proposed transaction, other than shares that may be issued to employees or directors pursuant to certain stock option and stock incentive plans or that may be issued to employee benefit plans. 15. If all of the net proceeds from the sale of Holding Company Stock had been contributed by the Holding Company to the Stock Bank in exchange for common stock of the Stock Bank in the Conversion, as opposed to the Holding Company retaining a portion of such net proceeds ("retained proceeds"), the Stock Bank immediately thereafter made a distribution of the retained proceeds to the Holding Company, the Stock Bank would have sufficient current and accumulated earnings and profits for tax purposes such that the distribution would not result in the recapture of any portion of the bad debt reserves of the Stock Bank under Section 593(e) of the Code. 16. At the time of the proposed transaction, the fair market value of the assets of the Bank on a going concern basis (including intangibles) will equal or exceed the amount of its liabilities plus the amount of liability to which such assets are subject. The Bank will have a positive regulatory net worth at the time of the Conversion. Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 10 17. The Bank is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. The proposed transaction does not involve a receivership, foreclosure, or similar proceeding before a federal or state agency involving a financial institution to which Section 585 or 593 of the Code applies. 18. The Bank's savings depositors will pay expenses of the Conversion solely attributable to them, if any. The Holding Company, the Stock Bank, and the Bank will pay their own expenses of the Conversion and will not pay any expenses solely attributable to the savings depositors or to the Holding Company stockholders. 19. The liabilities of the Bank assumed by the Stock Bank plus the liabilities, if any, to which the transferred assets are subject were incurred by the Bank in the ordinary course of its business and are associated with the assets transferred. 20. There will be no purchase price advantage for the Bank's deposit account holders who purchase Holding Company Stock in the Conversion. 21. Neither the Bank nor the Stock Bank is an investment company as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code. 22. No creditors of the Bank have taken any steps to enforce their claims against the Bank by instituting bankruptcy or other legal proceedings, in either a court or appropriate regulatory agency, that would eliminate the proprietary interests of the members of the Bank prior to the Conversion. 23. The proposed transaction does not involve the payment to the Stock Bank or the Bank of financial assistance from federal agencies within the meaning of Notice 89-102, 1989-40 C.B. 1. 24. The Eligible Account Holders' and Supplemental Eligible Account Holders' proprietary interest in the Bank arise solely by virtue of the fact that they are account holders in the Bank. 25. At the time of the Conversion, the Bank will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire an equity interest in the Holding Company or the Stock Bank. 26. The Stock Bank has no plan or intention to sell or otherwise dispose of any of the assets of the Bank acquired in the transaction (except for dispositions, including deposit withdrawals, made in the ordinary course of business). Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 11 27. On a per share basis, the purchase price of the Holding Company Stock in the Conversion will be equal to the fair market value of such stock at the time of the completion of the proposed transaction. 28. The Bank has received or will receive an opinion from Keller & Company, Inc. ("Appraiser"s Opinion"), which concludes that subscription rights to be received by Eligible Account Holders, Supplemental Eligible Account Holders, and other eligible subscribers do not have any ascertainable fair market value, because they are acquired by the recipients without cost, are non- transferable, exist for such a short duration, and merely afford the recipients a right only to purchase Holding Company Stock at a price equal to its estimated fair market value, which will be the same price used in the Public Offering for unsubscribed shares of Holding Company Stock. 29. The Bank will not have any net operating losses, capital loss carryovers, or built-in losses at the time of the Conversion. OPINION OF COUNSEL ------------------ Based solely upon the foregoing information and our analysis and examination of current applicable federal income tax laws, rulings, regulations, judicial precedents, and the Appraiser's Opinion, and provided the Conversion is undertaken in accordance with the above assumptions, we render the following opinion of counsel: 1. The change in the form of operation of the Bank from a federally chartered mutual savings bank to a federally chartered capital stock savings bank, as described above, will constitute a reorganization within the meaning of Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized to either the Bank or to the Stock Bank as a result of such Conversion. (See Rev. Rul. 80-105, 1980-1 C.B. 78). The Bank and the Stock Bank will each be a party to a reorganization within the meaning of Section 368(b) of the Code. (Rev. Rul. 72-206, 1972-1 C.B. 104). 2. No gain or loss will be recognized by the Stock Bank on the receipt of money in exchange for shares of Stock Bank stock. (Section 1032(a) of the Code). 3. The Holding Company will recognize no gain or loss upon its receipt of money in exchange for shares of Holding Company Stock. (Section 1032(a) of the Code). 4. The assets of the Bank will have the same basis in the hands of the Stock Bank as in the hands of the Bank immediately prior to the Conversion. (Section 362(b) of the Code). Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 12 5. The holding period of the assets of the Bank to be received by the Stock Bank will include the period during which the assets were held by the Bank prior to the Conversion. (Section 1223(2) of the Code). 6. Depositors will realize gain, if any, upon the issuance to them of (i) withdrawable deposit accounts of the Stock Bank, (ii) subscription rights in connection with the Conversion, and/or (iii) interests in the Liquidation Account of the Stock Bank. Any gain resulting therefrom will be recognized, but only in an amount not in excess of the fair market value of the Liquidation Accounts and/or subscription rights received. The Liquidation Accounts will have nominal, if any, fair market value. Based solely on the accuracy of the conclusion reached in the Appraiser's Opinion, and our reliance on such opinion, that the subscription rights have no value at the time of distribution or exercise, no gain or loss will be required to be recognized by depositors upon receipt or distribution of subscription rights. (Section 1001 of the Code). See Paulsen v. Commissioner, 469 U.S. 131, 139 (1985). Likewise, based solely on the accuracy of the aforesaid conclusion reached in the Appraiser's Opinion, and our reliance thereon, we give the following opinions: (a) no taxable income will be recognized by the borrowers, directors, officers, and employees of the Bank upon distribution to them of subscription rights or upon the exercise or lapse of the subscription rights to acquire Holding Company Stock at fair market value; (b) no taxable income will be realized by the depositors of the Bank as a result of the exercise or lapse of the subscription rights to purchase Holding Company Stock at fair market value (Rev. Rul. 56-572, 1956-2 C.B. 182); and (c) no taxable income will be realized by the Bank, the Stock Bank, or the Holding Company on the issuance or distribution of subscription rights to depositors of the Bank to purchase shares of Holding Company Stock at fair market value (Section 311 of the Code). Notwithstanding the Appraiser's Opinion, if the subscription rights are subsequently found to have a fair market value greater than zero, income may be recognized by various recipients of the subscription rights (in certain cases, whether or not the rights are exercised) and the Holding Company and/or the Stock Bank may be taxable on the distribution of the subscription rights. (Section 311 of the Code). In this regard, the subscription rights may be taxed partially or entirely at ordinary income tax rates. 7. The basis of the savings accounts in the Stock Bank received by the account holders of the Bank will be the same as the basis of their savings accounts in the Bank surrendered in exchange therefor (Section 358(a)(1)). The basis of the interests in the Liquidation Account of the Stock Bank received by the Eligible Account Holders and Supplemental Eligible Account Holders will be zero, that being the cost of such property. (Paulsen v. Commissioner, 469 U.S. ----------------------- 131, 139 (1985)). The basis of the non-transferable subscription rights will be zero, provided that such subscription rights are not deemed to have a fair market value and that the subscription price of such stock issuable upon exercise of such Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 13 rights is equal to the fair market value of such stock. The basis of the Holding Company Stock to its stockholders will be purchase price thereof, increased by the basis, if any, of the subscription rights exercised (Section 1012 of the Code). The holding period of Holding Company Stock will commence upon the effective date of exercise of the subscription rights (Section 1223(6) of the Code). The holding period for the Holding Company Stock purchased pursuant to the direct community offering, public offering or under other purchase arrangements will commence on the date following the date on which such stock is purchased. (Rev. Rul. 70-598, 1970-2 C.B. 168). 8. The part of the taxable year of the Bank before the Conversion and the part of the taxable year of the Stock Bank after the Conversion will constitute a single taxable year of the Stock Bank. (See Rev. Rul. 57-276, 1957-1 C.B. 126). Consequently, the Bank will not be required to file a federal income tax return for any portion of such taxable year (Section 1.381(b)-1(a)(2) of the Treasury Regulations). 9. As provided by Section 381(c)(2) of the Code and Section 1.381(c)(2)-1 of the Treasury Regulations, the Stock Bank will succeed to and take into account the earnings and profits or deficit in earnings and profits of the Bank as of the date or dates of transfer. 10. Pursuant to the provisions of Section 381(c)(4) of the Code and Section 1.381(c)(4)-1(a)(1)(ii) of the Treasury Regulations, the Stock Bank will succeed to and take into account, immediately after the reorganization, those accounts of the Bank which represent bad debt reserves in respect of which the Bank has taken a bad debt deduction for taxable years ending on or before the date of the reorganization. The bad debt reserves will not be required to be restored to the gross income of either the Bank or the Stock Bank for the taxable year of the reorganization, and such bad debt reserves will have the same character in the hands of the Stock Bank as they would have had in the hands of the Bank if no distribution or transfer had occurred. No opinion is being expressed as to whether the bad debt reserves will be required to be restored to the gross income of either the Bank or the Stock Bank for the taxable year of the reorganization. 11. Regardless of book entries made for the creation of the Liquidation Account, the Conversion, as described above, will not diminish the accumulated earnings and profits of the Stock Bank available for the subsequent distribution of dividends within the meaning of Section 316 of the Code. (Section 1.312- 11(b) and (c) of the Treasury Regulations). 12. The creation of the Liquidation Account on the records of the Stock Bank will have no effect on the taxable income of the Bank or the Stock Bank, deductions or additions to reserves for bad debts under Section 593 of the Code, or distributions to shareholders under Section 593(e). (Rev. Rul. 68-475, 1968- 2 C.B. 259). Board of Directors Advance Financial Savings Bank, f.s.b. September 25, 1996 Page 14 13. For purposes of Section 381 of the Code, the Stock Bank will be treated the same as the Bank would have been had there been no reorganization. Accordingly, the taxable year of the Bank will not end on the effective date of the proposed transaction merely because of the transfer of assets of the Bank to the Stock Bank and the tax attributes of the Bank enumerated in Section 381(c) will be taken into account by the Stock Bank as if there had been no reorganization (Section 1.381(b)-1(a)(2)) of the Treasury Regulations). No opinion is expressed as to the tax treatment of the Conversion under the provisions of any of the other sections of the Code and Treasury Regulations which may also be applicable thereto, or under federal law, or to the tax treatment of any conditions existing at the time of, or effects resulting from, the transactions which are not specifically covered by the items set forth above. Notwithstanding any reference to Section 381 above, no opinion is expressed or intended to be expressed herein as to the effect, if any, of this transaction on the continued existence of, the carryover or carryback of, or the limitation on, any net operating losses of the Bank or its successor, the Stock Bank, under the Code. We hereby consent to the filing of this opinion as an exhibit to the Application for Conversion on Form AC of the Bank filed with the OTS, the Application H-(e)(1)-S of the Holding Company filed with the OTS, and the Registration Statement on Form S-1 of the Holding Company filed under the Securities Act of 1933, as amended, and to the reference of our firm in the prospectus related to this opinion. Very truly yours, /s/ MALIZIA, SPIDI, SLOANE & FISCH, P.C. MALIZIA, SPIDI, SLOANE & FISCH, P.C. EX-23.2 9 EXHIBIT 23.2 EXHIBIT 23.2 [LETTERHEAD OF S.R. SNODGRASS, A.C.] INDEPENDENT AUDITOR'S CONSENT We consent to the reference to our firm under the caption "Experts" and to the use of our report dated August 19, 1996, except for the subsequent events as described in Note 17, which is as of September 3, 1996 on the consolidated financial statements of Advance Financial Savings Bank, f.s.b., to the Registration Statement (Form S-1), Application for Conversion (Form AC), and related Prospectus for Advance Financial Bancorp. /s/ S.R. Snodgrass, A.C. Steubenville, Ohio September 24, 1996 EX-23.3 10 EXHIBIT 23.3 KELLER & COMPANY, INC. 555 METRO PLACE NORTH SUITE 524 DUBLIN, OHIO 43017 (614) 766-1426 (614) 766-1459 FAX September 25, 1996 Re: Valuation Appraisal of Advance Financial Bancorp Advance Financial Savings Bank, f.s.b. Wellsburg, West Virginia We hereby consent to the use of our firm's name, Keller & Company, Inc., and the reference to our firm as experts in the Application for Conversion on Form AC to be filed by Advance Financial Savings Bank, f.s.b. with the Office of Thrift Supervision and the Registration Statement on Form S-1 to be filed by Advance Financial Bancorp with the Securities and Exchange Commission and any amendments thereto, and to the statements with respect to us and the references to our Valuation Appraisal Report in the Prospectus, in the subscription rights letter, in the said Form AC and in the said Form S-1 and any amendments thereto. Very truly yours, KELLER & COMPANY, INC. by: /s/Michael R. Keller ---------------------------- Michael R. Keller President EX-27 11 EXHIBIT 27
9 1,000 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 949 3,068 0 0 68 5,336 5,323 81,062 325 91,852 80,771 0 505 4,376 0 0 0 6,200 91,852 6,153 319 138 6,610 3,628 3,801 3,809 263 0 2,147 693 417 0 0 417 0 0 790 139 303 0 0 198 145 9 325 325 0 0
EX-99.3 12 EXHIBIT 99.3 EXHIBIT 99.3 [LETTERHEAD OF CHARLES WEBB & COMPANY] TO MEMBERS AND FRIENDS OF ADVANCE FINANCIAL SAVINGS BANK - -------------------------------------------------------------------------------- Charles Webb & Company, a member of the National Association of Securities Dealers, Inc. ("NASD"), is assisting Advance Financial Savings Bank, FSB (the "Bank") in its conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank and the concurrent offering of shares of common stock by Advance Financial Bancorp (the "Company"), the newly formed corporation that will serve as holding company for the Bank following the conversion. At the request of the Company, we are enclosing materials explaining this process and your options, including an opportunity to invest in shares of the Company's common stock being offered to customers and the community through XXXX XX, 1996. Please read the enclosed offering materials carefully. The Company has asked us to forward these documents to you in view of certain requirements of the securities laws in your state. If you have any questions, please visit our Stock Information Center at 1015 Commerce Street, Wellsburg, West Virginia or feel free to call the Stock Information Center at (304) xxx-xxxx. Very truly yours, Charles Webb & Company XXXXX XX, 1996 Dear Friend: We are pleased to announce that Advance Financial Savings Bank, FSB (the "Bank") is converting from a federally chartered mutual savings bank to a federally chartered stock savings bank (the "Conversion"). In conjunction with the Conversion, Advance Financial Bancorp, the newly-formed corporation that will serve as holding company for the Bank, is offering shares of common stock in a subscription offering and community offering. The sale of stock in connection with the Conversion will enable the Bank to raise additional capital to support and enhance its current operations. Because we believe you may be interested in learning more about the merits of Advance Financial Bancorp's stock as an investment, we are sending you the following materials which describe the stock offering. PROSPECTUS: This document provides detailed information about operations at the Bank and the proposed stock offering. QUESTIONS AND ANSWERS: Key questions and answers about the stock offering are found in this pamphlet. STOCK ORDER FORM: This form is used to purchase stock by returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is X:00 p.m., XXXX XX, 1996. CERTIFICATION FORM: This form must be completed and returned with the stock order form in the enclosed business reply envelope if you wish to purchase stock. As a friend of the Bank, you will have the opportunity to buy stock directly from Advance Financial Bancorp in the Conversion without commission or fee. If you have additional questions regarding the Conversion and stock offering, please call us at (304) XXX-XXXX, Monday through Friday from X:00 a.m. to X:00 p.m. or stop by the Stock Information Center at 1015 Commerce Street, Wellsburg, West Virginia. We are pleased to offer you this opportunity to become a charter shareholder of Advance Financial Bancorp. Sincerely, Stephen M. Gagliardi Chairman, President and Chief Executive Officer THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. XXXXX XX, 1996 Dear Member: We are pleased to announce that Advance Financial Savings Bank, FSB (the "Bank") is converting from a federally chartered mutual savings bank to a federally chartered stock savings bank (the "Conversion"). In conjunction with the Conversion, Advance Financial Bancorp, the newly-formed corporation that will serve as holding company for the Bank, is offering shares of common stock in a subscription offering and community offering to certain of our depositors, to our Employee Stock Ownership Plan and some members of the general public pursuant to a Plan of Conversion. To accomplish this Conversion, we need your participation in an important vote. Enclosed is a proxy statement describing the Plan of Conversion and your voting and subscription rights. Advance Financial Savings Bank's Plan of Conversion has been approved by the Federal Deposit Insurance Corporation and now must be approved by you. YOUR VOTE IS VERY IMPORTANT. Enclosed, as part of the proxy material, is your proxy card located behind the window of your mailing envelope. This proxy should be signed and returned to us prior to the Special Meeting scheduled for XXXXX XX, 1996. Please take a moment to sign the enclosed proxy card and return it to us in the postage-paid envelope provided. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING AGAINST THE CONVERSION. The Board of Directors of the Bank feels that the Conversion will offer a number of advantages, such as an opportunity for depositors and customers of the Bank to become shareholders. Please remember: . Your accounts at the Bank will continue to be insured up to the maximum legal limit by the Federal Deposit Insurance Corporation ("FDIC"). . There will be no change in the balance, interest rate, or maturity of any deposit accounts because of the Conversion. . Members have a right, but no obligation, to buy stock before it is offered to the public. . Like all stock, stock issued in this offering will not be insured by the FDIC. Enclosed are materials describing the stock offering. We urge you to read these materials carefully. If you are interested in purchasing the common stock of Advance Financial Bancorp, you must submit your Stock Order Form, Certification Form, and payment prior to X:00 p.m. XXXX XX, 1996. If you have additional questions regarding the stock offering, please call us at (304) XXX-XXXX, Monday through Friday from X:00 a.m. to X:00 p.m., or stop by the Stock Information Center located at 1015 Commerce Street in Wellsburg, West Virginia. Sincerely, Stephen M. Gagliardi Chairman, President and Chief Executive Officer THE SHARES OF COMMON STOCK BEING OFFERED IN THIS OFFERING ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS. XXXXX XX, 1996 Dear Member: We are pleased to announce that Advance Financial Savings Bank, FSB (the "Bank") is converting from a federally mutual savings bank to a federally chartered stock savings bank (the "Conversion"). In conjunction with the Conversion, Advance Financial Bancorp, the newly-formed corporation that will serve as holding company for the Bank, is offering shares of common stock in a subscription offering and community offering. Unfortunately, Advance Financial Bancorp is unable to either offer or sell its common stock to you because the small number of eligible subscribers in your jurisdiction makes registration or qualification of the common stock under the securities laws of your jurisdiction impractical, for reasons of cost or otherwise. Accordingly, this letter should not be considered an offer to sell or a solicitation of an offer to buy the common stock of Advance Financial Bancorp. However, as a member of the Bank, you have the right to vote on the Plan of Conversion at the Special Meeting of Members to be held on XXXX XX, 1996. Therefore, enclosed is a proxy card, a Proxy Statement (which includes the Notice of the Special Meeting), Prospectus (which contains information incorporated into the Proxy Statement) and a return envelope for your proxy card. I invite you to attend the Special Meeting on XXXXX XX, 1996. However, whether or not you are able to attend, please complete the enclosed proxy card and return it in the enclosed envelope. Sincerely, Stephen M. Gagliardi Chairman, President and Chief Executive Officer XXXX XX, 1996 Dear Prospective Investor: We are pleased to announce that Advance Financial Savings Bank, FSB (the "Bank") is converting from a federally chartered mutual savings bank to a federally chartered stock savings bank (the "Conversion"). In conjunction with the Conversion, Advance Financial Bancorp, the newly-formed corporation that will serve as holding company for the Bank, is offering shares of common stock in a subscription offering and community offering. The sale of stock in connection with the Conversion will enable the Bank to raise additional capital to support and enhance its current operations. We have enclosed the following materials which will help you learn more about the merits of Advance Financial Bancorp's common stock as an investment. Please read and review the materials carefully. PROSPECTUS: This document provides detailed information about operations at the Bank and the proposed stock offering. QUESTIONS AND ANSWERS: Key questions and answers about the stock offering are found in this pamphlet. STOCK ORDER FORM: This form is used to purchase stock by returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is x:00 p.m., XXXX XX, 1996. CERTIFICATION FORM: This form must be completed and returned with the stock order form in the enclosed business reply envelope if you wish to purchase stock. We invite our loyal customers and local community members to become charter shareholders of Advance Financial Bancorp. Through this offering you have the opportunity to buy stock directly from Advance Financial Bancorp, without commission or fee. The board of directors and senior management of the Bank fully support the stock offering. If you have additional questions regarding the Conversion and stock offering, please call us at (304) XXX-XXXX, Monday through Friday from x:00 a.m. to x:00 p.m. or stop by the Stock Information Center located at 1015 Commerce Street in Wellsburg, West Virginia. Sincerely, Stephen M. Gagliardi Chairman, President and Chief Executive Officer THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. - -------------------------------------------------------------------------------- STOCK OFFERING QUESTIONS AND ANSWERS - -------------------------------------------------------------------------------- Advance Financial Bancorp THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. FACTS ABOUT CONVERSION The Board of Directors of Advance Financial Savings Bank, FSB (the "Bank") unanimously adopted a Plan of Conversion (the "Plan") to convert from a federally chartered mutual savings bank to a federally chartered stock savings bank. This brochure answers some of the most frequently asked questions about the Plan and about your opportunity to invest in Advance Financial Bancorp, (the "Company"), the newly formed corporation that will serve as holding company for the Bank following the conversion. Investment in the stock of Advance Financial Bancorp involves certain risks. For a discussion of these risks and other factors, investors are urged to read the accompanying Prospectus, especially the discussion under the heading "Risk Factors". WHY IS THE BANK CONVERTING TO STOCK FORM? - -------------------------------------------------------------------------------- The stock form of ownership is used by most business corporations and an increasing number of savings institutions. Through the sale of stock, the Bank will raise additional capital enabling it to: . support and expand its current financial and other services. . allow customers and friends to purchase stock and share in the Company's and the Bank's future. WILL THE PLAN AFFECT ANY OF MY DEPOSIT ACCOUNTS OR LOANS? - -------------------------------------------------------------------------------- No. The Plan will have no effect on the balance or terms of any savings account or loan, and your deposits will continue to be federally insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum legal limit. YOUR SAVINGS ACCOUNT IS NOT BEING CONVERTED TO STOCK. WHO IS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS? - -------------------------------------------------------------------------------- Certain past and present depositors of the Bank, the Company's Employee Stock Ownership Plan and members of the general public. HOW MANY SHARES OF STOCK ARE BEING OFFERED AND AT WHAT PRICE? - -------------------------------------------------------------------------------- Advance Financial Bancorp is offering up to X,XXX,X00 shares of common stock, subject to adjustment as described in the Prospectus, at a price of $10.00 per share through the Prospectus. HOW MUCH STOCK MAY I BUY? - -------------------------------------------------------------------------------- The minimum order is 25 shares. No person, together with associates of and persons acting in concert with such person, may purchase more than $XXX,000 of the common stock sold. DO MEMBERS HAVE TO BUY STOCK? - -------------------------------------------------------------------------------- No. However, the Plan will allow the Bank's depositors an opportunity to buy stock and become charter shareholders of the holding company for the local financial institution with which they do business. HOW DO I ORDER STOCK? - -------------------------------------------------------------------------------- You must complete the enclosed Stock Order Form and the Certification Form. Instructions for completing your Stock Order Form and Certification Form are contained in this packet. Your order must be received by X:00 p.m. on XXXXX XX, 1996. HOW MAY I PAY FOR MY SHARES OF STOCK? - -------------------------------------------------------------------------------- First, you may pay for stock by check, cash or money order. Interest will be paid by the Bank on these funds at the passbook rate, which is currently X.0% per annum, from the day the funds are received until the completion or termination of the Plan. Second, you may authorize us to withdrawal funds from your Bank savings account or certificate of deposit for the amount of funds you specify for payment. You will not have access to these funds from the day we receive your order until completion or termination of the Plan. CAN I PURCHASE SHARES USING FUNDS IN MY BANK IRA ACCOUNT? - -------------------------------------------------------------------------------- Federal regulations do not permit the purchase of conversion stock from your existing Bank IRA account. To accommodate our depositors however, we have made arrangements with an outside trustee to allow such purchases. Please call our Stock Information Center for additional information. WILL THE STOCK BE INSURED? - -------------------------------------------------------------------------------- No. Like any other common stock, the Company's stock will not be insured. WILL DIVIDENDS BE PAID ON THE STOCK? - -------------------------------------------------------------------------------- The Board of Directors of the Company will consider whether to pay a cash dividend in the future, subject to regulatory limits and requirements. No decision has been made as to the amount or timing of such dividends, if any. HOW WILL THE STOCK BE TRADED? - -------------------------------------------------------------------------------- The Company's stock will trade on the Nasdaq Stock Market Small Caps under the symbol "XXXX". However, no assurance can be given that an active and liquid market will develop. ARE OFFICERS AND DIRECTORS OF THE BANK PLANNING TO PURCHASE STOCK? - -------------------------------------------------------------------------------- Yes! the Bank's officers and directors plan to purchase, in the aggregate, $XXX,000 worth of stock or approximately X.X% of the stock offered at the midpoint of the offering range. MUST I PAY A COMMISSION? - -------------------------------------------------------------------------------- No. You will not be charged a commission or fee on the purchase of shares in the Plan. SHOULD I VOTE? - -------------------------------------------------------------------------------- Yes. Your "YES" vote is very important! PLEASE VOTE, SIGN AND RETURN ALL PROXY CARDS! WHY DID I GET SEVERAL PROXY CARDS? - -------------------------------------------------------------------------------- If you have more than one account, you could receive more than one proxy card, depending on the ownership structure of your accounts. HOW MANY VOTES DO I HAVE? - -------------------------------------------------------------------------------- Your proxy card(s) show(s) the number of votes you have. Every depositor entitled to vote may cast one vote for each $X00, or fraction thereof, on deposit as of the voting record date. MAY I VOTE IN PERSON AT THE SPECIAL MEETING? - -------------------------------------------------------------------------------- Yes, but we would still like you to sign and mail your proxy today. If you decide to revoke your proxy you may do so by giving notice at the special meeting. FOR ADDITIONAL INFORMATION YOU MAY CALL OUR STOCK INFORMATION CENTER BETWEEN X:00 A.M. AND X:00 P.M. MONDAY THROUGH FRIDAY. STOCK INFORMATION CENTER (304) XXX-XXXX Advance Financial Bancorp 1015 Commerce Street Wellsburg, WV 26070 Phone (304) 737-3531 Fax (304) 737-3154 -----END PRIVACY-ENHANCED MESSAGE-----