As filed with the Securities and Exchange Commission
on August 11, 1999
Registration No. 333-80183
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO THE FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
JADE FINANCIAL CORP.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 6035 To Be Requested
------------ ---- ---------------
(State or other juris- (Primary Standard (I.R.S. Employer
diction of incorporation Industrial Classi- Identification
or organization) fication Code Number) Number)
213 West Street Road,
Feasterville, Pennsylvania 19053 (215) 322-9000
---------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
John J. O'Connell, Chairman and Chief Executive Officer
JADE FINANCIAL CORP.
213 West Street Road
Feasterville, Pennsylvania 19053
(215) 322-9000
---------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Please send copies of allcommunications to:
Jeffrey P. Waldron, Esquire Martin L. Meyrowitz,
Stevens & Lee, P.C. Esquire
One Glenhardie Corporate Center Silver, Freedman & Taff, P.C.
1275 Drummers Lane 1100 New York Avenue, N.W.
P.O. Box 236 Washington, DC 20005
Wayne, Pennsylvania 19087 (202) 414-6100
(610) 964-1480
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 being
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 delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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
[Logo]
Up to 2,397,035 Shares of Common Stock
JADE FINANCIAL CORP.
(Proposed Holding Company for IGA Federal Savings)
JADE FINANCIAL CORP. has been formed to own all of the common stock of IGA
Federal Savings. IGA is a federal savings bank that is changing from the mutual
to the stock form of organization.
We propose to list the shares on the Nasdaq Small Cap Market under the
symbol "IGAF."
Terms of the Offering
Maximum
Minimum Maximum as adjusted
------------- ------------- ------------
Per Share Price ..................................... $ 8.00 $ 8.00 $ 8.00
Number of Shares .................................... 1,540,628 2,084,379 2,397,035
Underwriting Commissions and Other Expenses ......... $ 558,346 $ 614,374 $ 646,590
Net Proceeds to JADE FINANCIAL ...................... $11,766,678 $16,060,658 $18,529,690
Net Proceeds Per Share .............................. $ 7.64 $ 7.71 $ 7.73
JADE FINANCIAL has engaged Charles Webb & Company, a Division of Keefe,
Bruyette & Woods, Inc., a registered broker-dealer, to consult with and advise
JADE FINANCIAL in connection with the sale of common stock in the offering.
Charles Webb & Company will assist, on a best efforts basis, in the
solicitation of orders to purchase common stock in the offering. Charles Webb &
Company is not obligated to purchase any shares of common stock in the
offering.
The Offering will terminate at 12:00 p.m., local time, on September 15,
1999, unless extended by JADE FINANCIAL for up to an additional 45 days, or if
approved by the Office of Thrift Supervision, for an additional period after
such 45-day extension. JADE FINANCIAL is not required to give prospective
purchasers notice of any extension unless the expiration date is later than
October 30, 1999, in which event prospective purchasers will be given the right
to increase, decrease, confirm, or rescind their orders. The offering must be
completed by September 22, 2001.
Persons interested in purchasing common stock must return the accompanying
order form to JADE FINANCIAL, together with full payment for all common stock
to be purchased at $8.00 per share, or appropriate instructions authorizing
withdrawals of such an amount from existing deposit accounts at IGA. No person
may purchase fewer than 25 shares of common stock. An executed order form, once
received by JADE FINANCIAL, may not be modified, amended or rescinded without
the consent of JADE FINANCIAL. Purchase orders made by cash, check or money
order will earn interest at IGA's current passbook rate from the date of
receipt until completion or termination of the offering. Payments authorized by
withdrawal from deposit accounts at IGA will continue to earn interest at the
contractual rate until the offering is completed or terminated; these funds
will be otherwise unavailable to the depositor. No early withdrawal penalties
will apply for funds withdrawn from an account at IGA for the purpose of
purchasing common stock. If the offering is not completed by the expiration
date, all funds held will be returned promptly with interest and all withdrawal
authorizations will be terminated. All funds received for the purchase of
shares of common stock will be held on a separate escrow account at IGA until
completion or termination of the offering.
Please refer to Risk Factors beginning on page 7 of this document.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For information on how to subscribe, call the Stock Information Center at
(215) 322-9231.
CHARLES WEBB & COMPANY,
a Division of Keefe, Bruyette & Woods, Inc.
---------------------
The date of this Prospectus is August 12, 1999.
[MAP OF REGISTRANT'S MARKET AREA TO BE PRODUCED HERE]
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
The following are frequently asked questions. You should read this entire
prospectus, including "Risk Factors" beginning on page 7, and "the Conversion"
beginning on page 22, for more information.
Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A. We are offering for sale up to 2,084,379 shares of common stock at a
subscription price of $8.00 per share. We must sell at least 1,540,628
shares. If the appraised market value of the common stock changes due to
market or financial conditions, then, without notice to you, we may be
required to sell up to 2,397,035 shares.
Q. WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER TO PURCHASE
THE STOCK?
A. There are many important factors for you to consider before making an
investment decision. Therefore, you should read this entire prospectus
before making your investment decision.
Q. WHEN WILL CASH DIVIDENDS BE PAID ON THE STOCK?
A. We intend to adopt a policy of paying cash dividends on the common stock,
starting after the first full calendar quarter following completion of the
conversion. We expect the amount of the dividend to be between $0.16 and
$0.24 per year. This will provide an annual yield of 2% to 3% on the
initial $8.00 per share purchase price. Based on our earnings history and
expected earnings on the proceeds from the conversion, we believe we will
have the financial ability to pay this dividend. Future dividends are not
guaranteed and will depend on our ability to pay them. See "Our Policy
Regarding Dividends" on page 15.
Q. HOW DO I SELL MY STOCK AFTER I PURCHASE IT?
A. We anticipate having our stock quoted on the Nasdaq Small Cap Market System
under the symbol "IGAF." Purchases and sales of our common stock will be
effected by brokers through the Nasdaq National Market System. There can be
no assurance that someone will want to buy your shares or that you will be
able to sell them for more money than you originally paid. You should
consider the possibility that you may be unable to easily sell our stock.
There may also be a wide spread between the bid and asked price for our
stock.
Q. WILL MY STOCK BE COVERED BY DEPOSIT INSURANCE OR GUARANTEED BY ANY
GOVERNMENT AGENCY?
A. No. Unlike insured deposit accounts at IGA Federal Savings, our stock will
not be insured or guaranteed by the Federal Deposit Insurance Corporation
or any other government agency.
Q. WHEN IS THE DEADLINE TO SUBSCRIBE FOR STOCK?
A. We must receive a properly signed order form with the required payment on or
before 12:00 p.m., local time, on September 15, 1999.
Q. CAN THE OFFERING BE EXTENDED?
A. Yes. If we do not receive sufficient orders, we can extend the offering
beyond September 15, 1999. We must complete any offering to general members
of the public within 45 days after the close of the subscription offering,
unless we receive regulatory approval to further extend the offering. No
single extension can exceed 90 days, and the extensions may not go beyond
September 22, 2001.
Q. HOW DO I PURCHASE THE STOCK?
A. First, you should read this entire prospectus carefully. Then, complete and
return the enclosed stock order and certification form, together with your
payment. Subscription orders may be delivered in person to our office
during regular banking hours, or by mail in the enclosed envelope marked
STOCK ORDER RETURN. Subscription orders received after the subscription
offering expiration date may be held for participation in any community
offering. If the stock offering is not completed by October 30, 1999 and is
not extended, then all funds will be returned promptly with interest, and
all withdrawal authorizations will be canceled.
1
Q. CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A. No. After we receive your order form and payment, you may not cancel or
modify your order. However, if we extend the offering beyond October 30,
1999, you will be able to change or cancel your order. If
you cancel your order, you will receive a prompt refund plus interest.
Q. HOW CAN I PAY FOR THE STOCK?
A. You have three options: (1) pay cash if it is delivered to us in person; (2)
send us a check or money order, or (3) authorize a withdrawal form your
deposit account at IGA Federal Savings (without any penalty for early
withdrawal). Please do not send cash in the mail.
Q. WILL I RECEIVE INTEREST ON MY SUBSCRIPTION PAYMENT?
A. Yes. Subscriptions payments will be placed in an interest-bearing escrow
account at IGA Federal Savings, and will earn interest at our savings
account rate. Depositors who elect to pay by withdrawal will continue
to receive interest on their accounts until the funds are withdrawn.
Q. CAN I SUBSCRIBE FOR SHARES USING FUNDS IN MY INDIVIDUAL RETIREMENT ACCOUNT
("IRA") AT IGA FEDERAL SAVINGS?
A. Yes. However, you cannot purchase stock with your existing IRA at IGA
Federal Savings. You must establish a self-directed IRA with an outside
trustee to subscribe for stock using your IRA funds. Please call our Stock
Information Center at (215) 322-9231 to get more information. Please
understand that the transfer of IRA funds takes time, so please make
arrangements as soon as possible.
Q. WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES OF STOCK TO FILL ALL ORDERS?
A. If there is an oversubscription, then you may not receive any or all of the
shares you want to purchase.
Q. WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE STOCK OFFERING?
A. For answers to other questions we encourage you to read this prospectus.
Questions may also be directed to our Stock Information Center at
(215) 322-9231 Monday, between the hours of 10:00 a.m. and 4:00 p.m., and
Tuesday through Friday, between the hours of 8:00 a.m. and 4:00 p.m. To
ensure that each person receives a prospectus at least 48 hours prior to the
expiration date of September 15, 1999 in accordance with federal law, no
prospectus will be mailed any later than five days prior to September 15,
1999 or hand delivered any later than two days prior to September 15, 1999.
2
PROSPECTUS SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements of IGA.
The Company:
JADE FINANCIAL CORP.
213 West Street Road
Feasterville, Pennsylvania 19053
(215) 322-9000
JADE FINANCIAL CORP. is not an operating company and has not engaged in
any significant business to date. It was formed as a Pennsylvania-chartered
corporation to be the holding company for IGA.
The Bank:
IGA Federal Savings
213 West Street Road
Feasterville, Pennsylvania 19053
(215) 322-9000
IGA Federal Savings originally was established in 1975 as IGA Federal
Credit Union. On July 1, 1998, we converted from a credit union to IGA Federal
Savings, a federal mutual savings bank. We are now a community-oriented federal
mutual savings bank primarily serving customers in the Philadelphia
metropolitan area through five offices located in Philadelphia, Bucks, Chester
and Delaware Counties, Pennsylvania. We provide financial services to
individuals, families and small businesses. Historically, we have emphasized
consumer loans, including home equity, auto, credit card and personal loans,
and one- to four-family first mortgage loans. We also offer a variety of
commercial loan products.
The Stock Offering
JADE FINANCIAL is offering between 1,540,628 and 2,084,379 shares of
common stock at $8.00 per share. As a result of changes in market and financial
conditions prior to completion of the conversion or to fill the order of our
employee stock ownership plan we may increase the offering to 2,397,035 shares
with the approval of the Office of Thrift Supervision without further notice to
you. In that event, you may not change or cancel any stock order previously
delivered to us.
Charles Webb & Company, a division of Keefe, Bruyette & Woods, Inc. will
assist us in selling the stock. For further information about Charles Webb &
Company's role in the offering, see "The Conversion -- Market Arrangements."
How We Determined The Offering Range and the $8.00 Price Per Share
The independent appraisal by RP Financial, L.C., dated as of July 23,
1999, established the offering range. The appraisal was based both upon our
financial condition and operations and upon the effect of the additional
capital we will raise in this offering. RP Financial will update the appraisal
before the completion of the offering. Our board of directors set the purchase
price per share of the common stock at $8.00 to ensure that there would be
enough publicly held shares to meet the listing requirements for the Nasdaq
National Market.
After completion of the conversion and the stock offering, each share of
JADE FINANCIAL common stock, including the shares given to the IGA Charitable
Foundation, will have a book value of
3
$13.51, at the maximum of the offering range. This means the price paid for
each share sold in this offering will be 59.22% of the book value. This ratio
is one important factor used by the appraiser in determining the appraised
value of IGA. Our ratio is lower than our peer group of publicly traded thrift
institutions of 103.3%.
The following table compares our pro forma price to book value ratio and
price to earnings ratio upon completion of the offering to a comparative group
of 11 Mid-Atlantic thrifts.
The pro forma price to book value ratio represents the ratio of the $8.00
offering price per share of JADE FINANCIAL'S common stock to JADE FINANCIAL'S
pro forma book value per share at the maximum of the offering range.
The pro forma price to earnings ratio represents the ratio of the $8.00
offering price per share of JADE FINANCIAL'S common stock to JADE FINANCIAL'S
pro forma earnings per share based on annualized after tax reported earnings for
the nine months ended March 31, 1999.
Price to Book Price to
Value Ratio Earnings Ratio
--------------- ---------------
JADE FINANCIAL ............ 59.22% 22.22x
Comparative Group ......... 103.28% 16.91x
The above table shows that JADE FINANCIAL's pro forma price to book value
ratio of 59.22% at the maximum of the offering range is 42.7% lower than the
103.28% average price to book value ratio of the comparable group. The table
also shows that JADE FINANCIAL's pro forma price earnings ratio of 22.22x at
the maximum of the offering range is 31.40% higher than the average 16.91x
price to earnings ratio of the comparable group.
Terms of the Offering
We are offering the shares of common stock to those with subscription
rights in the following order of priority:
(1) Depositors with us on March 31, 1998.
(2) The IGA employee stock ownership plan.
(3) Depositors with us on June 30, 1999.
(4) Other members of IGA on July 31, 1999.
Shares of common stock not subscribed for in the subscription offering
will be offered to the general public in a direct community offering and, if
necessary, a public offering. See pages 38 to 40.
Termination of the Offering
The subscription offering will end at 12:00 p.m., local time, on September
15, 1999. If all of the shares are not subscribed for in the subscription
offering and we do not get orders for the remaining shares by October 30, 1999,
we will either:
(1) promptly return any payment you made to us, with interest, or cancel
any withdrawal authorization you gave us; or
(2) extend the offering, if allowed, and give you notice of the extension
and of your rights to cancel or change your order. If we extend the
offering and you do not respond to the notice, then we will cancel your
order and return your payment, with interest, or cancel any withdrawal
authorization you gave us.
The offering must be completed by September 22, 2001.
4
Use of the Proceeds Raised from the Sale of Common Stock
We intend to use the net proceeds received from the offering as follows:
$ 8,337,500 -- Used to buy all of the capital stock of IGA which will
retain and use such proceeds for general corporate purposes.
$ 1,334,000 -- Employee stock ownership plan loan.
$ 277,918 -- Cash portion of $833,750 cash and stock contribution to IGA
Charitable Foundation.
$ 5,780,500 -- Retained by JADE FINANCIAL and initially placed in
short-term investments for general corporate purposes.
$15,729,918 -- Net proceeds from stock offering at the maximum of the
offering range.
---------
The proceeds received by IGA will increase our capital and will be
available for expansion of our branch system and future lending and investment,
in addition to general corporate purposes.
Dividends
We intend to adopt a policy of paying cash dividends on the common stock,
starting after the first full calendar quarter following completion of the
conversion. We expect the amount of the dividend to be between $0.16 and $0.24
per year. This will provide an annual yield of 2% to 3% on the initial $8.00
per share purchase price. Based on our earnings history and expected earnings
on the proceeds from the conversion, we believe we will have the financial
ability to pay this dividend. Future dividends are not guaranteed and will
depend on our ability to pay them. See "Our Policy Regarding Dividends" on page
15.
Market for the Common Stock
JADE FINANCIAL has applied to have its common stock quoted on the Nasdaq
Small Cap Market System under the symbol "IGAF." We cannot predict whether a
liquid trading market in shares of JADE FINANCIAL's common stock will develop.
Persons purchasing shares may not be able to sell their shares when they desire
if a liquid trading market does not develop or sell them at a price equal to or
above $8.00 per share even if a liquid trading market develops.
We Intend to Contribute a Total of $833,750 in Cash and Stock to a New
Charitable Foundation
To continue our long-standing commitment to our local community, we intend
to establish the IGA Charitable Foundation, and to fund the foundation with
cash and shares of our common stock with a total value equal to 5% of the
shares sold in this offering. Based on the maximum amount of shares offered, we
will issue an additional 69,479 shares to the foundation, worth $555,832, and
make a cash contribution of $277,918. We plan for the foundation to support
charitable causes in our primary market areas. Charitable contributions by IGA
totaled $12,500 in 1996, $11,000 in 1997 and $16,000 in 1998. If we do
establish the foundation, then the value of the common stock will be lower than
if the offering was completed without the foundation. For a further discussion
of the financial impact of the foundation, see "Risk Factors -- The
establishment of IGA Charitable Foundation will reduce our earnings," "Pro
Forma Data" and "Comparison of Valuation and Pro Forma Information With No
Foundation."
Payment for Shares
You may pay for your subscriptions:
(1) by personal check, official bank check or money order;
(2) by authorizing us to withdraw money from your deposit account(s)
maintained at IGA; or
5
(3) in cash, if delivered in person at any full-service banking office of
IGA, although we request that you exchange cash for a check with any of
our tellers.
Stock Information Center
If you have any questions regarding the offering or our change in
structure, please call the Stock Information Center at (215) 322-9231.
Transfer of Subscription Rights is not Permitted
Subscription rights are not allowed to be transferred and we will act to
ensure that you do not transfer your subscription rights. We will not accept
any stock orders that we believe involve the transfer of subscription rights.
Important Risks in Owning JADE FINANCIAL CORP.'s Common Stock.
Before you decide to purchase stock in the offering, you should read the
"Risk Factors" section on pages 7 - 8 of this document, in addition to the
other sections of this prospectus. The common stock is subject to investment
risk, including the possible loss of principal invested.
Benefits to Management from the Offering
We intend to establish the IGA employee stock ownership plan which will
purchase 8% of the shares sold in this offering. A loan from JADE FINANCIAL to
the plan, funded by a portion of the proceeds from this offering, will be used
to purchase these shares. If shares are not available for purchase by the
employee stock ownership plan in the subscription offering, then, if the Office
of Thrift Supervision approves, the plan will purchase the shares in the open
market. The employee stock ownership plan will provide a retirement benefit to
all employees eligible to participate in the plan.
We also intend to adopt a stock option plan and a restricted stock plan
for the benefit of directors, officers and employees, subject to shareholder
approval. Under Office of Thrift Supervision regulations these plans cannot be
submitted to shareholders for approval sooner than six months after completion
of the conversion. If shareholders adopt a restricted stock plan, directors,
officers and employees will be awarded stock at no cost to them. As a result,
both the employee stock ownership plan and the restricted stock plan will
increase the voting control of management without a cash outlay.
The following table presents the total value of the shares of common
stock, at the maximum of the offering range, which would be acquired by the
employee stock ownership plan and the total value of all shares available for
award and issuance when we grant awards under the restricted stock plan. The
table assumes that the value of the shares is the same as the sales price of
the shares in the offering. The table does not include a value for the options
because the price paid for the option shares will be equal to the fair market
value of the common stock on the day that the options are granted. As a result,
financial gains can be realized under an option only if the market price of the
common stock increases.
Percentage of
Estimated Shares Sold
Value of Shares in the Offering
----------------- ----------------
Employee Stock Ownership Plan ......... $1,334,000 8.0%
Restricted Stock Awards ............... 667,000 4.0
Stock Options ......................... -- 10.0
---------- ----
Total ...................... ......... $2,001,000 22.0%
========== ====
For a further discussion of benefits to management, see "Management."
6
RISK FACTORS
In addition to the other information in this document, you should consider
carefully the following risk factors in evaluating an investment in the common
stock.
Our Return on Equity Will Decrease and Our Expenses Will Increase After
Conversion
The proceeds we receive from the sale of our common stock, will increase
our equity substantially. We expect our expenses to increase because we are now
subject to federal income tax and because of costs associated with our employee
stock ownership plan, our restricted stock plan, and being a public company.
Because of the increases in our equity and expense, our return on equity will
decrease as compared to our performance in previous years and compared to our
regional and national peers. A lower return on equity could hurt our stock
price. See "How We Intend to Use the Proceeds" and "Pro Forma Data."
Our Increased Emphasis on Originating Commercial Real Estate Loans and
Commercial Business Loans Exposes Us to a Greater Risk of Financial Loss
Consistent with our effort to be a full-service community bank, IGA has
increased its efforts to originate commercial real estate loans and commercial
business loans. Both involve a higher degree of risk than single-family
residential lending due to a variety of factors, including generally larger
loan balances, the dependency on successful operation of a project, or the
income stream of a borrower for repayment, and greater oversight efforts
compared to mortgage loans. Commercial real estate loans often do not require
full amortization of the loan over their term, and require successfully
developing and/or selling the property. Commercial business loans often involve
collateral in the form of intangible assets and/or inventory which is subject
to market obsolescence. Each of these risks can be heightened by economic
conditions that might adversely impact the borrowers' ability to repay the
loans, including such events as an economic recession, an increase in interest
rates or an increase in the rate of inflation.
Rising Interest Rates May Hurt Our Profits
Our ability to make a profit largely depends on our net interest income.
Net interest income is the difference between what we earn on loans and
investments and what we pay on deposits and borrowings. The rates we earn on
our assets and pay on our liabilities are generally established for a
contractual period of time. We, like many savings institutions, have
liabilities that generally have shorter contractual maturities than our assets.
This imbalance can create significant earnings volatility, because market
interest rates change over time. In a period of rising interest rates, the
interest income earned on our assets may not increase as rapidly as the
interest paid on our liabilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset/Liability Management"
and "Business of IGA."
Changes in interest rates can also affect the average life of loans and
mortgage-backed and related securities. A reduction in interest rates results
in increased prepayments of loans and mortgage-backed and related securities,
as borrowers refinance their debt in order to reduce their borrowing cost. This
causes reinvestment risk. This means that we may not be able to reinvest
prepayments at rates which are comparable to the rates we earned on the prepaid
loans or securities.
The Creation of the Charitable Foundation Will Reduce Your Ownership and Voting
Interest and Our Earnings
The contribution of cash and a number of shares with a total value equal
to 5% of the shares of JADE FINANCIAL sold in the offering is subject to the
approval of our members at the special meeting of members called to vote upon
the conversion. The stock contribution to the foundation means that your
ownership and voting interest in JADE FINANCIAL will be reduced by 3.23%. The
contribution to the foundation will be recorded as an expense and will decrease
our earnings in the quarter and year recorded.
7
If Our Computer Systems Do Not Properly Work on January 1, 2000, our Business
Operations Will be Disrupted
If our computer systems and the computer systems operated by our third
party vendors do not properly work on January 1, 2000, then we could experience
a disruption in our business operations. As a result, our financial condition
and results of operations could be adversely affected. In addition, if we are
not adequately prepared for the January 1, 2000 date change, then regulators
may take action against us. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Issues."
The Amount of Common Stock We Will Control, Our Articles of Incorporation and
Bylaws and State and Federal Statutory Provisions Could Discourage Hostile
Acquisitions of Control
Our board of directors and executive officers intend to purchase
approximately 7.95% of our common stock at the maximum of the offering range.
These purchases, together with the purchase of 8% of the shares by the employee
stock ownership plan, as well as the potential acquisition of common stock
through the proposed stock option plan and restricted stock plan will result in
significant inside ownership of JADE FINANCIAL. This inside ownership and
provisions in our articles of incorporation and bylaws contain may have the
effect of discouraging a sale of JADE FINANCIAL, a proxy contest for control of
JADE FINANCIAL, the assumption of control of JADE FINANCIAL by a holder of a
large block of common stock and the removal of JADE FINANCIAL's management, all
of which certain shareholders might think are in their best interests. These
provisions include, among other things:
o the classification of the terms of the members of the Board of
Directors;
o an 80% shareholder vote requirement for the approval of any merger or
consolidation of JADE FINANCIAL into any entity that directly or
indirectly owns 5% or more of JADE FINANCIAL's voting stock if such
transaction is not approved in advance by at least 66 2/3% of the members
of JADE FINANCIAL's board of directors;
o supermajority shareholder vote requirements for the approval of certain
amendments to JADE FINANCIAL's articles of incorporation and bylaws;
o a prohibition on any holder of common stock voting more than 10% of the
outstanding common stock;
o elimination of cumulative voting by shareholders in the election of
directors;
o restrictions on the acquisition of our equity securities; and
o the issuance of 5,000,000 shares of preferred stock that could be issued
without shareholder approval on terms or in circumstances that could deter
a future takeover attempt.
In addition, the Pennsylvania Business Corporation Law provides for
certain restrictions on acquisition of JADE FINANCIAL, and federal laws contain
restrictions on acquisitions of control of savings and loan holding companies
such as JADE FINANCIAL.
Holders of JADE FINANCIAL Common Stock May Not Be Able to Sell Their Shares
When Desired or for $8.00 or More Per Share
We have never issued common stock to the public. Consequently, there is no
established market for the common stock. JADE FINANCIAL has applied to have its
common stock quoted on the Nasdaq Small Cap Market under the symbol "IGAF." We
cannot predict whether a liquid trading market in shares of JADE FINANCIAL's
common stock will develop or how liquid that market might become. Persons
purchasing shares may not be able to sell their shares when they desire if a
liquid trading market does not develop or sell them at a price equal to or
above $8.00 per share even if a liquid trading market develops.
8
SELECTED CONSOLIDATED FINANCIAL INFORMATION
In 1998, IGA changed its fiscal year from a period ending June 30 to a
period ending December 31. Accordingly, the summary information presented below
under "Selected Financial Condition Data" and "Selected Operations Data" for,
and as of the end of, each of the years ended June 30 and the six moths ended
December 31, 1998 is derived from IGA's audited financial statements. The
summary information presented below under those headings for, and as of the end
of, the six months ended December 31, 1997 and each of the three month periods
ended March 31, 1999 and 1998 is unaudited but, in the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial condition and results of operations for
such periods have been included. The following information is only a summary
and you should read it in conjunction with our financial statements and notes
beginning on page F-1.
Three Months Ended Six Months Ended
At March 31, At December 31,
---------------------------- ----------------------------
1999 1998 1998 1997
------------- ------------- ------------- -------------
(In Thousands)
Selected Financial Condition Data:
Total assets ............................. $ 177,470 $ 159,637 $ 171,091 $ 152,759
Cash and cash equivalents ................ 18,113 17,763 18,351 18,941
Loans receivable, net .................... 105,320 96,186 102,900 97,885
Mortgage-backed securities; Held-
to-maturity ............................. 5,594 10,598 6,635 11,895
Available-for-sale ....................... 15,529 15,641 10,176 11,223
Investment securities:
Held-to-maturity ......................... 0 500 0 500
Available-for-sale ....................... 28,240 14,480 28,726 8,920
Deposits ................................. 161,429 143,911 154,888 137,223
Equity ................................... 15,096 15,074 15,276 14,991
Selected Operations Data:
Total interest income .................... $ 2,942 $ 2,821 $ 5,789 $ 5,880
Total interest expense ................... 1,325 1,310 2,762 2,805
--------- --------- --------- ---------
Net interest income ...................... 1,617 1,511 3,027 3,075
Provision for loan losses ................ 135 376 300 397
--------- --------- --------- ---------
Net interest income after provision
for loan losses ......................... 1,482 1,135 2,727 2,678
Service fees ............................. 125 51 338 294
Gain (loss) on sales of investment
securities .............................. 0 0 198 26
Other non-interest income ................ 99 51 268 139
--------- --------- --------- ---------
Total non-interest income ................ 224 102 804 459
Total non-interest expense ............... 1,518 1,200 3,119 2,567
--------- --------- --------- ---------
Income tax expense ....................... 58 0 146 0
Net income ............................... $ 130 $ 37 $ 266 $ 570
========= ========= ========= =========
Selected Financial and Other Data:
Performance Ratios:
Return on assets (ratio of net
income to average total assets)(1) ...... 0.30% 0.09% 0.32% 0.72%
Return on equity (ratio of net
income to average equity)(1) ............ 3.41% 0.97% 3.46% 7.61%
Interest rate spread ..................... 3.84% 3.76% 3.74% 3.82%
Net interest margin ...................... 3.97% 4.01% 3.90% 4.06%
Operating expenses to average total
assets(1) ............................... 3.64% 3.07% 3.95% 2.96%
Average interest-earning assets to
average interest-bearing liabilities .... 103.77% 107.40% 104.13% 106.64%
Asset Quality Ratios:
Non-performing assets to total
assets at end of period ................. 0.11% 0.20% 0.10% 0.64%
Allowance for loan losses to non-
performing assets ....................... 549.75% 227.30% 631.76% 106.87%
Allowance for loan losses to gross
loans receivable ........................ 1.05% 0.76% 1.03% 1.05%
Capital Ratios:
Equity to total assets at end of
period .................................. 8.51% 9.44% 8.93% 9.81%
Average equity to average assets ......... 8.79% 9.75% 9.30% 9.50%
Other Data:
Number of full service offices ........... 5 5 5 5
Year Ended
At June 30,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- -------------- ------------- ----------- -------------
(In Thousands)
Selected Financial Condition Data:
Total assets ............................. $ 159,852 $164,752 $ 159,463 $156,231 $ 146,964
Cash and cash equivalents ................ 13,741 16,587 1,561 1,375 1,173
Loans receivable, net .................... 98,096 100,371 94,671 83,958 76,451
Mortgage-backed securities; Held-
to-maturity ............................. 9,071 14,320 16,535 9,745 10,500
Available-for-sale ....................... 14,267 13,724 19,198 13,157 15,092
Investment securities:
Held-to-maturity ......................... 499 7,731 7,115 29,229 19,498
Available-for-sale ....................... 19,340 7,199 15,411 14,258 19,519
Deposits ................................. 143,934 149,846 145,818 144,016 136,771
Equity ................................... 15,080 14,246 12,918 11,624 9,756
Selected Operations Data:
Total interest income .................... $ 11,476 $11,660 $ 11,799 $ 11,236 $ 10,361
Total interest expense ................... 5,475 5,655 5,705 4,954 4,163
--------- -------- --------- -------- ---------
Net interest income ...................... 6,001 6,005 6,094 6,282 6,198
Provision for loan losses ................ 1,038 847 355 330 270
--------- -------- --------- -------- ---------
Net interest income after provision
for loan losses ......................... 4,963 5,158 5,739 5,952 5,928
Service fees ............................. 887 760 248 257 317
Gain (loss) on sales of investment
securities .............................. 0 0 11 (70) 122
Other non-interest income ................ 71 91 147 112 251
--------- -------- --------- -------- ---------
Total non-interest income ................ 958 851 406 299 690
Total non-interest expense ............... 5,258 4,983 4,659 4,508 4,325
--------- -------- --------- -------- ---------
Income tax expense ....................... 0 0 0 0 0
Net income ............................... $ 663 $ 1,026 $ 1,486 $ 1,743 $ 2,293
========= ======= ========= ======== =========
Selected Financial and Other Data:
Performance Ratios:
Return on assets (ratio of net
income to average total assets)(1) ...... 0.42% 0.64% 0.94% 1.17% 1.59%
Return on equity (ratio of net
income to average equity)(1) ............ 4.52% 7.55% 12.11% 16.30% 25.71%
Interest rate spread ..................... 3.66% 3.64% 3.77% 4.22% 4.33%
Net interest margin ...................... 3.93% 3.86% 3.99% 4.37% 4.44%
Operating expenses to average total
assets(1) ............................... 3.33% 3.10% 2.96% 3.04% 3.00%
Average interest-earning assets to
average interest-bearing liabilities .... 107.58% 106.17% 105.71% 104.36% 103.63%
Asset Quality Ratios:
Non-performing assets to total
assets at end of period ................. 0.14% 0.49% 0.34% 0.30% 0.22%
Allowance for loan losses to non-
performing assets ....................... 419.47% 124.69% 101.45% 192.63% 268.81%
Allowance for loan losses to gross
loans receivable ........................ 0.96% 0.99% 0.59% 1.08% 1.14%
Capital Ratios:
Equity to total assets at end of
period .................................. 9.43% 8.65% 8.10% 7.44% 6.64%
Average equity to average assets ......... 9.29% 8.45% 7.79% 7.21% 6.18%
Other Data:
Number of full service offices ........... 5 5 5 5 5
- ------------
(1) Annualized where applicable.
9
RECENT DEVELOPMENTS
The selected financial and operating data presented below at June 30, 1999
and for the six months ended June 30, 1999 and 1998 are unaudited. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation have been included. The results of
operations and other data for the six months ended June 30, 1999 are not
necessarily indicative of the results of operations for the fiscal year ending
December 31, 1999.
June 30, December 31,
1999 1998
---------- -------------
(In Thousands)
Selected Financial Condition Data:
- --------------------------------------------------------
Total assets ........................................... $179,017 $171,091
Cash and cash equivalents .............................. 9,554 18,351
Loans receivable, net .................................. 108,083 102,900
Securities purchased under agreement to resell ......... 0 0
Investment securities:
Available-for-sale .................................... 41,974 28,726
Held-to-maturity ...................................... 0 0
Mortgage related securities:
Available-for-sale, at market value ................... 10,243 10,176
Held-to-maturity ...................................... 5,129 6,635
Deposits ............................................... 159,654 154,888
Equity ................................................. 14,147 15,276
For the Six Months For the Three Months
Ended Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
(In Thousands)
Selected Operations Data:
- ---------------------------------------------------------
Total interest income ................................... $5,961 $5,596 $3,019 $2,775
Total interest expense .................................. 2,643 2,670 1,318 1,360
------ ------ ------ ------
Net interest income .................................... 3,318 2,926 1,701 1,415
Provision for loan losses ............................... 270 641 135 265
------ ------ ------ ------
Net interest income after provision for loan losses ..... 3,048 2,285 1,566 1,150
------ ------ ------ ------
Service fees ............................................ 279 593 154 542
Other non-interest income ............................... 245 (94) 146 (145)
------ ------ ------ ------
Total non-interest income .............................. 524 499 300 397
Total non-interest expense .............................. 3,073 2,691 1,555 1,491
Income tax expense ...................................... 163 0 105 0
------ ------ ------ ------
Net income .............................................. $ 336 $ 93 $ 206 $ 56
====== ====== ====== ======
10
For the Six Months For the Three Months
Ended Ended
June 30, June 30,
---------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
(In Thousands)
Selected Financial Ratios and Other Data:
- -------------------------------------------------------------
Performance Ratios:
Return on average assets ................................... 0.38% 0.12% 0.46% 0.14%
Return on average equity ................................... 4.53% 1.24% 5.64% 1.49%
Interest rate spread information:
Average during period .................................... 3.85% 3.64% 3.91% 3.50%
End of period ............................................ 3.92% 3.34% 3.92% 3.34%
Net interest margin ........................................ 3.81% 3.80% 3.89% 3.64%
Ratio of operating expense to average total assets ......... 3.51% 3.74% 3.49% 3.73%
Ratio of average interest-earning assets to average
interest-bearing liabilities ............................. 104.66% 107.58% 104.09% 106.82%
Asset Quality Ratios:
Non-performing assets to total assets at end of period ..... 0.08% 0.14% 0.08% 0.14%
Non-performing loans to total loans ........................ 0.13% 0.23% 0.13% 0.23%
Allowance for loan losses to non-performing loans .......... 838.13% 419.47% 838.13% 419.47%
Allowance for loan losses to loans receivable, net ......... 1.08% 0.96% 1.08% 0.96%
Capital Ratios:
Equity to total assets at end of period .................... 7.90% 9.43% 7.90% 9.43%
Average equity to average assets ........................... 8.44% 9.29% 8.44% 9.29%
Other Data:
Number of full service offices ............................. 5 5 5 5
Capital Requirements
The following table sets forth our historical compliance with applicable
capital requirements at June 30, 1999. See "How We Are Regulated--Regulatory
Capital Requirements."
At June 30, 1999
-----------------------
Amount Percent
---------- ----------
Tangible Capital
Actual ........... $15,897 8.79%
Required ......... $ 7,231 4.00%
Excess ........... $ 8,666 4.79%
Core Capital
Actual ........... $15,897 8.79%
Required ......... $ 7,231 4.00%
Excess ........... $ 8,666 4.79%
Risk-based Capital
Actual ........... $17,062 16.57%
Required ......... $ 8,237 8.00%
Excess ........... $ 8,825 8.57%
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RECENT FINANCIAL INFORMATION
Comparison of Financial Condition at June 30, 1999 and December 31, 1998.
At June 30, 1999, our total assets amounted to $179.0 million compared to
total assets of $171.1 million at December 31, 1998. The $7.9 million, or
4.62%, increase in total assets was due primarily to a $13.2 million increase
in securities available for sale and a $5.2 million increase in net loans. We
funded this increase in interest-earnings assets primarily by decreasing
short-term investments in cash and cash equivalents by $8.8 million and
increasing deposits. Our deposits amounted to $159.7 million at June 30, 1999
compared to $154.9 million at December 31, 1998. Our total equity decreased by
$1.2 million, or 7.84%, to $14.1 million at June 30, 1999 compared to $15.3
million at December 31, 1998. The decrease in total equity was entirely due to
a decrease in the fair market value of securities available for sale that was
only partially offset by the profitable operations of IGA.
Comparison of Operating Results For the Six and Three Months Ended June 30,
1999 and June 30, 1998
Net Income. Net income amounted to $336,000 for the six months ended June
30, 1999 compared to $93,000 for the six months ended June 30, 1998. The
$243,000 increase in net income during the first six months of 1999 was due
primarily to an increase in net interest income due to higher levels of
interest-earning assets, a decrease in the provision for loan losses and an
increase in non-interest income of $25,000. Net income amounted to $206,000 for
the three months ended June 30, 1999 compared to $56,000 for the three months
ended June 30, 1998. The $150,000 increase in net income during the three
months ended June 30, 1999 was due primarily to an increase in net interest
income due to higher levels of interest-earning assets and a decrease in the
provision for loan losses that was partially offset by a $97,000 decrease in
non-interest income.
Interest Income and Interest Expense. Net interest income increased by
$392,000, or 13.40%, for the six months ended June 30, 1999 compared to the same
period in 1998. The increase in net interest income for the six months ended
June 30, 1999 was due to a $365,000 increase in interest income and a decrease
of $27,000 in interest expense. Net interest income increased by $286,000, or
20.21%, for the three months ended June 30, 1999 compared to the same period in
1998. The increase in net interest income was due to a $244,000 increase in
interest income and a decrease of $42,000 in interest expense. The increase in
interest income for the six and three months ended June 30, 1999 reflects our
effort to redeploy funds from short-term overnight deposits at banks to higher
yielding securities available for sale as well as increased loan activity,
particularly with respect to higher yielding commercial loans. The decrease in
interest expense for the six and three months ended June 30, 1999 resulted from
a reduction in rates paid on interest-bearing liabilities. Our interest rate
spread increased to 3.85% and 3.91% for the six and three months ended June 30,
1999, respectively, from 3.64% and 3.50% for the comparable prior year periods,
respectively.
Provision for Loan Losses. Our provision for loan losses was $270,000 for
the six months ended June 30, 1999 compared to $641,000 for the six months
ended June 30, 1998. Our provision for loan losses was $135,000 for the three
months ended June 30, 1999 compared to $265,000 for the three months ended June
30, 1998. The decrease for the six and three months ended June 30, 1999 was a
result of the higher than normal provision in 1998 that was designed to comply
with the recommendation of the Office of Thrifts Supervision due to the inherent
risk in our loan portfolio. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." At June 30, 1999, our total
non-performing loans amounted to $139,000. Our allowance for loan losses
amounted to $1.2 million at June 30, 1999, representing 1.08% of total loans and
838.13% of non-performing loans at such date.
Non-interest Income. Non-interest income increased by $25,000, or 5.0%, to
$524,000 for the six months ended June 30, 1999 compared to $499,000 for the
same period in 1998. This increase principally resulted from increased income
from our debit card product. Non-interest income decreased by $97,000, or
12
24.43%, to $300,000 for the three months ended June 30, 1999 compared to
$397,000 for the same period in 1998. The decrease was due to an extraordinary
increase in fee income in the three months ended June 30, 1998 resulting from a
reclassification of service charge fees.
Non-interest Expense. Non-interest expense amounted to $3.1 million and
$1.6 million for the six and three months ended June 30, 1999, respectively,
compared to $2.7 million and $1.5 million for the six and three months ended
June 30, 1998, respectively. The increase in non-interest expense during the
1999 periods primarily reflects the increased number of employees during these
periods and an increased level of expenses associated with operating as a
federal savings bank following our conversion from a federal credit union.
Income Taxes. IGA's income tax expense amounted to $163,000 and $105,000
for the six and three months ended June 30, 1999, respectively. For the
comparable periods in 1998, IGA paid no federal income tax because, as a credit
union, we were exempt from federal income tax.
Capital Ratios. At June 30, 1999, our tangible and core capital amounted
to $15.9 million, or 8.79% of adjusted total assets of $180.8 million, and our
risk-based capital amounted to $17.1 million or 16.57% of adjusted
risk-weighted assets of $103.0 million.
JADE FINANCIAL CORP.
JADE FINANCIAL was incorporated under the laws of the Commonwealth of
Pennsylvania at IGA's direction for the purpose of acquiring all of the capital
stock of IGA issued in connection with the conversion. JADE FINANCIAL has
received OTS approval to acquire control of IGA. Prior to the conversion, JADE
FINANCIAL has not engaged in any material operations. Upon completion of the
conversion, JADE FINANCIAL will have no significant assets other than all of
the outstanding capital stock of IGA, a note payable from the employee stock
ownership plan and 50% of the net proceeds of the conversion less the amount
loaned to the employee stock ownership plan and the amount contributed to the
foundation. JADE FINANCIAL's principal business will be managing the operations
of IGA.
The holding company structure will permit us to expand the financial
services currently offered through IGA, although there are no definitive plans
or arrangements for such expansion at present. As a holding company, we will
have greater flexibility to diversify our business activities through existing
or newly formed subsidiaries or through acquisition or merger with other
financial institutions. At the present time, however, we do not have any plans,
agreements, arrangements or understandings with respect to any such
acquisitions or mergers.
JADE FINANCIAL's executive offices are located at 213 West Street Road,
Feasterville, Pennsylvania 19053, and its main telephone number is (215)
322-9000.
IGA FEDERAL SAVINGS
We are a community-oriented federal mutual savings bank. We currently operate
through five offices:
o Our main office located in Feasterville, Bucks County;
o 23rd and Market Streets in Center City, Philadelphia (the branch is
located in the PECO headquarters building);
o Grays Ferry in Southwest Philadelphia;
o Chesterbrook in Chester County; and
o Media in Delaware County.
Our market area consists of the Philadelphia metropolitan area, although we
have a number of out-of-market customers who are retirees or employees of PECO
or its affiliates who are located at out-of-market facilities. At March 31,
1999, we had total assets of $177.47 million, deposits of $161.43 million and
total equity of $15.09 million.
13
We are primarily engaged in the business of attracting retail deposits
from the general public and originating consumer loans, including home equity,
auto, credit card and personal loans and one- to four-family first mortgage
loans on owner-occupied residences in our market area. We also offer a variety
of commercial loan products.
At March 31, 1999, our gross loan portfolio totaled $106.44 million,
consisting principally of $62.81 million in consumer loans, including home
equity loans, and $40.74 million of first mortgage loans. We also had on that
date $28.24 million of investment securities and $21.12 million of
mortgage-backed securities.
IGA is subject to examination and regulation by the Office of Thrift
Supervision and its savings deposits are insured up to applicable limits by the
FDIC. IGA is a member of, and owns capital stock in, the Federal Home Loan Bank
of Pittsburgh, which is one of 12 regional banks in the Federal Home Loan Bank
System. See "Regulation -- Regulation of IGA."
HOW WE INTEND TO USE THE PROCEEDS
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. We presently anticipate, however,
that the net proceeds will be between $11.63 million and $15.73 million, or up
to $18.09 million if the estimated value is increased by 15%. See "Pro Forma
Data" and "The Conversion -- How We Determined Our Price and Number of Shares
to be Issued in the Stock Offering" for the assumptions used to arrive at these
amounts.
JADE FINANCIAL will contribute approximately 50% of the net proceeds
received from the sale of the common stock in exchange for all of the common
stock of IGA issued in the conversion. The proceeds IGA receives in exchange
for the common stock of IGA will become part of IGA's general funds for use in
our business and will be used to support our existing operations. We anticipate
initially investing these proceeds in short-term assets similar to those
currently in our portfolio. Thereafter, we will redirect the net proceeds to
the origination of loans, the purchase of investment and mortgage-backed
securities, and the possible expansion of our branch system, subject to market
conditions.
Furthermore, JADE FINANCIAL also intends to lend a portion of the net
proceeds to the employee stock ownership plan to fund the employee stock
ownership plan's purchase of 8% of the common stock. Based upon the initial
purchase price of $8.00 per share, the dollar amount of the employee stock
ownership plan loan would range from $986,000 to $1.33 million, or up to $1.53
million if the estimated value is increased by 15%. The interest rate to be
charged by JADE FINANCIAL on the employee stock ownership plan loan will be
based upon the IRS prescribed applicable federal rate at the time of
origination. It is anticipated that the employee stock ownership plan will
repay the loan through periodic tax-deductible contributions from IGA over a
ten-year period.
The remainder of the net proceeds will be retained by JADE FINANCIAL.
Initially the remaining proceeds will be invested in short-term investments
similar to those currently in IGA's portfolio. These funds would be available
for general corporate purposes that may include:
o the payment of dividends;
o expansion of operations through acquisitions of other financial
service organizations and diversification into other related or
unrelated businesses;
o investment purposes; and
o contribution of additional capital into IGA when and if appropriate.
See "Regulation -- Holding Company Regulation" for a discussion of Office of
Thrift Supervision activity restrictions. Currently, there are no specific
plans being considered for the expansion of the business of JADE FINANCIAL.
JADE FINANCIAL also may use a portion of the proceeds to fund a restricted
stock plan equal to 4% of the number of shares sold in the conversion. This
plan would be subject to shareholder approval which cannot be sought sooner
than six months after the conversion. Compensation expense related to the
restricted stock
14
plan will be recognized as share awards made under the plan vest. See "Pro
Forma Data." Following shareholder approval of the restricted stock plan, the
plan will be funded either with shares purchased in the open market or with
authorized but unissued shares. Based upon the initial purchase price of $8.00
per share, the amount required to fund the restricted stock plan through
open-market purchases would range from $493,000 to $667,000, or up to $767,000
if the estimated value is increased by 15%. In the event that the price of the
common stock increases above the initial $8.00 per share purchase price
following completion of the offering, the amount necessary to fund the
restricted stock plan would also increase.
Following the six-month anniversary of the completion of the conversion,
to the extent permitted by the Office of Thrift Supervision and based upon then
existing facts and circumstances, JADE FINANCIAL's board of directors may
determine to repurchase shares of common stock, subject to any applicable
statutory and regulatory requirements. Such facts and circumstances may include
but not be limited to:
o market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of
other investment alternatives based on the rate of return and risk
involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and an
improvement in JADE FINANCIAL's return on equity;
o the avoidance of dilution to shareholders by not having to issue
additional shares to cover the exercise of stock options or to fund
employee stock benefit plans; and
o any other circumstances in which repurchases would be in the best
interests of JADE FINANCIAL.
Any stock repurchases will be subject to the determination of JADE FINANCIAL's
board of directors that IGA will be capitalized in excess of all applicable
regulatory requirements after any such repurchases.
OUR POLICY REGARDING DIVIDENDS
We intend to adopt a policy of paying cash dividends on the common stock.
The Board of Directors intends to declare quarterly dividends, commencing after
the first full calendar quarter following completion of the conversion of
between $0.16 and $0.24 per year. This equals an annual yield of 2% to 3% on
the initial $8.00 per share purchase price. Dividends, when and if paid, will
be subject to determination and declaration by our board of directors at its
discretion, which will take into account our consolidated financial condition
and results of operations, tax considerations, industry standards, economic
conditions, regulatory restrictions, general business practices and other
factors. We will not make a distribution as a tax-free return of capital. No
assurances can be given that dividends will be declared.
We do not presently anticipate that we will conduct significant operations
independent of those of IGA for some time following the conversion. Therefore,
we do not expect to have any significant source of income other than earnings
on the net proceeds from the conversion retained by JADE FINANCIAL and
dividends from IGA, if any. Consequently, our ability to pay cash dividends to
our shareholders will be dependent upon these retained proceeds, income
generated from these retained proceeds, and the ability of IGA to pay dividends
to JADE FINANCIAL.
IGA, like all savings institutions regulated by the Office of Thrift
Supervision, is subject to certain restrictions on capital distributions,
including the payment of dividends, based on its net income, its capital in
excess of the regulatory capital requirements, and the amount of regulatory
capital required for the liquidation account to be established in connection
with the conversion. See "How We Are Regulated Limitations on Dividends and
Other Capital Distributions" and Other Capital Distributions" and "-- Federal
and State Taxation." At March 31, 1999, IGA had available $4.14 million which
could be distributed pursuant to Office of Thrift Supervision regulations.
JADE FINANCIAL will also be subject to substantially the same regulatory
restrictions on the payment of dividends to shareholders. JADE FINANCIAL also
is subject to the Pennsylvania Business Corporation Law which permits dividends
or distributions to be paid as long as the corporation will be able to pay its
debts in the ordinary course of business after making the dividend or
distribution.
15
MARKET FOR THE COMMON STOCK
We have never issued common stock to the public. Consequently, there is no
established market for the common stock. We have applied to have the common
stock listed for quotation on the Nasdaq Small Cap Market under the symbol
"IGAF" upon completion of the conversion. The development of a public market
having the desirable characteristics of depth, liquidity and orderliness,
however, depends upon the presence in the marketplace of a sufficient number of
willing buyers and sellers at any given time, over which neither JADE FINANCIAL,
IGA nor any market maker has any control. Accordingly, there can be no assurance
that an established and liquid market for the common stock will develop, or if
one develops, that it will continue. Furthermore, there can be no assurance that
purchasers will be able to resell their shares of common stock at or above the
price they paid for such common stock. Purchasers of common stock should
consider the potentially illiquid and long-term nature of their investment.
CAPITALIZATION
The following table sets forth the historical capitalization, including
deposits, of IGA at March 31, 1999, and the pro forma consolidated
capitalization of JADE FINANCIAL based on the sale of the common stock at the
minimum, midpoint, maximum and the adjusted maximum of the estimated valuation
range and the assumptions set forth under "Pro Forma Data" below.
Company Pro Forma
Based upon sale at $8.00 per share
-----------------------------------------------------------------
IGA Adjusted
Existing Minimum Midpoint Maximum Maximum
Capitalization Shares Shares Shares Shares (In Thousands)
---------------- ----------- ------------ ----------- ----------------------
Deposits(1) .......................... $161,429 $161,429 $161,429 $161,429 $161,429
-------- -------- -------- -------- --------
Shareholders' Equity:
common stock ($0.01 par value)
authorized -- 10,000,000
shares; to be outstanding (as
shown)(2) ......................... -- 16 19 22 25
Additional paid-in capital .......... -- 11,611 13,660 15,709 18,065
Shares issued to the
foundation(3) ..................... -- 411 483 556 639
Retained earnings ................... 15,690 15,690 15,690 15,690 15,690
-------- -------- -------- -------- --------
Net unrealized loss on securities
available for sale ................ (594) (594) (594) (594) (594)
-------- -------- -------- -------- --------
Less:
Foundation contribution
expense, net of tax benefit(4)..... -- (201) (237) (273) (313)
Common stock acquired by
ESOP(5) ........................... -- (986) (1,160) (1,334) (1,534)
Common stock acquired by
restricted stock plan(6) .......... -- (493) (580) (667) (767)
-------- -------- -------- -------- --------
Total Shareholders' Equity ........... $ 15,096 $ 25,453 $ 27,281 $ 29,109 $ 31,210
======== ======== ======== ======== ========
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing common stock in the conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) Reflects the issuance of the shares of common stock to be sold in the
offering, including the issuance of additional shares of common stock to
the foundation. Does not reflect the issuance of shares of common stock
pursuant to the proposed stock option plan.
16
(3) Reflects shares contributed to the foundation at an assumed value of $8.00
per share.
(4) Represents the tax effect of the contribution of common stock to the
foundation based on a 34% tax rate. The realization of the tax benefit is
limited annually to 10% of JADE FINANCIAL's annual taxable income, subject
to the ability of JADE FINANCIAL to carry forward any unused portion of
the deduction for five years following the year in which the contribution
is made.
(5) Assumes that 8% of the shares issued in the conversion will be purchased by
the employee stock ownership plan. The funds used to acquire the employee
stock ownership plan shares will be borrowed from JADE FINANCIAL. The
amount to be borrowed by the employee stock ownership plan is reflected as
a reduction of shareholders' equity. See "Management -- Benefit Plans --
Employee Stock Ownership Plan" and "-- Other Stock Benefit Plans."
(6) JADE FINANCIAL intends to adopt the restricted stock plan and to submit
such plan to shareholders at an annual or special meeting of shareholders
held at least six months following the completion of the conversion. If
the plan is approved by shareholders, JADE FINANCIAL intends to contribute
sufficient funds to the restricted stock plan to enable the plan to
purchase a number of shares of common stock equal to 4.0% of the common
stock sold in the offerings. Assumes that shareholder approval has been
obtained and that the shares have been purchased in the open market at the
purchase price. However, in the event JADE FINANCIAL issues authorized but
unissued shares of common stock to the restricted stock plan in the amount
of 4.0% of the common stock sold in the offerings, the voting interests of
existing shareholders would be diluted approximately 3.8%. The shares are
reflected as a reduction of shareholders' equity. See "Pro Forma Data" and
"Management -- Benefits -- Other Stock Benefit Plans."
IGA
EXCEEDS ALL REGULATORY CAPITAL REQUIREMENTS
At March 31, 1999, IGA exceeded all of the regulatory capital requirements
applicable to it. The following table sets forth the historical regulatory
capital of IGA at March 31, 1999 and the pro forma regulatory capital of IGA
after giving effect to the stock issuance, based upon the sale of the number of
shares shown in the table. The pro forma regulatory capital amounts reflect the
receipt by IGA of 50% of the net stock issuance proceeds, minus expenses. The
pro forma risk-based capital amounts assume the investment of the net proceeds
received by IGA in assets which have a risk-weight of 20% under applicable
regulations, as if such net proceeds had been received and so applied at March
31, 1999.
Historical
at March 31, 1999
------------------------
Amount Percent(1)
---------- ------------
(Dollars in Thousands)
Capital and Retained
Earnings Under Generally
Accepted Accounting
Principles ............ $15,096 8.51%
======= =====
Tangible Capital
Capital level .......... $15,496 8.71%
======= =====
Requirement ............ 2,668 1.50%
------- -----
Excess ................. $12,828 7.21%
======= =====
Core Capital
Capital level .......... $15,496 8.71%
Requirement ............ 5,336 3.00%
------- -----
Excess ................. $10,160 5.71%
======= =====
Risk-Based Capital
Capital level .......... $16,612 16.58%
Requirement ............ 8,013 8.00%
------- -----
Excess ................. $ 8,599 8.58%
======= =====
Pro Forma at March 31, 1999
-----------------------------------------------------------------------------------------------------
1,540,628 1,812,503 2,084,379 2,397,035
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
Minimum Midpoint Maximum Adjusted Maximum
------------------------ ------------------------ ------------------------ -----------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1)
---------- ------------ ---------- ------------ ---------- ------------ ---------- -----------
(Dollars in Thousands)
Capital and Retained
Earnings Under Generally
Accepted Accounting
Principles ............ $19,743 10.78% $20,562 11.17% $21,382 11.55% $22,325 11.99%
======= ===== ======= ===== ======= ===== ======= =====
Tangible Capital
Capital level .......... $20,143 10.98% $20,962 11.36% $21,782 11.74% $22,725 12.18%
======= ===== ======= ===== ======= ===== ======= =====
Requirement ............ 2,752 1.50% 2,767 1.50% 2,782 1.50% 2,799 1.50%
------- ----- ------- ----- ------- ----- ------- -----
Excess ................. $17,390 9.48% $18,195 9.86% $19,000 10.24% $19,926 10.68%
======= ===== ======= ===== ======= ===== ======= =====
Core Capital
Capital level .......... $20,143 10.98% $20,962 11.36% $21,782 11.74% $22,725 12.18%
Requirement ............ 5,505 3.00% 5,535 3.00% 5,565 3.00% 5,599 3.00%
------- ----- ------- ----- ------- ----- ------- -----
Excess ................. $14,638 7.98% $15,428 8.36% $16,218 8.74% $17,127 9.18%
======= ===== ======= ===== ======= ===== ======= =====
Risk-Based Capital
Capital level .......... $21,259 20.99% $22,078 21.75% $22,898 22.52% $23,841 23.39%
Requirement ............ 8,103 8.00% 8,119 8.00% 8,135 8.00% 8,153 8.00%
------- ----- ------- ----- ------- ----- ------- -----
Excess ................. $13,155 12.99% $13,959 13.75% $14,763 14.52% $15,688 15.39%
======= ===== ======= ===== ======= ===== ======= =====
(1) Tangible and core capital figures are determined as a percentage of total
adjusted assets; risk-based capital figures are determined as a percentage
of risk-weighted assets.
17
PRO FORMA DATA
The following tables set forth the historical and pro forma consolidated
income, shareholders' equity and other data of JADE FINANCIAL after giving
effect to the conversion at or for the three month period ended March 31, 1999
and the six month period ended December 31, 1998. Unaudited pro forma
consolidated income and related data have been calculated assuming:
o common stock had been sold at the beginning of such period, and
yielded net proceeds to JADE FINANCIAL as indicated,
o an amount equal to 5% of the dollar value of shares sold in the
conversion were donated to the foundation and this donation was
comprised of 2/3 shares of stock and 1/3 cash,
o 50% of such net proceeds were retained by JADE FINANCIAL and the
remainder were used to purchase all of the stock of IGA, and
o such net proceeds, less the cash contributed to the foundation and the
amounts necessary to fund the employee stock ownership plan and
restricted stock plan were invested at 4.70% and 4.52% at the beginning
of each of the periods ended March 31, 1999 and December 31, 1998,
respectively.
The foregoing yields approximate the yields on the one-year U.S. Treasury bill
at the applicable period end, net of tax. The use of the treasury rate is
viewed to be more relevant than the use of an arithmetic average of the
weighted average yield earned by IGA on its interest-earning assets and the
weighted average rate paid on its interest-bearing liabilities during such
periods. The pro forma after-tax yields for JADE FINANCIAL that is used to
tax-effect historical earnings and the earnings on estimated net proceeds is
based on a combined federal and state effective tax rate of 34% for the period.
In calculating the fees to be paid as part of the offering, the table
assumes that expenses equal 4% of the offering. Actual conversion expenses may
be more or less than those estimated because the fees paid to Charles Webb &
Company and other brokers will depend upon the categories of purchasers, the
purchase price and market conditions and other factors.
The shareholders' equity and related data presented herein are not
intended to represent the fair market value of the common stock, the current
value of assets or liabilities or the amounts, if any, that would be available
for distribution to shareholders in the event of liquidation. For additional
information regarding the liquidation account, see "The Conversion -- Effects
of Conversion on Depositors and Borrowers of IGA -- Liquidation." The pro forma
income and related data derived from the assumptions set forth above should not
be considered indicative of the actual results of operations of JADE FINANCIAL
for the period and the assumptions regarding investment yields should not be
considered indicative of the actual yields expected to be achieved during any
future period. Such pro forma data may be materially affected by a change in
the number of shares to be issued in the conversion and other factors.
The following tables assume that the common stock contribution to the
foundation is approved as part of the conversion and therefore gives effect to
the issuance of authorized but unissued shares of the common stock to the
foundation concurrently with the completion of the conversion.
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, as adjusted to give effect to the shares purchased by the
employee stock ownership plan and the effect of the issuance of shares to the
foundation. See Notes 1 and 4 to the tables below. No effect has been given in
the pro forma shareholders' equity calculations for the assumed earnings on the
net proceeds. As discussed under "How We Intend to Use the Proceeds," JADE
FINANCIAL intends to make a loan to fund the purchase of 8.0% of the common
stock by the employee stock ownership plan and intends to retain 50% of the net
proceeds from the offering.
No effect has been given in the tables to the issuance of additional
shares of common stock pursuant to the proposed stock option plan. See
"Management -- Benefits -- Other Stock Benefit Plans." The table below gives
effect to the restricted stock plan which is expected to be adopted by JADE
FINANCIAL following the reorganization and presented along with the stock
option plan to shareholders for approval at an annual or special meeting of
shareholders to be held at least six months following the completion of the
conversion. If
18
the restricted stock plan is approved by shareholders, the restricted stock
plan intends to acquire an amount of common stock equal to 4.0% of the shares
of common stock sold in the offering, either through open market purchases or
from authorized but unissued shares of common stock, if permissible. The table
below assumes that shareholder approval has been obtained, as to which there
can be no assurance, and that the shares acquired by the restricted stock plan
are purchased in the open market at the purchase price. No effect has been
given to JADE FINANCIAL's results of operations after the reorganization, the
market price of the common stock after the reorganization or a less than 4.0%
purchase by the restricted stock plan.
19
At or for the Three Months Ended March 31, 1999
------------------------------------------------------------
1,540,628 1,812,503 2,084,379 2,397,035
shares at shares at shares at shares at
$8.00 $8.00 $8.00 $8.00
Per Share Per Share Per Share Per Share
------------- ------------- ------------- ------------
(Dollars in thousands, except per share amounts)
Gross proceeds .......................................... $ 12,325 $ 14,500 $ 16,675 $ 19,176
Plus: shares issued to the foundation(1) ................ 411 483 556 639
---------- ---------- ---------- ----------
Pro forma market capitalization ......................... $ 12,736 $ 14,983 $ 17,231 $ 19,815
Gross proceeds .......................................... 12,325 14,500 16,675 19,176
Less expenses ........................................... 493 580 667 767
Less cash contributions to foundation ................... 205 242 278 320
Estimated net proceeds ................................. 11,627 13,678 15,730 18,090
Less ESOP funded by JADE FINANCIAL ...................... (986) (1,160) (1,334) (1,534)
Less restricted stock plan shares ....................... (493) (580) (667) (767)
---------- ---------- ---------- ----------
Estimated investable net proceeds(2) ................... 10,148 11,938 13,729 15,788
Net income:
Historical earnings .................................... $ 130 $ 130 $ 130 $ 130
Pro forma earnings on net proceeds(3) .................. 79 93 106 122
Pro forma ESOP adjustment(4) ........................... (16) (19) (22) (25)
Restricted stock plan(5) ............................... (16) (19) (22) (25)
---------- ---------- ---------- ----------
Pro forma net income (6) .............................. $ 177 $ 185 $ 192 $ 202
========== ========== ========== ==========
Net income per share:
Historical earnings .................................... $0.09 $0.07 $0.06 $0.06
Pro forma earnings on net proceeds ..................... 0.05 0.05 0.05 0.05
Pro forma ESOP adjustment(4) ........................... (0.01) (0.01) (0.01) (0.01)
Restricted stock plan(5) ............................... (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Pro forma earnings per share(6) ....................... $0.12 $0.10 $0.09 $0.09
Ratio of offering price to pro forma net annualized
income per share ....................................... 16.67 20.00 22.22 22.22
Number of shares used in calculating pro forma
earnings per share ..................................... 1,471,810 1,731,541 1,991,272 2,289,963
Estimated net proceeds .................................. 11,627 13,678 15,730 18,090
Shareholders' equity:
Historical ............................................. 15,096 15,096 15,096 15,096
Plus shares issued to foundation ....................... 411 483 556 639
Less contribution to foundation ........................ (411) (483) (556) (639)
Plus tax benefit of stock contribution ................. 210 246 283 326
Less: common stock acquired by ESOP(4) ................. (986) (1,160) (1,334) (1,534)
common stock acquired by restricted stock
plan(5) ............................................ (493) (580) (667) (767)
---------- ---------- ---------- ----------
Pro forma shareholders' equity ......................... $ 25,453 $ 27,281 $ 29,109 $ 31,210
========== ========== ========== ==========
Shareholders' equity per share:
Historical ............................................. $ 9.48 $ 8.06 $ 7.01 $ 6.09
Pro forma increase due to the sale of common
stock in the conversion ............................... 7.30 7.30 7.30 7.30
Plus shares issued to foundation ....................... 0.26 0.26 0.26 0.26
Less contribution to foundation ........................ (0.26) (0.26) (0.26) (0.26)
Plus tax benefit of stock contribution ................. 0.13 0.13 0.13 0.13
Less: common stock acquired by ESOP(4) ................. (0.62) (0.62) (0.62) (0.62)
common stock acquired by restricted stock
plan(5) ............................................ (0.31) (0.31) (0.31) (0.31)
---------- ---------- ---------- ----------
Pro forma shareholders' equity per share .............. $ 15.98 $ 14.56 $ 13.51 $ 12.59
========== ========== ========== ==========
Offering price as a percentage of pro forma share-
holders' equity per share .............................. 50.06% 54.95% 59.22% 63.54%
Number of shares (including foundation shares)
used to calculate shareholders equity per share ........ 1,591,979 1,872,916 2,153,854 2,476,932
20
At or for the Six Months Ended December 31, 1998
------------------------------------------------------------
1,540,628 1,812,503 2,084,379 2,397,035
shares at shares at shares at shares at
$8.00 $8.00 $8.00 $8.00
Per Share Per Share Per Share Per Share
------------- ------------- ------------- ------------
(Dollars in thousands, except per share amounts)
Gross proceeds .......................................... $ 12,325 $ 14,500 $ 16,675 $ 19,176
Plus: shares issued to the foundation(1) ................ 411 483 556 639
---------- ---------- ---------- ----------
Pro forma market capitalization ......................... $ 12,736 $ 14,983 $ 17,231 $ 19,815
Gross proceeds .......................................... 12,325 14,500 16,675 19,176
Less expenses ........................................... 493 580 667 767
Less cash contributions to foundation ................... 205 342 278 320
Estimated net proceeds ................................. 11,627 13,678 15,730 18,090
Less ESOP funded by JADE FINANCIAL ...................... (986) (1,160) (1,334) (1,534)
Less restricted stock plan shares ....................... (493) (580) (667) (767)
---------- ---------- ---------- ----------
Estimated investable net proceeds(2) ................... 10,148 11,938 13,729 15,788
Net income:
Historical earnings .................................... $ 266 $ 266 $ 266 $ 266
Pro forma earnings on net proceeds(3) .................. 152 178 205 236
Pro forma ESOP adjustment(4) ........................... (33) (39) (44) (51)
Restricted stock plan(5) ............................... (33) (39) (44) (51)
---------- ---------- ---------- ----------
Pro forma net income (6) .............................. $ 353 $ 367 $ 383 $ 401
========== ========== ========== ==========
Net income per share:
Historical earnings .................................... $0.18 $0.15 $0.13 $0.12
Pro forma earnings on net proceeds ..................... 0.10 0.10 0.10 0.10
Pro forma ESOP adjustment(4) ........................... (0.02) (0.02) (0.02) (0.02)
Restricted stock plan(5) ............................... (0.02) (0.02) (0.02) (0.02)
---------- ---------- ---------- ----------
Pro forma earnings per share(6) ....................... $ 0.24 $ 0.21 $ 0.19 $ 0.18
Ratio of offering price to pro forma net annualized
income per share ....................................... 16.67 19.05 21.05 22.22
Number of shares used in calculating pro forma
earnings per share .................................... 1,474,891 1,735,166 1,995,444 2,294,757
Estimated net proceeds .................................. 11,627 13,678 15,730 18,090
Shareholders' equity:
Historical ............................................. 15,276 15,276 15,276 15,276
Plus shares issued to foundation ....................... 411 483 556 639
Less contribution to foundation ........................ (411) (483) (556) (639)
Plus tax benefit of stock contribution ................. 210 246 283 326
Less: common stock acquired by ESOP(4) ................. (986) (1,160) (1,334) (1,534)
common stock acquired by restricted stock
plan(5) ............................................ (493) (580) (667) (767)
---------- ---------- ---------- ----------
Pro forma shareholders' equity ........................ $ 25,633 $ 27,461 $ 29,289 $ 31,390
========== ========== ========== ==========
Shareholders' equity per share:
Historical ............................................. $9.60 $8.16 $7.09 $6.17
Pro forma increase due to the sale of common
stock in the conversion ............................... 7.30 7.30 7.30 7.30
Plus shares issued to foundation ....................... 0.26 0.26 0.26 0.26
Less contribution to foundation ........................ (0.26) (0.26) (0.26) (0.26)
Plus tax benefit of stock contribution ................. 0.13 0.13 0.13 0.13
Less: common stock acquired by ESOP(4) ................. (0.62) (0.62) (0.62) (0.62)
common stock acquired by restricted stock
plan(5) ............................................ (0.31) (0.31) (0.31) (0.31)
---------- ---------- ---------- ----------
Pro forma shareholders' equity per share .............. $ 16.10 $ 14.66 $ 13.59 $ 12.67
========== ========== ========== ==========
Offering price as a percentage of pro forma share-
holders' equity per share .............................. 49.69% 54.57% 58.87% 63.14%
Number of shares (including foundation shares)
used to calculate shareholders equity per share ........ 1,591,979 1,872,916 2,153,854 2,476,932
- ------------
(1) Subject to member approval, JADE FINANCIAL intends to contribute to the
foundation within 12 months following the completion of the conversion an
amount equal to 5% of the dollar value of shares sold in the offering,
two-thirds of which will be shares of JADE FINANCIAL's common stock and
one-third of which will be cash. See "The Conversion -- Stock Contribution
to the
21
Charitable Foundation." The contributed shares will be donated or sold for
nominal consideration, accordingly, they will not add to the gross proceeds.
Such shares are, however, issued and outstanding and therefore add to JADE
FINANCIAL's market capitalization. The amount of the common stock
contributed to the foundation will be accrued as an expense in the fiscal
quarter in which the conversion is completed. The pro forma earnings data
does not reflect such non-recurring accrual. Both the historical and pro
forma per share data assume that the common stock contribution to the
foundation is made.
(2) Reflects a reduction to net proceeds for the cost of the employee stock
ownership plan and the restricted stock plan (assuming shareholder
ratification is received) which it is assumed will be funded from the net
proceeds retained by JADE FINANCIAL.
(3) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing common stock in the conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by
the employee stock ownership plan and restricted stock plan, that will be
funded by JADE FINANCIAL have been deducted from net proceeds.
(4) It is assumed that 8% of the shares of common stock issued in the
conversion will be purchased by the employee ownership plan. The funds
used to acquire such shares will be borrowed by the employee stock
ownership plan from JADE FINANCIAL. IGA intends to make contributions to
the employee stock ownership plan in amounts at least equal to the
principal and interest requirements necessary to pay the debt. IGA's
payment of the employee stock ownership plan debt will offset the interest
paid by IGA. Accordingly, the only expense to JADE FINANCIAL on a
consolidated basis will be related to the allocations of earned employee
stock ownership plan shares which will be based on the number of shares
committed to be released to participants for the year at the average
market value of the shares during the year tax-effected at 34%. The amount
of employee stock ownership plan debt is reflected as a reduction of
shareholders' equity. In the event that the employee stock ownership plan
were to receive a loan from an independent third party, both employee
stock ownership plan expense and earnings on the proceeds retained by JADE
FINANCIAL would be expected to increase. For purposes of calculating
earnings per share, unallocated, employee stock ownership plan shares are
not considered to be outstanding. In addition, the employee stock
ownership plan shares committed to be released at the end of the year are
assumed to be outstanding at the beginning of the year.
(5) Adjustments to both book value and net earnings have been made to give
effect to the proposed open market purchase (based upon an assumed
purchase price of $8.00 per share) following conversion by the restricted
stock plan (assuming shareholder ratification of such plan is received) of
an amount of shares equal to 4% of the shares of common stock issued in
the conversion for the benefit of directors and officers. It is assumed
that the sale of the shares to the restricted stock plan occurred at the
beginning of the period. Funds used by the restricted stock plan to
purchase the shares will be contributed to the restricted stock plan by
JADE FINANCIAL if the restricted stock plan is ratified by shareholders
following the conversion. Therefore, this funding is assumed to reduce the
proceeds available for reinvestment. For financial accounting purposes,
the amount of the contribution will be recorded as a compensation expense
(although not an actual expenditure of funds) over the period of vesting.
These grants are expected to vest in equal annual installments over a
period of years following shareholder ratification of the restricted stock
plan. In the event the restricted stock plan is unable to purchase a
sufficient number of shares of common stock to fund the restricted stock
plan, JADE FINANCIAL may issue authorized but unissued shares of common
stock to fund the remaining balance. In the event the restricted stock
plan is funded by the issuance of authorized but unissued shares in an
amount equal to 4% of the shares sold in the conversion, the interests of
existing shareholders would be diluted up to approximately 3.8%.
In the event that the restricted stock plan is funded through authorized but
unissued shares, for the three months ended March 31, 1999, pro forma net
income per share would be $0.13, $0.11, $0.11 and $0.10, respectively, and
pro forma shareholders' equity per share would be $15.69, $14.32, $13.31 and
$12.43, respectively, in each case at the minimum, midpoint, maximum and
adjusted maximum of the estimated valuation range. In the event that the
restricted stock plan is funded through authorized but unissued shares, for
the six months ended December 31, 1998, pro forma net income per share would
be $0.26, $0.23, $0.21 and $0.19, respectively, and pro forma shareholders'
equity per share would be $15.80, $14.41, $13.39 and $12.50, respectively,
in each case at the minimum, midpoint, maximum and adjusted maximum of the
estimated valuation range.
(6) No effect has been given to the shares to be reserved for issuance under
the proposed stock option plan which is expected to be adopted by JADE
FINANCIAL following the conversion, subject to shareholder approval. In
the event the stock option plan is funded by the issuance of authorized
but unissued shares in an amount equal to 10% of the shares sold in the
conversion, at $8.00 per share, the interests of existing shareholders
would be diluted as follows:
o pro forma net income per share for the three months ended March 31, 1999
would be $0.11, $0.10, $0.09, and $0.08, respectively, and pro forma
shareholders' equity per share would be $15.29, $13.99, $13.03 and $12.20,
respectively, in each case at the minimum, maximum and adjusted maximum of
the estimated valuation range.
o pro forma net income per share for the six months ended December 31, 1999
would be $0.22, $0.20, $0.18 and $0.16, respectively, and pro forma
shareholders' equity per share would be $15.39, $14.08, $13.11 and $12.26,
respectively, in each case at the minimum, maximum and adjusted maximum of
the estimated valuation range.
In the alternative, JADE FINANCIAL may purchase shares in the open market to
fund the stock option plan following shareholder approval of such plan. To
the extent the entire 10% of the shares to be reserved for issuance under
the stock option plan is funded through open market purchases at the
purchase price of $8.00 per share, proceeds available for reinvestment would
be reduced by $1.23 million, $1.45 million, $1.67 million and $1.92 million
at the minimum, midpoint, maximum and adjusted maximum of the estimated
valuation range. See "Management -- Benefit Plans -- Other Stock Benefit
Plans."
22
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH NO FOUNDATION
In the event that the common stock contribution to the foundation is not
made, RP Financial has estimated that the amount of common stock offered for
sale in the conversion would increase by approximately $750,000 and that the
overall market capitalization would increase by $267,000, all at the midpoint
of the estimated valuation range. Under such circumstances, pro forma
shareholders' equity at March 31, 1999 of JADE FINANCIAL would be approximately
$27.91 million, at the midpoint, which is approximately $625,000 greater than
the pro forma shareholders' equity of JADE FINANCIAL would be if the common
stock contribution is made to the foundation. In preparing this estimate, it
has been assumed that the pro forma price to book value ratio would be
approximately the same under both the current appraisal and the estimate of the
value of JADE FINANCIAL without the common stock contribution to the foundation
at the midpoint of the estimated valuation range. Further, assuming the
midpoint of the estimated valuation range, pro forma shareholders' equity per
share and pro forma earnings per share would be substantially the same with the
common stock contribution as without such contribution. In this regard, pro
forma shareholders' equity and pro forma net income per share at and for the
period ended March 31, 1999 would be $14.64 and $0.11, respectively, at the
midpoint of the estimate, assuming no common stock contribution. The pro forma
price to book value ratio and the pro forma price to earnings ratio at and for
the period ended March 31, 1999 are 54.64% and 18.18x, respectively, at the
midpoint of the estimate, assuming no common stock contribution, and are 54.95%
and 20.00x, respectively, with the common stock contribution. This estimate by
RP Financial is solely for purposes of providing members with sufficient
information with which to make an informed decision on the common stock
contribution. There is no assurance that in the event the common stock
contribution is not approved at the special meeting of members that the
appraisal prepared at that time would conclude that the pro forma market value
of JADE FINANCIAL would be the same as that estimated herein.
23
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, with and without a foundation at the minimum,
midpoint, maximum and adjusted maximum of the estimated valuation range,
assuming the conversion was completed at March 31, 1999.
At the Maximum At the Minimum
---------------- ------------------------------
With Stock No Stock With Stock
Contribution Contribution Contribution
---------------- -------------- --------------
Estimated offering
amount....................... $ 12,325 $ 12,963 $ 14,500
Pro forma market
capitalization .............. 12,736 12,963 14,983
Total assets ................. 187,827 188,358 189,655
Total liabilities ............ 162,374 162,374 162,374
Pro forma shareholders'
equity ...................... 25,453 25,984 27,281
Pro forma consolidated
net earnings ................ 175 178 183
Pro forma shareholders'
equity per share ............ 15.98 16.04 14.56
Pro forma consolidated
net earnings per share....... 0.12 0.13 0.10
Pro forma pricing ratios:
Offering price as a
percentage of pro
forma shareholders'
equity per share ........... 50.06% 49.88% 54.95%
Offering price to pro
forma net earnings
per share .................. 16.67 15.38 20.00
Offering price to assets .... 6.78% 6.88% 7.90%
Pro forma financial
ratios:
Return on assets ............ 0.37% 0.38% 0.39%
Return on share-
holders' equity ............ 2.75% 2.74% 2.68%
Shareholders' equity to
assets ..................... 13.55% 13.80% 14.38%
At the Midpoint At the Maximum As Adjusted
------------------------------ ------------------------------ -------------
No Stock With Stock No Stock With Stock No Stock
Contribution Contribution Contribution Contribution Contribution
-------------- -------------- -------------- -------------- -------------
Estimated offering
amount....................... $ 15,250 $ 16,675 $ 17,538 $ 19,176 $ 20,168
Pro forma market
capitalization .............. 15,250 17,231 17,538 19,815 20,168
Total assets ................. 190,280 191,483 192,201 193,584 194,411
Total liabilities ............ 162,374 162,374 162,374 162,374 162,374
Pro forma shareholders'
equity ...................... 27,906 29,109 29,827 31,210 32,037
Pro forma consolidated
net earnings ................ 187 190 196 200 205
Pro forma shareholders'
equity per share ............ 14.64 13.51 13.61 12.59 12.71
Pro forma consolidated
net earnings per share....... 0.11 0.09 0.10 0.09 0.10
Pro forma pricing ratios:
Offering price as a
percentage of pro
forma shareholders'
equity per share ........... 54.64% 59.22% 58.78% 63.54% 62.94%
Offering price to pro
forma net earnings
per share .................. 18.18 22.22 20.00 22.22 20.00
Offering price to assets .... 8.01% 9.00% 9.12% 10.24% 10.37%
Pro forma financial
ratios:
Return on assets ............ 0.39% 0.40% 0.41% 0.41% 0.42%
Return on share-
holders' equity ............ 2.68% 2.61% 2.63% 2.56% 2.56%
Shareholders' equity to
assets ..................... 14.67% 15.20% 15.52% 16.12% 16.48%
THE CONVERSION
The board of directors of IGA and the Office of Thrift Supervision have
approved the plan of conversion. The Office of Thrift Supervision approval is
subject to approval of the plan of conversion by IGA's members, and subject to
the satisfaction of certain other conditions imposed by the Office of Thrift
Supervision. The Office of Thrift Supervision approval does not constitute a
recommendation or endorsement of the plan of conversion.
General
On May 26, 1999, IGA adopted a plan of conversion, pursuant to which IGA
proposes converting from a federally chartered mutual savings institution to a
federally chartered stock savings institution. IGA will be a wholly owned
subsidiary of JADE FINANCIAL immediately after the conversion. The conversion
will include adoption of the proposed federal stock charter and bylaws, which
will authorize IGA to issue capital stock. Under the plan, IGA's common stock
will be sold to JADE FINANCIAL and JADE FINANCIAL's common stock is being
offered to IGA's eligible depositors and other members and then to the public.
The conversion will be accounted for at historical cost in a manner similar to
a pooling of interests. The Office of Thrift Supervision has approved JADE
FINANCIAL's application to become a savings and loan holding company and to
acquire all of IGA's common stock to be issued in the conversion.
JADE FINANCIAL's common stock is first being offered in a subscription
offering to holders of subscription rights. To the extent shares of common
stock remain available after the subscription offering,
24
shares of JADE FINANCIAL's common stock may be offered in a community offering
and/or a syndicated community offering on a best efforts basis through Charles
Webb & Company in a manner designed to promote a wide distribution of the
shares. The community offering and the syndicated community offering, if any,
may commence with, at any time during, or as soon as practicable after the
subscription offering. If there are any unsold shares of common stock after the
subscription offering, community offering and syndicated community offering,
JADE FINANCIAL may offer the remaining shares in a public offering conducted on
a best efforts basis by Charles Webb & Company. JADE FINANCIAL has the right,
in its sole discretion, to accept or reject, in whole or in part, any orders to
purchase shares of the common stock received in the community offering, the
syndicated community offering and the public offering. See "-- Offering of
common stock."
Subscriptions for shares of common stock will be subject to the maximum
and minimum purchase limitations set forth in the plan of conversion.
The completion of the offering is subject to market conditions and other
factors beyond JADE FINANCIAL's control. No assurance can be given as to the
length of time JADE FINANCIAL will need to complete the sale of common stock
being offered in the conversion following approval of the plan of conversion at
the meeting of IGA's members. If delays are experienced, significant changes
may occur in the estimated valuation range with corresponding changes in the
offering price and the net proceeds to be realized by JADE FINANCIAL from the
sale of the shares. In the event the conversion is terminated, IGA will charge
all conversion expenses against current income and any funds collected by IGA
in the offering will be promptly returned, with interest, to each subscriber.
Our Reasons for the Corporate Change
As a mutual institution, IGA has no authority to issue shares of capital
stock and consequently has no access to market sources of equity capital. Only
by generating and retaining earnings from year to year is IGA able to increase
its capital position.
As a stock corporation upon completion of the conversion, IGA will be
organized in the form used by commercial banks, most major corporations and a
majority of savings institutions. The ability to raise new equity capital
through the issuance and sale of IGA or JADE FINANCIAL's capital stock will
allow IGA the flexibility to increase its capital position more rapidly than by
accumulating earnings and at times deemed advantageous by the board of
directors of IGA. It will also support future growth and expanded operations,
including increased lending and investment activities, as business and
regulatory needs require. The ability to attract new capital also will help IGA
address the needs of the communities it serves and enhance its ability to make
acquisitions or expand into new businesses. The acquisition alternatives
available to IGA are quite limited as a mutual institution, because of a
requirement in Office of Thrift Supervision regulations that the surviving
institution in a merger involving a mutual institution generally must be in
mutual form. After the conversion, IGA will have increased ability to merge
with other stock institutions and we may acquire control of other stock savings
associations and retain the acquired institution as our separate subsidiary.
Finally, the ability to issue capital stock will enable us to establish stock
compensation plans for directors, officers and employees, giving them equity
interests in JADE FINANCIAL and greater incentive to improve IGA's performance.
For a description of the stock compensation plans which will be adopted by us
in connection with the conversion, see "Management -- Benefit Plans."
After considering the advantages and disadvantages of the conversion, as
well as applicable fiduciary duties and alternative transactions, the board of
directors of IGA unanimously approved the conversion as being in the best
interests of IGA and equitable to its account holders.
Effects of the Conversion
General. The conversion will have no effect on IGA's present business of
accepting deposits and investing its funds in loans and other investments
permitted by law. The conversion will not result in any change in the existing
services provided to depositors and borrowers, or in existing offices,
management and staff. IGA will continue to be subject to regulation,
supervision and examination by the Office of Thrift Supervision and the FDIC.
25
Deposits and Loans. Each holder of a deposit account in IGA at the time of
the conversion will continue as an account holder in IGA after the conversion,
and the conversion will not affect the deposit balance, interest rate or other
terms of such accounts. Each account will be insured by the FDIC to the same
extent as before the conversion. Depositors in IGA will continue to hold their
existing certificates, passbooks and other evidence of their accounts. The
conversion will not affect the loan terms of any borrower from IGA. The amount,
interest rate, maturity, security for and obligations under each loan will
remain as they existed prior to the conversion.
Continuity. During the conversion and stock issuance process, the normal
business of IGA of accepting deposits and making loans will continue without
interruption. Following completion of the conversion, IGA will continue to be
subject to regulation by the Office of Thrift Supervision, and FDIC insurance
of accounts will continue without interruption. After the conversion, IGA will
continue to provide services for depositors and borrowers under current
policies and by its present management and staff.
The board of directors presently serving IGA will serve as the board of
directors of IGA after the conversion. The initial members of the board of
directors of JADE FINANCIAL will consist of five individuals currently serving
on the board of directors of IGA. After the conversion, the voting shareholders
of JADE FINANCIAL will elect approximately one-third of JADE FINANCIAL's
directors annually, and the directors of IGA will be elected annually by JADE
FINANCIAL's board of directors. All current officers of IGA will retain their
positions with IGA. See "Management -- Management of JADE FINANCIAL."
Voting Rights. Currently, depositors and certain borrowers of IGA have
voting rights to elect IGA's directors and control IGA's affairs. After the
conversion, JADE FINANCIAL will be the sole shareholder of IGA and, therefore,
possess exclusive voting rights with respect to IGA. JADE FINANCIAL's
shareholders will be entitled to vote on any matters to be considered by JADE
FINANCIAL's shareholders. See "Description of Capital Stock of JADE FINANCIAL."
Depositors' Rights if IGA Liquidates. There are currently no plans to
liquidate IGA or JADE FINANCIAL before or after completion of the conversion.
However, in the event IGA liquidates before or after the conversion, deposit
account holders would be entitled to the benefits of FDIC insurance up to
applicable limits. In addition, liquidation rights before or after conversion
would be as follows:
o Liquidation Rights in IGA Before Conversion. In the event IGA is
liquidated before the conversion, each deposit account holder would
receive his or her pro rata share of any assets of IGA remaining after
payment of claims of all creditors (including the claims of all
depositors in the amount of the withdrawal value of their accounts).
Such holder's pro rata share of such remaining assets, if any, would be
in the same proportion of such assets as the balance in his or her
deposit account was to the aggregate balance in all deposit accounts at
IGA at the time of liquidation.
o Liquidation Rights in IGA After Conversion. In the event IGA is
liquidated after the conversion, each deposit account holder would have
a claim in the amount of the balance in his or her deposit account plus
accrued interest. A deposit account holder would have no interest in the
assets of IGA.
Under the plan of conversion, IGA is required to establish a
"liquidation account" upon completion of the conversion for the benefit
of eligible account holders (i.e., eligible depositors at March 31,
1998) and supplemental account holders (i.e., eligible depositors at
June 30, 1999). In the event IGA is liquidated after the conversion,
each eligible account holder and supplemental eligible account holder
that maintains his or her deposit account with IGA would be entitled a
pro rata distribution from the liquidation account. However, if the
amount in an eligible account holder's or supplemental eligible account
holder's deposit account on December 31, 1998 and any December 31
thereafter is less than the lesser of (a) the deposit balance in such
account on any prior December 31, or (b) the deposit balance in such
account on the respective qualifying dates (i.e., March 31, 1998 for
eligible account holders and June 30, 1999 for supplement eligible
account holders), then the interest in this special liquidation account
would be reduced at that time by an amount proportionate to any
26
such reduction, and the interest would cease to exist if such
deposit account was 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.
Any assets remaining after the above liquidation rights of eligible
account holders and supplemental eligible account holders are
satisfied would be distributed to JADE FINANCIAL as the sole
shareholder of IGA.
Other than for payment of certain expenses incident to the conversion,
none of IGA's assets will be distributed in the conversion. IGA is a member of
the Federal Home Loan Bank of Pittsburgh and IGA's deposit accounts will
continue to be insured by the FDIC. IGA's affairs will continue to be directed
by IGA's existing Board of Directors and management.
Tax Effects of the Conversion and JADE FINANCIAL's Stock Offering. IGA
has received an opinion from Stevens & Lee, P.C., Wayne, Pennsylvania, as to
the material federal income tax consequences of the conversion and the stock
offering to IGA and JADE FINANCIAL, and as to the generally applicable material
federal income tax consequences of the conversion and stock offering to IGA
account holders and to persons who purchase common stock in the offering.
Stevens & Lee's complete opinion has been filed as an exhibit to the
Registration Statement JADE FINANCIAL filed with the SEC with respect to the
common stock offered hereby.
The opinion provides that, among other things, for federal income tax
purposes:
o IGA's adoption of a charter in stock form, known as the conversion, will
qualify as a tax-free reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended;
o No gain or loss will be recognized by IGA solely as a result of its
conversion from mutual to stock form;
o No gain or loss will be recognized by IGA's account holders upon the
issuance to them of accounts in IGA, in stock form, immediately after
the conversion, in the same dollar amounts and on the same terms and
conditions as their accounts at IGA, in mutual form, immediately prior
to the conversion;
o The tax basis of each account holder's interest in the liquidation
account received in the conversion will be equal to the value, if any,
of that interest on the date and at the time of the conversion;
o The tax basis of the common stock purchased in the conversion will be
equal to the amount paid therefor; increased, in the case of common
stock acquired pursuant to the exercise of subscription rights, by the
fair market value, if any, of such subscription rights;
o The holding period of the common stock purchased pursuant to the
exercise of subscription rights will commence upon the exercise of such
holder's subscription rights and, in all other cases, the holding period
of purchased common stock will commence on the day following the date of
such purchase; and
o Gain or loss will be recognized by account holders upon the receipt of
an interest in the liquidation account and the receipt of subscription
rights in the conversion, to the extent such holder's interest in the
liquidation account and subscription rights are deemed to have value, as
discussed below.
The opinion of Stevens & Lee is based in part upon, and subject to the
continuing validity in all material respects through the date of the conversion
of, various representations of IGA as to certain factual matters, and upon
certain assumptions and qualifications, including the assumption that the
conversion is completed in the manner and according to the terms provided in
the plan of conversion. This opinion is also based upon the Internal Revenue
Code, regulations now in effect or proposed thereunder, current administrative
rulings and practice and judicial authority, all of which are subject to
change, which change may be made with retroactive
27
effect. Unlike private letter rulings received from the IRS, an opinion of
counsel is not binding upon the IRS, and there can be no assurance that the IRS
will not take a position contrary to the positions reflected in such opinion,
or that such opinion will be upheld by the courts if challenged by the IRS.
Stevens & Lee has advised IGA that an interest in a liquidation account
has been treated by the IRS, in a series of private letter rulings which may
not be used or cited as precedent, as having nominal, if any, fair market value
and, therefore, it is likely that the interests in the liquidation account
established by IGA as part of the conversion will also be treated as having
nominal, if any, fair market value. Accordingly, it is likely that depositors
of IGA who receive an interest in the liquidation account established by IGA
pursuant to the conversion will not recognize any gain or loss upon receipt of
such interest.
Stevens & Lee has also advised IGA that the federal income tax treatment
of the receipt, exercise and lapse of subscription rights pursuant to the
offering is uncertain, and that several private letter rulings issued by the
IRS that have addressed the tax effects of the receipt, exercise and lapse of
subscription rights, in comparable transactions, have been in conflict. For
instance, the IRS adopted the position in one private ruling that subscription
rights will be deemed to have been received to the extent of the sum of the
minimum pro rata distribution of such rights, plus the rights actually
exercised in excess of such pro rata distribution, and that gain must be
recognized to the extent of the combined fair market value of the pro rata
distribution of subscription rights plus the subscription rights actually
exercised. While the issues are not free from doubt, persons who do not
exercise their subscription rights under this analysis would recognize gain
upon receipt of rights equal to the fair market value of such rights,
regardless of exercise, and these persons should recognize a corresponding loss
upon the expiration of unexercised rights that may be allowable to offset the
gain recognized on unexercised rights; although, the loss may not be of the
same character as the gain. Under another IRS private letter ruling,
subscription rights were deemed to have been received only to the extent
actually exercised. This private letter ruling required that gain be recognized
only if the holder of such rights exercised such rights, and that no loss would
be recognized if such rights were allowed to expire unexercised. There is no
authority that clearly resolves this conflict on the tax effects of the
receipt, exercise and lapse of subscriptions rights. However, based upon
express provisions of the Internal Revenue Code and in the absence of
controlling authority, Stevens & Lee has provided in its opinion that gain
should be recognized upon the receipt, rather than the exercise, of
subscription rights. This gain should be capital gain if the unexercised
subscription rights were a capital asset in the hands of the account holder.
While the issue is not free from doubt, account holders should be allowed to
recognize a loss upon the lapse of unexercised subscription rights, which would
be deductible as a capital loss if the unexercised subscription rights were a
capital asset in the hands of the account holder. Notwithstanding the foregoing
and the uncertainty of the law governing the tax effects of the receipt,
exercise and lapse of subscription rights, the actual tax consequences or tax
effects to account holders will depend upon the value of the subscription
rights, as discussed below.
IGA has also obtained an opinion from Stockton Bates, LLP, Philadelphia,
Pennsylvania, that IGA will recognize no gain or loss for purposes of the
Pennsylvania mutual thrift institutions tax solely as a result of the
conversion; although, certain accounting adjustments may be required as a result
of the conversion and offering transactions that may result in certain
adjustments which will create some items of taxable income and expense.
IGA and JADE FINANCIAL have received a letter from RP Financial, stating
its belief that the subscription rights do not have any value, based on the
fact that these rights are acquired by the recipients without cost, are
nontransferable and of short duration, and give the recipients the right only
to purchase the common stock at a price equal to its estimated fair market
value, which will be the same price as the purchase price for the unsubscribed
shares of common stock. Unlike private letter rulings, the letter of RP
Financial is not binding on the IRS, and the IRS could disagree with
conclusions reached in the letter. In the event of any disagreement, there can
be no assurance that the IRS would not prevail in a judicial or administrative
proceeding. If the subscription rights are deemed to have a fair market value,
the receipt of such rights will be taxable to eligible account holders,
supplemental eligible account holders, and other persons who receive
subscription rights, even though such persons would have received no cash from
which to pay taxes on such taxable income. IGA could also be required to
recognize gain on the distribution of such subscription rights in an amount
equal to their aggregate fair market value if IGA is treated as distributing
the subscription rights to
28
persons who participate in the offering. Eligible account holders, supplemental
eligible account holders and other members are encouraged to consult with their
own tax advisors as to the tax consequences in the event that the subscription
rights are deemed to have a fair market value. Because the fair market value,
if any, of the subscription rights issued in the conversion depends primarily
upon the existence of certain facts rather than the resolution of legal issues,
Stevens & Lee has neither adopted the opinion of RP financial as its own nor
incorporated the opinion of RP Financial in its tax opinion issued in
connection with the conversion.
The Federal income tax discussion set forth above does not purport to
consider all aspects of Federal income taxation which may be relevant to each
eligible account holder, supplemental eligible account holder and other members
entitled to special treatment under the Internal Revenue Code, such as trusts,
individual retirement accounts, other employment benefit plans, insurance
companies, and eligible account holders, supplemental eligible account holders
and other members who are not citizens or residents of the United States. Due
to the individual nature of tax consequences, each eligible account holder,
supplemental eligible account holder and other member is urged to consult his
or her own tax and financial advisor as to the effect of such Federal income
tax consequences on his or her own particular facts and circumstances,
including the receipt, exercise and lapse of subscription rights, and also as
to any state, local, foreign or other tax consequences arising out of the
conversion.
Charitable Foundation
General. Continuing IGA's commitment to the communities that it serves,
the plan of conversion provides that IGA and JADE FINANCIAL will establish the
foundation, which will be incorporated under Pennsylvania law as a non-stock
corporation. JADE FINANCIAL will fund the foundation with cash and common stock
in an amount up to 5.0% of the total value of shares of common stock sold in
the conversion. IGA believes that the foundation will improve the long-term
value of IGA's community banking franchise by increasing IGA's visibility and
reputation in the communities that it serves.
Purpose of the Foundation. The purpose of the foundation is to provide
funding to support charitable purposes including, community development grants,
affordable housing activities, nonprofit community groups and other charitable
purposes within the communities served by IGA. Traditionally, IGA has
emphasized community lending and community development activities within the
communities that it serves. The foundation is being formed as a complement to
IGA's existing community activities. IGA believes that the foundation will
enable IGA and JADE FINANCIAL to assist their local communities in areas beyond
community development and lending.
The boards of directors of IGA and JADE FINANCIAL believe the
establishment of a charitable foundation is consistent with IGA's commitment to
community service. The boards of directors also believe that the funding of the
foundation with common stock of JADE FINANCIAL is a means of enabling the
communities served by IGA to share in the growth and success of JADE FINANCIAL
long after the completion of the conversion. The establishment of the
foundation will also enable IGA and JADE FINANCIAL to develop a unified
charitable donation strategy. IGA, however, does not expect the contribution to
the foundation to take the place of IGA's traditional community charitable
activities. In this respect, subsequent to the conversion, IGA may continue to
make contributions to other charitable organizations and/or it may make
additional contributions to the foundation.
Structure of the Foundation. The foundation will be incorporated under
Pennsylvania law as a non-stock corporation. The authority for the affairs of
the foundation is vested in its board of directors. Under Office of Thrift
Supervision guidelines, for at least the initial five years of the foundation's
existence (i) at least one director of the foundation must be a director of IGA
and (ii) at least one director of the foundation must be an independent
director from the local community, preferably with grant-making experience with
a local foundation. Pursuant to the foundation's bylaws, the foundation's
initial board of directors will be comprised of three members of JADE FINANCIAL
and IGA's boards of directors (Messrs. John J. O'Connell, Mario L. Incollingo,
Jr. and Edward D. McBride) and two other individuals chosen in light of their
commitment and service to charitable and community purposes. The other persons
expected to serve as directors of the foundation are and Pennsylvania State
Representative John M. Perzel and either Pennsylvania State Senator Vincent J.
Fumo or Mr. Anthony DiSandro.
29
There are no plans to change the size of the foundation's board of
directors during the one-year period after completion of the conversion.
Although all of the foundation's initial directors were selected by us, future
foundation directors may be nominated and elected only by the foundation's
directors. As a result, the board of directors is self-perpetuating. The board
of directors may be expanded following the conversion to include additional IGA
directors and other community members as directors, but it is currently
anticipated that at least a majority of the foundation's board of directors
will consist of persons who are the current or former directors of IGA.
No determination has been made as to what, if any, compensation the
foundation directors will receive. The certificate of incorporation of the
foundation provides that the corporation is organized exclusively for
charitable purposes, including community development, as set forth in Section
501(c)(3) of the Internal Revenue Code. The foundation's certificate of
incorporation also provides that no part of the net earnings of the foundation
will inure to the benefit of, or be distributable to its directors, officers or
members. No award, grant or distribution will be made by the foundation to any
director, officer or employee of JADE FINANCIAL or IGA or any affiliate
thereof. In addition, any of these persons, to the extent that they serve as an
officer, directors or employee of the foundation will be subject to the
conflict of interest regulations of the Office of Thrift Supervision. In
addition, it is anticipated that the foundation will adopt a conflicts of
interest policy to protect against inappropriate insider benefits.
The board of directors of the foundation will be responsible for
establishing the policies of the foundation with respect to grants or donations
by the foundation, consistent with the purposes for which the foundation was
established. Although no formal policy governing foundation grants exists at
this time, the foundation's board of directors will adopt such a policy upon
establishment of the foundation. Directors of the foundation will at all times
be bound by their fiduciary duty to advance the foundation's charitable goals,
to protect the assets of the foundation and to act in a manner consistent with
the charitable purposes for which the foundation is established. The directors
of the foundation will also be responsible for directing the activities of the
foundation, including the management of the common stock of JADE FINANCIAL held
by the foundation. However, it is expected that as a condition to receiving the
approval of the Office of Thrift Supervision to IGA's conversion, the
foundation will be required to commit to the Office of Thrift Supervision that
all shares of common stock held by the foundation will be voted in the same
ratio as all other shares of JADE FINANCIAL's common stock on all proposals
considered by shareholders of JADE FINANCIAL; provided, however, that,
consistent with this expected condition, the Office of Thrift Supervision would
waive this voting restriction under certain circumstances if compliance with
the voting restriction would:
o cause a violation of the law of the Commonwealth of Pennsylvania and the
Office of Thrift Supervision determines that federal law would not
preempt the application of the laws of Pennsylvania to the foundation;
o cause the foundation to lose its tax-exempt status, or cause the IRS to
deny the foundation's request for a determination that it is an exempt
organization or otherwise have a material and adverse tax consequence on
the foundation; or
o cause the foundation to be subject to an excise tax under Section 4941
of the Internal Revenue Code.
In order for the Office of Thrift Supervision to waive such voting restriction,
JADE FINANCIAL's or the foundation's legal counsel would be required to render
an opinion satisfactory to the Office of Thrift Supervision that compliance
with the voting requirement would have the effect described above. Under those
circumstances, the Office of Thrift Supervision would grant a waiver of the
voting restriction upon submission of such legal opinion(s) by JADE FINANCIAL
or the foundation that are satisfactory to the Office of Thrift Supervision. In
the event that the Office of Thrift Supervision were to waive the voting
requirement, the trustees would direct the voting of the common stock held by
the foundation.
The foundation's place of business is expected to initially be located at
IGA's executive offices. The foundation will utilize the employees of IGA and
will pay IGA for the value of these services. The board of directors of the
foundation will appoint any officers as may be necessary to manage the
operations of the
30
foundation. In this regard, it is expected that IGA will be required to provide
the Office of Thrift Supervision with a commitment that, to the extent
applicable, IGA will comply with the affiliate restrictions set forth in
Sections 23A and 23B of the Federal Reserve Act with respect to any
transactions between IGA and the foundation.
JADE FINANCIAL intends to capitalize the foundation with an amount of cash
and common stock equal to 5% of the value of shares of common stock sold in the
conversion, 33.33% in cash and 66.67% in common stock, which would have a total
market value of $616,250 to $833,750 ($958,813 at the maximum, as adjusted),
based on the purchase price of $8.00 pre share. The initial directors of the
foundation and their affiliates intend to purchase subject to availability, an
aggregate of _______ shares of common stock. The shares of common stock to be
acquired by the foundation, when combined with the proposed purchases of shares
of common stock by the foundation directors and their affiliates will total
________ shares or ____% of the total number of shares of common stock to be
issued and outstanding (assuming the issuance of _____ million shares of common
stock) after completion of the conversion.
The foundation will receive working capital from any dividends that may be
paid on the common stock in the future, and subject to applicable federal and
state laws, loans collateralized by the common stock or from the proceeds of
the sale of any of the common stock in the open market from time to time as may
be permitted to provide the foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Internal Revenue Code, the foundation
will be required to distribute annually in grants or donations, a minimum of 5%
of the average fair market value of its net investment assets. Failure to
distribute this minimum return will require substantial federal taxes to be
paid. Upon completion of the conversion and the contribution of shares of
common stock to the foundation, JADE FINANCIAL would have 1,591,982 shares,
1,872,920 shares, 2,153,858 shares and 2,476,936 shares issued and outstanding
based on the minimum, midpoint, maximum and maximum, as adjusted, of the
estimated offering range.
Tax Considerations. IGA believes that an organization created for the
above purposes will qualify as an organization exempt from taxation under
Section 501(c)(3) of the Internal Revenue Code, and will likely be classified
as a private foundation. A private foundation typically receives its support
from one person or one corporation whereas a public charity receives its
support from the public. The foundation will submit an application to the IRS
to be recognized as an exempt organization. If the foundation files such an
application within 15 months from the date of its organization, and if the IRS
approves the application, the effective date of the foundation's status as a
Section 501(c)(3) organization will be retroactive to the date of its
organization. Stevens & Lee, however, has not rendered any advice on the
condition to the contribution to be agreed to by the foundation which requires
that all shares of common stock held by the foundation must be voted in the
same ratio as all other outstanding shares of common stock on all proposals
considered by shareholders of JADE FINANCIAL. Consistent with this condition,
in the event that JADE FINANCIAL or the foundation receives an opinion of its
legal counsel that compliance with this voting restriction would have the
effect of causing the foundation to lose its tax-exempt status or otherwise
have a material and adverse tax consequence on the foundation, or subject the
foundation to an excise tax for "self-dealing" under Section 4941 of the
Internal Revenue Code, the Office of Thrift Supervision will waive such voting
restriction upon submission by JADE FINANCIAL or the foundation of a legal
opinion to that effect satisfactory to the Office of Thrift Supervision. See
"-- Regulatory Conditions Imposed on the Foundation."
A legal opinion of the Office of Thrift Supervision which addresses the
establishment of charitable foundations by savings associations opines that as
a general rule funds contributed to a charitable foundation should not exceed
the deductible limitation set forth in the Internal Revenue Code, and if an
association's contributions exceed the deductible limit, such action must be
justified by the board of directors. In addition, under Pennsylvania law, JADE
FINANCIAL is authorized by statute to make charitable contributions and case
law has recognized the benefits of such contributions to a Pennsylvania
corporation. In this regard, Pennsylvania case law provides that a charitable
gift must merely be within reasonable limits as to amount and purpose to be
valid. Under the Internal Revenue Code, JADE FINANCIAL may deduct up to 10% of
its taxable income in any one year and any contributions made by JADE FINANCIAL
in excess of the deductible amount will be deductible for federal tax purposes
over each of the five succeeding taxable years. We believe that the conversion
presents a unique opportunity to make the stock contribution given the
31
substantial amount of additional capital being raised in the conversion. In
making such a determination, we considered the dilutive impact of the stock
contribution on the conversion appraisal. See "Comparison of Valuation and Pro
Forma Information with No Stock Contribution." Based on such considerations, we
believe that the stock contribution to the foundation in excess of the 10%
annual limitation is justified given our capital position and earnings, the
substantial additional capital being raised in the conversion and the potential
benefits of the foundation to our community. In this regard, assuming the sale
of the common stock at the midpoint of the estimated valuation range, at March
31, 1999, JADE FINANCIAL would have pro forma shareholders' equity of $27.28
million and our pro forma tangible, core and risk-based capital ratios would be
11.36%, 11.36% and 21.75%, respectively. See "Regulatory Capital Compliance,"
"Capitalization," and "Comparison of Valuation and Pro Forma Information with
No Stock Contribution." Thus, the amount of the stock contribution will not
adversely impact our financial condition, and we therefore believe that the
amount of the charitable contribution is reasonable given the and our pro forma
capital positions. As such, we believe that the stock contribution does not
raise safety and soundness concerns.
We have received an opinion of Stevens & Lee that JADE FINANCIAL's
contribution of its own stock to the foundation will be deductible subject to a
limitation based on 10% of JADE FINANCIAL's annual taxable income. JADE
FINANCIAL, however, would be able to carry forward any unused portion of the
deduction for five years following the year in which the contribution is made
for federal and Pennsylvania tax purposes.
JADE FINANCIAL currently estimates that substantially all of the stock
contribution should be deductible. However, no assurances can be made that JADE
FINANCIAL will have sufficient pre-tax income over the periods following the
year in which the contributions are made to utilize fully the carryover related
to the excess contribution.
In cases of willful, flagrant or repeated acts or failures to act which
result in violations of the IRS rules governing private foundations, a private
foundation's status as a private foundation may be involuntarily terminated by
the IRS. In such event, the managers of a private foundation could be liable
for excise taxes based on such violations and the private foundation could be
liable for a termination tax under the Internal Revenue Code. The foundation's
articles of incorporation provide that it shall have a perpetual existence. In
the event, however, the foundation were subsequently dissolved as a result of a
loss of its tax exempt status, the foundation would be required under the
Internal Revenue Code and its articles of incorporation to distribute any
assets remaining in the foundation at that time for one or more exempt purposes
within the meaning of Section 501(c)(3) of the Internal Revenue Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.
In general, the income of a private foundation is exempt from federal and
state taxation. However, investment income, such as interest, dividends and
capital gains, will be subject to a federal excise tax of 2.0%. The foundation
will be required to make an annual filing with the IRS within four and one-half
months after the close of the foundation's taxable year to maintain its
tax-exempt status. The foundation will also be required to publish a notice
that the annual information return will be available for public inspection for
a period of 180 days after the date of such public notice. The information
return for a private foundation must include, among other things, an itemized
list of all grants made or approved, showing the amount of each grant, the
recipient, any relationship between a grant recipient and the foundation's
managers, and a concise statement of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
foundation is expected to be subject to the following conditions being agreed
to by the foundation in writing as a condition to receiving the Office of
Thrift Supervision's approval for the conversion:
1. the foundation will be subject to examination by the Office of Thrift
Supervision;
2. the foundation must comply with supervisory directives imposed by the
Office of Thrift Supervision;
3. the foundation will operate in accordance with written policies adopted
by its board of directors, including a conflict of interest policy;
32
4. any shares of common stock held by the foundation must be voted in the
same ratio as all other shares of common stock voting on all proposals
considered by shareholders of JADE FINANCIAL; provided, however, that
consistent with the condition, the Office of Thrift Supervision would
waive this voting restriction under certain circumstances of compliance
with the voting restriction would:
o cause a violation of the law of the Commonwealth of Pennsylvania and
the Office of Thrift Supervision determines that federal law would not
preempt the application of the laws of Pennsylvania to the foundation;
o cause the foundation to lose its tax-exempt status or otherwise have a
material and adverse tax consequence on the foundation; or
o cause the foundation to be subject to an excise tax under Section 4941
of the Internal Revenue Code; and
5. any shares of common stock subsequently purchased by the foundation will
be aggregated with any shares repurchased by JADE FINANCIAL or IGA for
purposes of calculating the number of shares which may be repurchased
during the three-year period subsequent to conversion.
6. under Office of Thrift Supervision guidelines, for at least the initial
five years of the foundation's existence (i) at least one director of the
foundation must be a director of IGA and (ii) at least one director of the
foundation must be an independent director from the local community,
preferably with grant-making experience with a local foundation.
In order for the Office of Thrift Supervision to waive the voting restriction,
JADE FINANCIAL's or the foundation's legal counsel would be required to give an
opinion satisfactory to the Office of Thrift Supervision. While there is no
current intention for JADE FINANCIAL or the foundation to seek a waiver from
the Office of Thrift Supervision from these restrictions, there can be no
assurances that a legal opinion addressing these issues could be given, or if
given, that the Office of Thrift Supervision would grant an unconditional
waiver of the voting restriction. If the voting restriction is waived or
becomes unenforceable, the Office of Thrift Supervision may either impose a
condition that provides a certain portion of the members of the foundation's
board of directors shall be persons who are not directors, officers or
employees of JADE FINANCIAL, IGA or any affiliate or impose other conditions
relating to control of the foundation's common stock as are determined by the
Office of Thrift Supervision to be appropriate at the time. In no event would
the voting restriction survive the sale of shares of the common stock held by
the foundation.
Various Office of Thrift Supervision regulations may be deemed to apply to the
foundation including regulations regarding:
o transactions with affiliates;
o conflicts of interest;
o capital distributions; and
o repurchases of capital stock within the three-year period subsequent to
the stock issuance.
JADE FINANCIAL and IGA anticipate that the foundation's affairs will be
conducted in a manner consistent with the Office of Thrift Supervision's
conflict of interest regulations. IGA has provided information to the Office of
Thrift Supervision demonstrating that the initial contribution of common stock
to the foundation would be within the amount which IGA would be permitted to
make as a capital distribution assuming such contribution is deemed to have
been made by IGA.
How We Determined Our Price and the Number of Shares to be Issued in the Stock
Offering
The plan of conversion and federal regulations require that the purchase
price of the common stock must be based on the appraised pro forma market value
of IGA and JADE FINANCIAL, as determined on the basis of an independent
valuation. IGA has retained RP Financial to make this valuation. For its
services in making this appraisal, RP Financial's fees and out-of-pocket
expenses are estimated to be $42,500. IGA has agreed to indemnify RP Financial
and any employees of IGA who act for or on behalf of RP Financial in connection
33
with the appraisal against any and all loss, cost, damage, claim, liability or
expense of any kind, including claims under federal and state securities laws,
arising out of any misstatement or untrue statement of a material fact or an
omission to state a material fact in the information supplied by IGA to RP
financial, unless RP Financial is determined to be negligent or otherwise at
fault.
An appraisal has been made by RP Financial in reliance upon the
information contained in this prospectus, including IGA's financial statements.
RP Financial also considered the following factors, among others:
o the present and projected operating results and financial condition of
IGA and JADE FINANCIAL and the economic and demographic conditions
in IGA's existing marketing areas;
o certain historical, financial and another information relating to IGA;
a comparative evaluation of the operating and financial statistics
of IGA with those of other similarly situated publicly traded
savings and loan holding companies;
o the aggregate size of the offering of the common stock;
o the impact of the conversion on IGA's net worth and earnings
potential;
o the proposed dividend policy of IGA and JADE FINANCIAL; and
o the trading market for securities of comparable institutions and
general conditions in the market for such securities.
In its review of the appraisal provided by RP Financial, IGA's board of
directors reviewed the methodologies and the appropriateness of the assumptions
used by RP Financial in addition to the factors listed above, and the board of
directors believes that these assumptions were reasonable.
On the basis of the foregoing, RP Financial has advised IGA and JADE
FINANCIAL that in RP Financial's opinion, dated July 23, 1999, the estimated
pro forma market value of the common stock on a fully converted basis, assuming
a contribution to a charitable foundation in an amount equal to 5.0% of the
shares sold, ranged from a minimum of $12.33 million to a maximum of $16.68
million with a midpoint of $14.50 million. The boards of directors of IGA and
JADE FINANCIAL determined that the common stock should be sold at $8.00 per
share. Based on the estimated valuation range and the purchase price, the
number of shares of common stock that we will issue, not including shares to be
issued to the foundation, will range from between 1,540,628 shares to 2,084,379
shares, with a midpoint of 1,812,503 shares. The estimated valuation range may
be amended with the approval of the Office of Thrift Supervision, if required,
or if necessitated by subsequent developments in the financial condition of IGA
and JADE FINANCIAL or market conditions generally, or to fill the order of our
tax-qualified employee plans. In the event the estimated valuation range is
updated to amend the value of the common stock below the current minimum
estimated valuation range of $12.33 million or above the current maximum of the
estimated valuation range of $16.68 million, the new appraisal will be filed
with the Office of Thrift Supervision and the SEC.
Based upon current market and financial conditions and recent practices
and policies of the Office of Thrift Supervision, in the event we receive
orders for common stock in excess of $16.68 million (the maximum of the
estimated valuation range) and up to $19.18 million (the maximum of the
estimated valuation range, as adjusted by 15%), we may be required by the
Office of Thrift Supervision to accept all such orders. No assurances, however,
can be made that we will receive orders for common stock in excess of the
maximum of the estimated valuation range or that, if such orders are received,
that all such orders will be accepted because our final valuation and number of
shares to be issued are subject to the receipt of an updated appraisal from RP
Financial which reflects such an increase in the valuation and the approval of
such increase by the Office of Thrift Supervision. In addition, an increase in
the number of shares above 2,084,379 shares will first be used, if necessary,
to fill the order of our employee stock ownership plan. There is no obligation
or understanding on the part of management to take and/or pay for any shares in
order to complete the conversion.
34
RP Financial's valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing these shares.
RP Financial did not independently verify the consolidated financial statements
and other information provided by IGA, nor did RP Financial value independently
the assets or liabilities of IGA. The valuation considers IGA as a going
concern and should not be considered as an indication of the liquidation value
of IGA. Moreover, because this valuation is necessarily based upon estimates
and projections of a number of matters, all of which are subject to change from
time to time, no assurance can be given that persons purchasing common stock in
the offering will thereafter be able to sell such shares at prices at or above
the purchase price or in the range of the valuation described above.
Prior to the completion of the conversion the maximum of the estimated
valuation range may be increased up to 15% and the number of shares of common
stock may be increased to 2,397,035 shares to reflect changes in market and
financial conditions or to fill the order of our tax-qualified employee plans,
without the resolicitation of subscribers. See "-- Limitations on Stock
Purchases" as to the method of distribution and allocation of additional shares
that may be issued in the event of an increase in the estimated valuation range
to fill unfilled orders in the subscription offering.
No sale of shares of common stock in the conversion may be consummated
unless prior to such completion RP Financial confirms that nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause it to conclude that the aggregate value of the common stock to be
issued is materially incompatible with the estimate of the aggregate
consolidated pro forma market value of IGA and JADE FINANCIAL. If this
confirmation is not received, we may cancel the offering, extend the offering
and establish a new estimated valuation range and/or estimated price range,
extend, reopen or hold a new offering or take any other action the Office of
Thrift Supervision may permit.
Depending upon market or financial conditions following the start of the
subscription offering, the total number of shares of common stock may be
increased or decreased without a resolicitation of subscribers, provided that
the product of the total number of shares times the purchase price is not below
the minimum or more than 15% above the maximum of the estimated valuation
range. In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the estimated
valuation range or more than 15% above the maximum of such range, purchasers
will be resolicited and be permitted to continue their orders, in which case
they will need to reconfirm their subscriptions prior to the expiration of the
resolicitation valuation or their subscription funds will be promptly refunded
with interest at IGA's passbook rate of interest, or be permitted to modify or
rescind their subscriptions. Any change in the estimated valuation range must
be approved by the Office of Thrift Supervision. If the number of shares of
common stock issued in the conversion is increased due to an increase of up to
15% in the estimated valuation range to reflect changes in market or financial
conditions or to fill the order of our tax-qualified employee plans, persons
who subscribed for the maximum number of shares will be given the opportunity
to subscribe for the adjusted maximum number of shares. See "-- Limitations on
Stock Purchases."
An increase in the number of shares of common stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and our pro forma net income and shareholders'
equity on a per share basis while increasing pro forma net income and
shareholders' equity on an aggregate basis. A decrease in the number of shares
of common stock would increase both a subscriber's ownership interest and our
pro forma net income and shareholders' equity on a per share basis while
decreasing pro forma net income and shareholders' equity on an aggregate basis.
See "Risk Factors -- Our Board of Directors, Management and Employee Plans May
Have Voting Control of JADE FINANCIAL" and "Pro Forma Data."
Copies of the appraisal report of RP Financial, including any amendments,
and the detailed report of the appraiser setting forth the method and
assumptions for the appraisal are available for inspection at the main office
of IGA and the other locations specified under "Additional Information."
Subscription Offering and Subscription Rights
Under the plan of conversion, rights to subscribe for the purchase of
common stock have been granted to the following persons in the following order
of descending priority:
35
o depositors of IGA as of the close of business on March 31, 1998
("Eligible Account Holders"),
o Tax-qualified employee plans ("Tax-Qualified Employee Plans"),
o depositors of IGA as of the close of business on June 30, 1999
("Supplemental Eligible Account Holders"), and
o members of IGA as of the close of business on July 31, 1999 other than
Eligible Account Holders or Supplemental Eligible Account Holders
("Other Members").
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and to the maximum and minimum purchase limitations
set forth in the plan of conversion and as described below under "--
Limitations on Stock Purchases."
Preference Category No. 1: Eligible Account Holders. Each Eligible Account
Holder shall receive, without payment, first priority, nontransferable
subscription rights to subscribe for shares of common stock in an amount equal
to the greater of:
(1) $300,000 of common stock;
(2) one-tenth of one percent of the total offering of shares of common
stock in the subscription offering; or
(3) 15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of common stock offered in
the subscription offering by a fraction, of which the numerator is the
amount of the qualifying deposits of the Eligible Account Holder and
the denominator is the total amount of qualifying deposits of all
Eligible Account Holders in IGA in each case as of the close of
business on March 31, 1998 (the "Eligibility Record Date"), subject to
the overall purchase limitations.
See "-- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated among subscribing Eligible Account Holders so as
to permit each such Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his total allocation equal to
the lesser of the number of shares subscribed for or 100 shares. Thereafter,
any shares remaining after each subscribing Eligible Account Holder has been
allocated the lesser of the number of shares subscribed for or 100 shares will
be allocated among the subscribing Eligible Account Holders pro rata whose
subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits of all subscribing Eligible Account Holders
whose subscriptions remained unfulfilled. Subscription Rights of Eligible
Account Holders will be subordinated to the priority rights of IGA and JADE
FINANCIAL's employee stock ownership plan to purchase shares in excess of the
maximum of the estimated valuation range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors of officers of IGA and their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding March 31, 1998.
Preference Category No. 2: Tax-Qualified Employee Plans. Each
Tax-Qualified Employee Plan, including the employee stock ownership plan, shall
be entitled to receive, without payment therefor, second priority,
nontransferable subscription rights to purchase up to 10% of the common stock,
provided that individually or in the aggregate such plans (other than that
portion of such plans which is self-directed) shall not purchase more than 10%
of the shares of common stock, including any increase in the number of shares
of common stock after the date hereof as a result of an increase in the maximum
of the estimated valuation range of the total number of shares of common stock
to be issued in the conversion. The employee stock ownership plan intends to
purchase 8.0% of the shares of common stock sold in the offering, or 123,250
shares and 166,750 shares based on the minimum and maximum of the estimated
valuation range respectively.
36
Shares of common stock purchased by any individual participant in a Tax
Qualified Employee Plan using funds therein pursuant to the exercise of
subscription rights granted to such participant in his individual capacity as
an Eligible Account Holder and/or Supplemental Eligible Account Holder and/or
purchases by such participant in the community offering shall not be deemed to
be purchases by a Tax-Qualified Employee Plan for purposes of calculating the
maximum amount of common stock that Tax-Qualified Employee Plans may purchase
if the individual participant controls or directs the investment authority.
Subscription rights received pursuant to this Category shall be subordinated to
all rights received by Eligible Account Holders to purchase shares pursuant to
Category No. 1; provided, however, that notwithstanding any other provision of
the plan of conversion to the contrary, the Tax-Qualified Employee Plans shall
have a first priority subscription right to the extent that the total number of
shares of common stock sold in the offering exceeds the maximum of the
estimated valuation range as set forth in this prospectus. In the event that
the total number of shares offered in the offering is increased to an amount
greater than the number of shares representing the maximum of the estimated
valuation range, the employee stock ownership plan will have a priority right
to purchase any such shares exceeding the maximum of the estimated valuation
range up to an aggregate of 8% of the common stock sold in the offering. See
"Limitations on Stock Purchases" and "Management -- Benefit Plans -- Employee
Stock Ownership Plan."
Preference Category No. 3: Supplemental Eligible Account Holders. To the
extent that there are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders and the Tax-Qualified Employee Plans,
each Supplemental Eligible Account Holder shall be entitled to receive, without
payment therefor, third priority, nontransferable subscription rights to
subscribe for shares of common stock in an amount equal to the greater of:
(1) $300,000 shares of common stock (or such maximum purchase limitation
as may be established for the community offering and/or syndicated
community offering or public offering);
(2) one-tenth of one percent of the total offering of shares of common
stock in the subscription offering; or
(3) 15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of common stock offered in
the subscription offering by a fraction, of which the numerator is the
amount of the qualifying deposits of the Supplemental Eligible Account
Holder and the denominator of which is the total amount of qualifying
deposits of all Supplemental Eligible Account Holders in IGA in each
case on the close of business on June 30, 1999 (the "Supplemental
Eligibility Record Date"), subject to the overall purchase
limitations.
See "-- Limitations on Stock Purchases.
If there are not sufficient shares available to satisfy all subscriptions
of all Supplemental Eligible Account Holders, available shares first will be
allocated among subscribing Supplemental Eligible Account Holders so as to
permit each such Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make his total allocation
(including the number of shares, if any, allocated in accordance with Category
No. 1) equal to the lesser of the number of shares subscribed for or 100
shares. Thereafter, any shares remaining available will be allocated among the
Supplemental Eligible Account Holders pro rata whose subscriptions remain
unfilled in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled.
Preference Category No. 4: Other Members. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the Tax-Qualified Employee Plans and Supplemental Eligible
Account Holders, each Other Member shall receive, without payment therefor,
fourth priority, nontransferable subscription rights to subscribe for shares of
common stock, up to the greater of $300,000 of common stock (or such maximum
purchase limitation as may be established for the community offering and/or
syndicated community offering or public offering) or one-tenth of one percent
of the total offering of shares of common stock in the subscription offering,
subject to the overall purchase limitations. See "-- Limitations on Stock
Purchases."
37
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the
Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, is in
excess of the total number of shares of common stock offered in the offering,
shares shall be allocated so as to permit each such Other Member, to the extent
possible, to purchase a number of shares which will make his or her total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Any shares remaining will be allocated among the subscribing Other
Members whose subscriptions remain unsatisfied on an equal number of shares
basis per order until all orders have been filled or the remaining shares have
been allocated.
Expiration Date for the Subscription Offering. The subscription offering
will expire at 12:00 p.m., local time, on September 15, 1999 (the "Subscription
Expiration Date"), unless extended for up to 45 days or for such additional
periods by JADE FINANCIAL and IGA as may be approved by the Office of Thrift
Supervision. The subscription offering may not be extended beyond September 22,
2001. Subscription rights which have not been exercised prior to the
Subscription Expiration Date (unless extended) will become void.
JADE FINANCIAL and IGA will not execute orders for the purchase of common
stock until at least the minimum number of shares of common stock, 1,540,625
shares, have been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Subscription Expiration Date,
unless this period is extended with the consent of the Office of Thrift
Supervision, all funds delivered to IGA pursuant to this subscription offering
will be returned promptly to the subscribers with interest at IGA's passbook
rate and all withdrawal authorizations will be canceled. If an extension beyond
the 45-day period following the Subscription Expiration Date is granted, JADE
FINANCIAL and IGA will notify subscribers of the extension of time and of any
rights of subscribers to modify or rescind their subscriptions.
Community Offering
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, the Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders and Other Members, JADE FINANCIAL
and IGA anticipate that they will offer shares pursuant to the plan of
conversion in a community offering to certain members of the general public,
with preference given to natural persons residing in counties in Pennsylvania
in which IGA has a branch office. These natural persons are referred to as
Preferred Offerees.
No persons, together with an associate or group of persons acting in
concert with such persons, may subscribe for or purchase in the community
offering more than the greater of (i) $300,000 of common stock or (ii)
one-tenth of 1% of the total offering of shares in the subscription offering,
provided, however, that this amount may be increased to 5% of the total
offering of shares in the subscription offering, subject to any required
regulatory approval but without the further approval of IGA's members.
The opportunity to subscribe for shares of common stock in the community
offering will be subject to the right of JADE FINANCIAL and IGA in their sole
discretion, to accept or reject any such orders in whole or in part from any
person either at the time of receipt of an order or as soon as practicable
following completion of the community offering. The community offering, if any,
will commence concurrently with, during or promptly after the subscription
offering, and must be completed within 45 days after the completion of the
subscription offering, unless extended by JADE FINANCIAL and IGA with any
required regulatory approval.
Available shares first will be allocated among Preferred Offerees whose
orders are accepted, so as to permit each such Preferred Subscriber, to the
extent possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Thereafter, any shares remaining will be allocated among the Preferred
Offerees whose subscriptions remain unsatisfied on an equal number of shares
basis per order until all orders have been filled or the remaining shares have
been allocated. If there are any shares remaining after all subscriptions by
Preferred Offerees have been satisfied, such remaining shares shall be
allocated to other members of the general public who purchase in the community
offering applying the same allocation described above for Preferred Offerees.
38
Syndicated Community Offering
To the extent that shares remain available for purchase after satisfaction
of all subscriptions in the subscription offering and the community offering,
JADE FINANCIAL and IGA anticipate that they will offer shares pursuant to the
plan of conversion to members of the general public in a syndicated community
offering (i.e., an offering by JADE FINANCIAL and IGA conducted through a
syndicate of broker/dealers).
No persons, together with an associate or group of persons acting in
concert with such persons, may subscribe for or purchase in the syndicated
community offering more than $300,000 of common stock; provided, however, that
this amount may be increased to 5% of the total offering of shares in the
subscription offering, subject to any required regulatory approval but without
the further approval of IGA's members; provided further that orders for common
stock in the syndicated community offering shall first be filled to a maximum
of 2% of the total number of shares of common stock sold in the conversion and
thereafter any remaining shares shall be allocated on an equal number of shares
basis per order until all orders have been filled.
The opportunity to subscribe for shares of common stock in the syndicated
community offering will be subject to the right of JADE FINANCIAL and IGA, in
their sole discretion, to accept or reject any such orders in whole or in part
from any person either at the time of receipt of an order or as soon as
practicable following completion of the syndicated community offering. The
syndicated community offering, if any, will commence concurrently with, during
or promptly after the subscription and/or community offering, and must be
completed within 45 days after the completion of the subscription offering,
unless extended by JADE FINANCIAL and IGA with any required regulatory
approval.
Public Offering
As a final step in the offerings, the plan of conversion provides that, if
feasible, all shares of common stock not purchased in the subscription and
community offerings may be offered for sale to the general public in a public
offering through Charles Webb & Company. We call this the public offering. It
is expected that the public offering will commence as soon as practicable after
termination of the subscription offering and the community offerings, if any.
JADE FINANCIAL and IGA, in their sole discretion, have the right to reject
orders in whole or in part received in the public offering. Neither Charles
Webb & Company nor any registered broker-dealer shall have any obligation to
take or purchase any shares of common stock in the public offering; however,
Charles Webb & company has agreed to use its best efforts in the sale of shares
in the public offering.
The price at which common stock is sold in the public offering will be the
same price at which shares are offered and sold in the subscription and
community offerings.
Charles Webb & Company may enter into agreements with broker-dealers to
assist in the sale of the shares in the public offering, although no such
agreements exist as of the date of this prospectus. No orders may be placed or
filled by or for a selected dealer during the subscription offering. After the
close of the subscription offering, Charles Webb & Company will instruct
selected dealers as to the number of shares to be allocated to each selected
dealer. Only after the close of the subscription offering and upon allocation
of shares to selected dealers may selected dealers take orders from their
customers. During the subscription offering, community offering, and syndicated
community offering, selected dealers may only solicit indications of interest
from their customers to place orders with JADE FINANCIAL as of a certain order
date for the purchase of shares of JADE FINANCIAL common stock. When, and if,
Charles Webb & Company and IGA believe that enough indications of interest and
orders have not been received in the subscription offering, community offering
and syndicated community offering to consummate the conversion, Charles Webb &
Company will request, as of the order date, selected dealers to submit orders
to purchase shares for which they have previously received indications of
interest from their customers. Selected dealers will send confirmations of the
orders to such customers on the next business day after the order date.
Selected dealers will debit the accounts of their customers on the "Settlement
Date" which date will be three business days from the order date. Customers who
authorize selected dealers to debit their brokerage accounts are required to
have the funds for payment in their account on but not before the Settlement
Date. On the Settlement Date,
39
selected dealers will deposit funds to the account established by IGA for each
selected dealer. Each customer's funds forwarded to IGA, along with all other
accounts held in the same title, will be insured by the FDIC up to $100,000 in
accordance with applicable FDIC regulations. After payment has been received by
IGA from selected dealers, funds will earn interest at IGA's passbook rate
until the completion or termination of the conversion. Funds will be promptly
returned, with interest, in the event conversion is not consummated as
described above.
Persons Who are Not Permitted to Participate in the Offering
JADE FINANCIAL and IGA will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the plan of conversion reside. However, JADE
FINANCIAL and IGA are not required to offer stock in the subscription offering
to any person who resides in a foreign country or resides in a state of the
United States with respect to which:
o the number of persons otherwise eligible to subscribe for shares under
the plan of conversion who reside in such jurisdiction is small;
o the granting of subscription rights or the offer or sale of shares of
common stock to such persons would require any of JADE FINANCIAL and
IGA or their officers, directors or employees, under the laws of
such jurisdiction to register as a broker, dealer, salesman or
selling agent or to register or otherwise qualify its securities for
sale in such jurisdiction or to qualify as a foreign corporation or
file a consent to service of process in such jurisdiction; and
o such registration, qualification or filing in the judgment of JADE
FINANCIAL and IGA would be impracticable or unduly burdensome for
reasons of cost or otherwise.
Where the number of persons eligible to subscribe for shares in one state is
small, JADE FINANCIAL and IGA will base their decision as to whether or not to
offer the common stock in that state on a number of factors, including but not
limited to the size of accounts held by account holders in the state, the cost
of registering or qualifying the shares or the need to register their officers,
directors or employees as brokers, dealers or salesmen.
Limitations on Stock Purchases
The plan of conversion includes the following limitations on the number of
shares of JADE FINANCIAL common stock which may be purchased in the offering:
(1) No fewer than 25 shares of common stock may be purchased, to the
extent shares are available;
(2) Except for the Tax-Qualified Employee Plans and certain Eligible
Account Holders and Supplemental Eligible Account Holders whose
subscription rights are based upon the amount of their deposits, the
maximum number of shares of our common stock subscribed for or purchased
in all categories of the offering by any person, together with
associates of and groups of persons acting in concert with such persons,
shall not exceed 2.5% of the common stock offered in the offering; and
(3) No more than 22% of the total number of shares offered for sale in the
subscription offering may be purchased by directors, officers and
employees of IGA in the fifth priority category in the subscription
offering. No more than 32% of the total number of shares offered for
sale in the offering may be purchased by directors and officers of IGA
and their associates in the aggregate, excluding purchases by the
Tax-Qualified Employee Plans.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
IGA, the boards of directors of JADE FINANCIAL and IGA may increase or decrease
the individual purchase limitations to a percentage which does not exceed 5% or
fall below .10% of the total offering of shares in the subscription offering
and increase the aggregate purchase limitation to a percentage which does not
exceed 5% of the total shares offered in the conversion.
The term "associate" when used to indicate a relationship with any person
means:
40
o any corporation or organization (other than IGA, JADE FINANCIAL or a
majority-owned subsidiary of any of IGA) of which such person is a
director, officer or partner or is directly or indirectly the beneficial
owner of 10% or more of any class of equity securities;
o 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; provided, however, that Tax-Qualified or
Non-Tax Qualified Employee Plans of JADE FINANCIAL or IGA in which such
person has a substantial beneficial interest or serves as trustee or in
a similar fiduciary capacity shall not be deemed to be an associate of
such person;
o 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
IGA, JADE FINANCIAL or any subsidiary of IGA or JADE FINANCIAL; and
o any person acting in concert with any of the persons or entities
specified above;
The term "acting in concert" is defined to mean knowing participation in a
joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or 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. A person or company which
acts in concert with another person or company shall also be deemed to be
acting in concert with any person or company who is also acting in concert with
that other party, expect that the Tax-Qualified Employee Plans 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 each plan will be aggregated. The determination
of whether a group is acting in concert shall be made solely by the board of
directors of IGA or officers delegated by such board of directors and may be
based on any evidence upon which such board or delegatee chooses to rely.
Marketing Arrangements
JADE FINANCIAL and IGA have retained Charles Webb & Company to consult
with and to advise IGA, and to assist JADE FINANCIAL, on a best efforts basis,
in the distribution of the shares of common stock in the distribution of the
shares of common stock in the offering. The services that Charles Webb &
Company will provide include, but are not limited to:
o training the employees of IGA who will perform certain ministerial
functions in the offering regarding the mechanics and regulatory
requirements of the stock offering process;
o managing the stock information centers by assisting interested stock
subscribers and by keeping records of all stock orders;
o preparing marketing materials; and
o assisting in the solicitation of proxies from IGA's members for use
at the special meeting.
For its services, Charles Webb & Company has received a management fee of
$25,000 and will receive a success fee of 1.4% of the aggregate purchase price
of the shares of our common stock sold in the offering, excluding shares
purchased by the Tax-Qualified Employee Plans, and officers, directors and
employees of IGA and members of their immediate families as well as shares
issued to the foundation. The success fee paid to Charles Webb & Company will
be reduced by the amount of the management fee. In the event that selected
dealers are used to assist in the sale of shares of our common stock in the
offering, these dealers will be paid a fee of up to 5.5% of the total purchase
price of the shares sold by such dealers. IGA has agreed to indemnify Charles
Webb & Company against certain claims or liabilities, including certain
liabilities under the Securities Act of 1933, as amended, and will contribute
to payments Charles Webb & Company may be required to make in connection with
any such claims or liabilities.
Sales of shares of our common stock will be made by registered
representatives affiliated with Charles Webb & Company or by the broker-dealers
managed by Charles Webb & Company. Charles Webb & Company has undertaken that
the shares of our common stock will be sold in a manner which will ensure that
41
the distribution standards of the Nasdaq Stock Market will be met. A stock
information center will be established at the main office of IGA in
Feasterville, Pennsylvania. We will rely on Rule 3a4-1 of the Securities
Exchange Act of 1934, as amended, and sales of our common stock will be
conducted within the requirements of this Rule, so as to permit officers,
directors and employees to participate in the sale of our common stock in those
states where the law permits. No officer, director or employee of IGA or JADE
FINANCIAL will be compensated directly or indirectly by the payment of
commissions or other remuneration in connection with his or her participation
in the sale of common stock.
Procedure for Purchasing Shares in the Subscription Offering
To ensure that each purchaser receives a prospectus at least 48 hours
before the Subscription Expiration Date (unless extended) in accordance with
Rule 15c2-8 of the Securities Exchange Act of 1934, as amended, no prospectus
will be mailed any later than five days prior to such date or hand delivered
any later than two days prior to such date. Execution of the order form will
confirm receipt or delivery in accordance with Rule 15c2-8. Order forms will
only be distribution with a prospectus.
To purchase shares in the Subscription Offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at IGA, which may be given
by completing the appropriate blanks in the order form, must be received by IGA
by noon, Philadelphia, Pennsylvania time, on or before the Subscription
Expiration Date, unless extended. In addition, JADE FINANCIAL and IGA will
require a prospective purchaser to execute a certification in the form required
by applicable Office of Thrift Supervision regulations in connection with any
sale of common stock. Order forms which are not received by this time or are
executed defectively or ar received without full payment or appropriate
withdrawal instructions are not required to be accepted. In addition, IGA will
not accept orders submitted on photocopied or facsimilied order forms nor order
forms unaccompanied by an executed certification form. IGA has the right to
waive or permit the correction of incomplete or improperly executed forms, but
does not represent that it will do so. Once received, an executed order form
may not be modified, amended or rescinded without the consent of IGA, unless
the conversion has not been completed within 45 days after the end of the
subscription offering, or this period has been extended.
In order to ensure that Eligible Account Holders, Tax- Qualified Employee
Plans, Supplemental Eligible Account Holders and Other Members are properly
identified as to their stock purchase priority, depositors as of the close of
business on the Eligibility Record Date (March 31, 1998) or the Supplemental
Eligibility Record Date (June 30, 1999) and depositors and certain borrowers as
of the close of business on the voting record date (July 31, 1999) must list
all accounts on the stock order form giving all names in each account and the
account numbers.
Payment for subscriptions may be made:
o by check or money order;
o by authorization of withdrawal from deposit accounts maintained with
IGA (including a certificate of deposit); or
o in cash, if delivered in person at any full-service banking office of
IGA, although we request that you exchange cash for a check with any
of our tellers.
IGA, in its sole discretion, may also elect to receive payments by wire
transfer. Interest will be paid on payments made by cash, check or money order
at our then-current passbook yield from the date payment is received until
completion of the offering. If payment is made by authorization of withdrawal
from deposit accounts, the funds authorized to be withdrawn from a deposit
account will continue to accrue interest at the contractual rate, but may not
be used by the subscriber until all of our common stock has been sold or the
plan of conversion is terminated, whichever is earlier.
If a subscriber authorizes IGA to withdraw the amount of the purchase
price from his deposit account, IGA will do so as of the effective date of the
conversion. IGA will waive any applicable penalties for early withdrawal from
certificate accounts.
42
In the event of an unfilled amount of any subscription order, IGA will
make an appropriate refund or cancel an appropriate portion of the related
withdrawal authorization, after completion of the offering. If for any reason
the offering is not consummated, purchasers will have refunded to them all
payments made, with interest, and all withdrawal authorizations will be
canceled in the case of subscription payments authorized from accounts at IGA.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the subscription offering, these plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
rather, may pay for shares of common stock subscribed for at the purchase price
upon completion of the subscription offering, community offering and syndicated
community offering, if all shares are sold, or upon completion of the public
offering if shares remain to be sold in such offering. In the event that, after
the completion of the subscription offering the amount of shares to be issued
is increased above the maximum of the estimated valuation range included in
this prospectus, the Tax-Qualified Employee and Non-Tax-Qualified Employee
Plans will be entitled to increase their subscriptions by a percentage increase
in the amount of shares to be issued above the maximum of the estimated
valuation range provided that such subscription will continue to be subject to
applicable purchase limits and stock allocation procedures.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of our common stock in the subscription offering, community offering and
syndicated community offering. ERISA provisions and IRS regulations require that
officers, directors and 10% shareholders who use self-directed IRA funds to
purchase shares of common stock in the offering make such purchases for the
exclusive benefit of the IRAs. IRAs maintained at IGA are not self-directed IRAs
and any interested parties wishing to use IRA funds for stock purchases are
advised to contact the stock information center at (215) 322-9231 for additional
information.
The records of IGA will be deemed to control with respect to all matters
related to the existence of subscription rights and/or one's ability to
purchase shares of common stock in the subscription offering.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the Office of Thrift Supervision,
no person with subscription rights may transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the plan of conversion or the shares of common stock to be
issued upon their exercise. Such rights may be exercised only by the person to
whom they are granted and only for such person's account. Each person
exercising such subscription rights will be required to certify that the person
is purchase shares solely for the person's own account and that such person has
no agreement or understanding regarding the sale or transfer of such shares.
Federal 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.
IGA will refer to the Office of Thrift Supervision any situations that it
believes may involve a transfer of subscription rights and will not honor
orders believed by it to involve the transfer of such rights.
Delivery of Certificates
Certificates representing common stock issued in the offering will be
mailed by our transfer agent to the persons entitled thereto at the addresses
of such persons appearing on the stock order form as soon as practicable
following completion of the conversion. Any certificates claimed by persons
legally entitled to them or otherwise disposed of in accordance with applicable
law. Until certificates for common stock are available and delivered to
subscribers, they may not be able to sell the shares of common stock for which
they have subscribed, even though trading of the common stock may have
commenced.
Required Approvals
Various approvals of the Office of Thrift Supervision are required in
order to consummate the conversion. The Office of Thrift Supervision has
approved the plan of conversion, subject to approval by IGA's members and other
standard conditions. JADE FINANCIAL's holding company application is currently
pending with the Office of Thrift Supervision.
43
We are required to make certain filings with state securities regulatory
authorities in connection with the issuance of our common stock in the
offering.
Judicial Review
Any person hurt by a final action of the Office of Thrift Supervision
which approves, with or without conditions, or disapproves a plan of conversion
may obtain review of this action by filing in the court of appeals of the
United States for the circuit in which the principal office or residence of the
person is located, or in the United States Court of Appeals for the District of
Columbia, a written petition asking that the final action of the Office of
Thrift Supervision be modified, terminated or set aside. This petition must be
filed within 30 days after the publication of notice of final action in the
Federal Register, or 30 days after the mailing by the applicant of the notice
to members as provided for in 12 C.F.R. ss. 563b.6(c), whichever is later. The
further procedure for review is as follows: A copy of the petition is promptly
transmitted to the Office of Thrift Supervision by the clerk of the court and
then the Office of Thrift Supervision files in the court the record in the
proceeding, as provided in Section 2112 of Title 28 of the United States Code.
Upon the filing of the petition, the court has jurisdiction, which upon the
filing of the record is exclusive, to affirm, modify, terminate, or set aside
in whole or in part, the final action of the Office of Thrift Supervision.
Review of these proceedings is as provided in Chapter 7 of Title 5 of the
United States Code. The judgment and decree of the court is final, except that
they are subject to review by the Supreme Court upon certiorari as provided in
Section 1254 of Title 28 of the United States Code.
Restrictions on Purchase or Transfer of Shares After the Conversion
Common stock received in the conversion by persons who are not
"affiliates" of JADE FINANCIAL may be resold without registration.
Shares received by affiliates of JADE FINANCIAL (primarily the directors,
officers and principal shareholders of JADE FINANCIAL) will be subject to the
resale restrictions of Rule 144 under the Securities Act of 1933, as amended.
Rule 144 generally requires that there be publicly available certain
information concerning JADE FINANCIAL, and that sales thereunder be made in
routine brokerage transactions or through a market maker. If the conditions of
Rule 144 are satisfied, each affiliate (or group of persons acting in concert
with one or more affiliates) is entitled to sell in the public market, without
registration, in any three-month period, a number of shares which does not
exceed the greater of (i) 1% of the number of outstanding shares of common
stock, or (ii) if the stock is admitted to trading on a national securities
exchange or reported through the automated quotation system of a registered
securities bank, the average weekly reported volume of trading during the four
weeks preceding the sale.
In addition, all shares of common stock purchased in connection with the
conversion by a director or an executive officer of JADE FINANCIAL and IGA will
be subject to a restriction that the shares not be sold for a period of one
year following the conversion except in the event of the death of the director
or officer or pursuant to a merger of similar transaction approved by the
Office of Thrift Supervision. Each certificate for restricted shares will bear
a legend giving notice of this restriction on transfer, and instructions will
be issued to the effect that any transfer within such time period of any
certificate or record ownership of the shares other than as provided above is a
violation of the restriction. Any shares of common stock issued at a later date
within this one year period as a stock dividend, stock split or otherwise with
respect to the restricted stock will be subject to the same restrictions.
Purchases of our common stock of JADE FINANCIAL by directors, executive
officers and their associates during the three-year period following completion
of the conversion may be made only through a broker or dealer registered with
the SEC, except with the prior written approval of the Office of Thrift
Supervision. This restriction does not apply, however, to negotiated
transactions involving more than 1% of our outstanding common stock or to
certain purchases of stock pursuant to an employee stock benefit plan.
Pursuant to Office of Thrift Supervision regulations, JADE FINANCIAL will
generally be prohibited from repurchasing any shares of the common stock for a
period of three years following the conversion other than pursuant to (a) an
offer to all shareholders on a pro rata basis which is approved by the Office
of Thrift Supervision or (b) the repurchase of qualifying shares of a director,
if any.
44
The above limitations are subject to Office of Thrift Supervision policies
which generally provide that JADE FINANCIAL may repurchase its capital stock
provided:
o no repurchases occur within the first six months following the
conversion;
o repurchases during the second six months following the conversion do
not exceed 5% of its outstanding capital stock (subject to certain
exceptions) and repurchases prior to the third anniversary of the
conversion do not exceed 25% of its outstanding capital stock;
o repurchases prior to the third anniversary of the conversion are part
of an open-market stock repurchase program;
o if the repurchases do not cause IGA to become undercapitalized; and
o IGA provides to the Regional Director of the Office of Thrift
Supervision no later than 10 days prior to the commencement of a
repurchase program written notice containing a full description of
the program to be undertaken and such program is not disapproved by
the Regional Director.
The Office of Thrift Supervision may permit stock repurchases in excess of such
amounts prior to the third anniversary of the conversion if exceptional
circumstances are shown to exist.
Risk of Delay in Completion of the Offering
The completion of the sale of all unsubscribed shares of common stock in
the offering will be dependent, in part, upon IGA's operating results and
market conditions at the time of the offering. Under the plan of conversion,
all shares of common stock offered in the conversion must be sold within a
period ending 24 months from the date of the special meeting. While JADE
FINANCIAL and IGA anticipate completing the sale of shares offered in the
conversion within this period, if JADE FINANCIAL and IGA's Boards of Directors
are of the opinion that economic conditions generally or the market for
publicly traded thrift institution stocks make undesirable a sale of the common
stock, then the offering may be delayed until such conditions improve. If the
offering is extended beyond October 30, 1999, all subscribers will have
the right to modify or rescind their subscriptions and to have their
subscription funds returned with interest. There can be no assurance that the
offering will not be extended as set forth above.
A material delay in the completion of the sale of all unsubscribed shares
in the offering or otherwise may result in a significant increase in the costs
of completing the conversion. Significant changes in our operations and
financial condition, the aggregate market value of the shares to be issued in
the conversion and general market conditions may occur during such material
delay. In the event the conversion is not consummated within 24 months after
the date of the special meeting, IGA would charge accrued conversion costs to
then current period operations.
Approval, Interpretation, Amendment and Termination
All interpretations of the plan of conversion, as well as the completeness
and validity of order forms and stock order and account withdrawal
authorizations, will be made by JADE FINANCIAL and IGA and will be final,
subject to the authority of the Office of Thrift Supervision and the
requirements of applicable law. The plan of conversion provides that, if deemed
necessary or desirable by the Boards of Directors of IGA and JADE FINANCIAL,
the plan of conversion may be substantively amended by the Boards of Directors
of IGA and JADE FINANCIAL, as a result of comments from regulatory authorities
or otherwise, at any time with the concurrence of the Office of Thrift
Supervision. In the event the plan of conversion is substantially amended,
other than a change in the maximum purchase limits set forth herein, we intend
to notify subscribers of the change and to refund subscription funds with
interest unless subscribers affirmatively elect to increase, decrease or
maintain their subscriptions. The plan of conversion will terminate if the sale
of all shares is not completed within 24 months after the date of the special
meeting. The plan of conversion may be terminated by IGA's Board of Directors
at any time prior to the special meeting, and at any time following such
special meeting with the concurrence of the Office of Thrift Supervision.
45
PROPOSED PURCHASES BY MANAGEMENT
The following table sets forth, for each of IGA's directors and for all of
the directors and senior officers as a group, the proposed purchases of common
stock, assuming sufficient shares are available to satisfy their subscriptions.
The amounts include shares that may be purchased through individual retirement
accounts and by associates.
At the Minimum At the Maximum
of the Estimated of the Estimated
Offering Range Offering Range
------------------ -----------------
As a Percent As a Percent
Number of of Shares of Shares
Name Amount Shares Offered Offered
- ---- ------------- ----------- ------------------ -----------------
Robert E. Adelsberger ...................... $ 50,000 6,250 0.41% 0.30%
Dorothy M. Bourlier ........................ 75,000 9,375 0.61 0.45
Thomas P. Calabrese ........................ 20,000 2,500 0.16 0.12
William L. Harm ............................ 50,000 6,250 0.41 0.30
Mario L. Incollingo, Jr. ................... 200,000 25,000 1.62 1.20
Edward D. McBride .......................... 80,000 10,000 0.65 0.48
Francis J. Moran ........................... 75,000 9,375 0.61 0.45
John J. O'Connell .......................... 300,000 37,500 2.43 1.80
Clyde A. Warden ............................ 150,000 18,750 1.22 .90
Dennis P. Wesley ........................... 100,000 12,500 0.81 0.60
---------- ------ ----- -----
All directors and senior officers as a group
(10 persons) .............................. $1,100,000 137,500 8.93% 6.60%
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF IGA
General
JADE FINANCIAL has only recently been formed and, accordingly, has no
results of operations. As a result, this discussion relates to IGA. We are
primarily engaged in the business of attracting deposits from the general
public and originating consumer loans, including home equity, auto, credit card
and personal loans, and residential real estate loans secured by first
mortgages on owner-occupied, one- to four-family residences in our market area.
IGA originates a limited amount of commercial loans. IGA also invests in
investment and mortgage related securities.
Our net income is dependent primarily on our net interest income, which is
the difference between interest earned on loans and investments and the
interest paid on our deposits and borrowings. IGA's interest rate spread is
also affected by regulatory, economic and competitive factors that influence
interest rates, loan demand and deposit flows. Our net income is also affected
by the generation of non-interest income, which primarily consists of fees and
service charges. In addition, net income is affected by the level of operating
expenses and provisions for loan losses.
The operations of financial institutions, including IGA, are significantly
affected by prevailing economic conditions, competition and regulatory
policies, and the monetary and fiscal policies of the U.S. Government. Lending
activities are influenced by the demand for, and supply of housing, competition
among lenders, the level of interest rates and the availability of funds.
Deposit flows and costs of funds are influenced by prevailing market rates of
interest primarily on competing investments, account maturities and the levels
of personal income and savings in our market area.
This analysis of our financial condition and results of operations should
be read in conjunction with the consolidated financial statements and the other
financial data found elsewhere in this Prospectus. Prior to June 30, 1998,
IGA's fiscal year ended on June 30. After the fiscal year ended June 30, 1998,
IGA changed its fiscal year to end on December 31. Therefore, the discussion
covers IGA's financial condition and results of operation for the three month
periods ended March 31, 1999 and 1998, the six month transition period ended
December 31, 1998, and the six month comparative period ended December 31, 1997
as well as each of its fiscal years in the two-year period ended June 30, 1998.
Business Strategy
Our strategy is to be an independent, consumer oriented financial
institution that provides retail loan and deposit products to individuals and
small businesses. Highlights of this strategy include the following:
o Consumer Lending -- Historically we have concentrated on the
origination of consumer loans as our primary loan product, including
home equity, automobile, credit card and personal loans. At March 31,
1999, consumer loans totalled $62.81 million, or 59.01% of our loan
portfolio.
o Home Mortgage Lending -- In recent years, residential first mortgage
loans have become an increasingly important component of our lending
activities. We expect this trend to continue. At March 31, 1999,
residential first mortgage loans totalled $40.74 million, or 38.28% of
our loan portfolio.
o Commercial Real Estate and Commercial Business Loans -- We plan to
selectively increase our commercial real estate and commercial business
lending with a focus on small and medium-sized borrowers. We have hired
an experienced commercial lender to manage our expansion in this area.
We will fund this product expansion with locally gathered deposits. We
believe a cautious and prudent expansion in these areas will diversify
our loan portfolio and increase the average yield of our interest
earning assets. However, we recognize that commercial real estate and
commercial business loans both involve a higher degree of risk than
single-family residential lending due to a variety of factors,
including generally larger loan balances, the
47
dependency on successful operation of a project, or the income stream
of a borrower for repayment, and greater oversight efforts compared to
mortgage loans. At March 31, 1999, we had $2.1 million in commercial
real estate loans and $760,000 in commercial business loans.
o Expanded Customer Base -- Prior to June 30, 1998, under our federal
credit union charter, we were limited in the customers that we could
service. The cornerstone of our strategy as a saving bank is to
maintain our base of customers who were credit union members and expand
our customer base by marketing to the communities served by our
branches. We believe we have maintained our original customer base. In
addition, since June 30, 1998 we have entered into more than 1,901 loan
or deposit relationships.
Comparison of Results of Operations for the Three Months Ended March 31, 1999
and March 31, 1998.
The table that follows is called an average balance sheet. This table
provides an analysis of our net interest income for the three-month periods
ended March 31, 1999 and March 31, 1998 setting forth:
o our average assets, liabilities, and equity,
o our interest income earned on interest-earning assets and interest
expense paid on interest-bearing liabilities,
o our average yields earned on interest-earning assets and average rates
paid on interest-bearing liabilities,
o our interest rate spread (the difference between the average yield
earned on interest-earning assets and the average rate paid on
interest-bearing liabilities), and
o our net interest margin assets (net interest income as a percentage of
average total interest earning assets). For purposes of this table,
loan balances include non- accrual loans and interest income on loans
includes loan fees or amortization of such fees which have been
deferred as well as interest recorded on non-accrual loans as cash is
received once the principal has been fully paid.
48
Three Months Ended March 31,
-----------------------------------------------------------------------------------
1999 1998
--------------------------------------- -----------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------- ---------- ---------- --------------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) .................... $ 105,990 $ 2,154 8.13% $ 97,150 $ 2,137 8.80%
Investments ............................ 57,002 788 5.53% 53,719(2) 684 5.09%
--------- ------- ----------- -------
Total earning assets ................. 162,992 2,942 7.20% 150,869 2,821 7.48%
Non-interest earning assets ............ 10,366 5,496
--------- -----------
Total assets ......................... $ 173,358 $ 156,365
========= ===========
Interest-bearing liabilities:
Savings deposits ....................... $ 70,861 $ 377 2.13% $ 66,426 $ 432 2.60%
NOW accounts ........................... 10,167 0 0.00% 8,894 0 0.00%
Money market accounts .................. 10,144 77 3.04% 8,470 80 3.78%
Certificates of deposit ................ 65,899 871 5.29% 56,685 798 5.63%
--------- ------- ----------- -------
Total interest-bearing
liabilities ......................... 157,071 1,325 3.36% 140,475 1,310 3.72%
Non-interest bearing ...................
liabilities .......................... 1,043 651
--------- -----------
Total liabilities .................... 158,114 141,126
Equity ................................. 15,244 15,239
--------- -----------
Total liabilities and equity ......... $ 173,358 $ 156,365
========= ===========
Net interest-earning assets .......... $ 5,921 $ 10,394
========= ===========
Net interest spread(3) ............... $ 1,617 3.84% $ 1,511 3.76%
======= ==== ======= ====
Net interest margin(4) ............... 3.97% 4.01%
==== ====
Ratio of average interest- earning
assets to average interest-bearing
liabilities ......................... 103.77% 107.40%
========= ===========
(1) Average loan balances include non-accrual loans and loans held for resale.
(2) Includes interest-earning deposits with the National Credit Union
Administration Share Insurance Fund.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(4) Represents net interest earnings divided by average interest-earning
assets.
49
The following table presents the weighted average yields earned on loans,
investments and other interest-earning assets, and the weighted average rates
paid on savings deposits and borrowings and the resultant interest rate spreads
at the date indicated.
At March 31, 1999
------------------
Weighted average yield on:
Loans receivable ............................ 8.05%
Investments ................................. 5.85%
Total earning assets ....................... 7.29%
Weighted average rate paid on:
Savings deposits ............................ 2.24%
NOW accounts ................................ 0%
Money market accounts ....................... 3.13%
Certificates of deposit ..................... 5.22%
Total interest-bearing liabilities ......... 3.40%
Net interest spread ......................... 3.89%
Net interest margin ......................... 3.65%
Net Income.
Our net income for the three months ended March 31, 1999, was $130,000, an
increase of 251.35% over the $37,000 we earned for the three months ended March
31, 1998. The increase resulted from higher interest and noninterest income in
the three months ended March 31, 1999 and a higher provision for loan losses in
the three months ended March 31, 1998. These changes were partially offset by
higher noninterest expense in the three months ended March 31, 1999 compared to
the same period in 1998.
Net Interest Income.
Net interest income for the three months ended March 31, 1999 was $1.62
million as compared to $1.51 million for the three months ended March 31, 1998.
This increase of $106,000, or 7.02%, resulted from an increase in the average
balance of interest earning assets as well as an increase in the difference
between the rate we earned on our interest earning assets and the rate we paid
on interest bearing liabilities.
Interest income increased to $2.94 million for the three months ended
March 31, 1999, from $2.82 million for the three months ended March 31, 1998.
This increase of $121,000, or 4.29%, resulted from an increase in average
interest earning assets of $12.12 million, or 8.03%, to $162.99 million for the
three month period ended March 31, 1999 from $150.87 million for the same
period in 1998. This increase in average interest-earned assets is a direct
result of our ability to serve additional customers under our savings bank
charter. This increase was partially offset by a decrease of 28 basis points in
the average yield on interest earnings assets to 7.20% in the 1999 period from
7.48% in the comparable 1998 period due to decreasing interest rates in 1998.
The yield on average net loans, decreased to 8.13% for the three-month period
ended March 31, 1999 from 8.80% for the comparable 1998 period but the balance
of average loans increased $8.84 million, or 9.10%, over the same comparable
periods. Interest income from investment securities increased $103,000 in the
three months ended March 31, 1999 compared to the same period in 1998. This
increase resulted from a 44 basis point increase in the average yield earned on
investment securities from 5.09% in 1998 to 5.53% in 1999 and an increase in
the average balance of investment securities of $3.28 million, or 6.11%, from
$53.72 million in 1998 to $57.00 million in 1999.
For the three months ended March 31, 1999, interest expense increased
$16,000, or 1.53%, to $1.33 million compared to $1.31 million for the three
months ended March 31, 1998. The small increase in interest expense between the
comparable three-month periods in 1999 and 1998 was due to an increase of
$16.59 million, or 11.81%, in the average balance of deposits from $140.48
million in 1998 to $157.07 million in 1999 which was almost completely offset
by a 36 basis point decline in the average rate paid on deposits from 3.72% in
1998 to 3.36% in 1999.
Provision for Loan Losses.
The provision for loan losses decreased from $376,000 for the three months
ended March 31, 1998 to $135,000 for the three months ended March 31, 1999. The
decrease in provision for loan losses represents a return to a more normalized
amount in 1999 compared to 1998 when the provision was uncharacteristically
50
high. The high provision for the three months ended March 31, 1998 was
designed to comply with the recommendation of the Office of Thrifts Supervision
due to the inherent risk in our loan portfolio.
As a credit union, in accordance with guidance provided by our regulator,
the National Credit Union Administration, we sought to maintain an allowance
for loan losses that approximated our five year average loan charge-off
experience which was 56 basis points of total loans. In anticipation of
becoming a savings bank at the beginning of the third quarter of 1998, and in
response to regulatory guidance from the Office of Thrift Supervision, we
changed our charge-off methodology and the manner in which we determined our
allowance for loan losses. We adopted a policy of charging-off consumer loans
that were 90 days or more delinquent regardless of the existence of an
agreement with the borrower on a repayment schedule. As a result, during the
first six months of 1998 we charged-off approximately $350,000 of consumer
loans consisting principally of unsecured personal loans. This absorbed a
significant portion of our then existing allowance. In addition, we changed the
manner in which we determine our allowance so that it now consists of a
component determined based on our assessment of risk inherent in our general
loan portfolio and a component based upon our review of identified loans
classified as special mention, substandard and doubtful under our regulatory
loan classification system. The amount of the allowance we determine based on
our assessment of risk inherent in our general loan portfolio varies by type of
loan, but, on a blended basis, it is between 90 and 100 basis points. This
significantly exceeded the amount of the allowance we established using our
credit union methodology. The combination of the increased charge-offs and the
change in reserve methodology resulted in a materially higher provision in both
in the quarter ended March 31, 1998 and the fiscal year ended June 30, 1998. We
believe our current reserve methodology, which accounts for general risk
inherent in the loan portfolio and specific risks associated with identified
loans, is superior to our prior method that was based exclusively on historical
loss experience. See "Description of IGA -- Allowance and Provision for Loan
Losses" for a discussion of how management determines the provision for loan
losses.
Noninterest Income.
Noninterest income was $224,000 for the three months ended March 31, 1999
compared to $102,000 for the three months ended March 31, 1998. This 119.61%
increase resulted primarily from an increase in service charges and ATM
interchange income from higher ATM usage.
Noninterest Expense.
Total noninterest expense increased $320,000, or 26.67%, to $1.52 million
for the three months ended March 31, 1999 from $1.20 million for the three
months ended March 31, 1998. This increase was primarily attributable to
increased compensation and employee benefits expenses of $92,000 associated
with normal salary and benefit increases and an increased lending staff, and an
increase in bank and ATM charges of $161,000 due to increased usage. We expect
noninterest expense to increase in future periods because of increased staffing
need as we continue to expand our lending and credit administration staff, and
costs associated with our status as a public company.
Income Taxes.
Prior to July 1, 1998, IGA was a tax-exempt entity. Therefore no income
taxes were paid for the three months ended March 31, 1998. For the three months
ended March 31, 1999, we accrued income tax expense of $58,000.
51
Comparison of Results of Operations for the Six Months Ended December 31, 1998
and December 31, 1997.
The following table is our average balance sheet for the six-month periods
ended December 31, 1998 and December 31, 1997:
Six Months Ended December 31,
------------------------------------------------------------------------------
1998 1997
------------------------------------- ---------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------- ---------- ---------- --------------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) ......................... $ 100,915 $ 4,275 8.47% $ 99,837 $ 4,511 9.04%
Investments ................................. 54,501 1,514 5.56% 51,725(2) 1,369 5.29%
--------- ------- ----------- -------
Total earning assets ...................... 155,416 5,789 7.44% 151,562 5,880 7.76%
Non-interest earning assets ................. 10,026 6,001
--------- -----------
Total assets .............................. $ 165,442 $ 157,563
========= ===========
Interest-bearing liabilities:
Savings deposits ............................ $ 68,852 $ 834 2.42% $ 71,405 $ 1,090 3.05%
NOW accounts ................................ 9,277 0 0.00% 8,462 0 0.00%
Money market accounts ....................... 9,038 160 3.54% 8,138 157 3.86%
Certificates of deposit ..................... 62,082 1,767 5.69% 54,119 1,558 5.76%
--------- ------- ----------- -------
Total interest-bearing
liabilities .............................. 149,249 2,761 3.70% 142,124 2,805 3.94%
Non-interest bearing
liabilities ............................... 799 467
--------- -----------
Total liabilities ......................... 150,048 142,591
Equity ...................................... 15,394 14,972
--------- -----------
Total liabilities and equity .............. $ 165,442 $ 157,563
========= ===========
Net interest-earning assets .................. $ 6,167 $ 9,438
========= ===========
Net interest spread(3) ....................... $ 3,028 3.74% $ 3,075 3.82%
======= ==== ======= ====
Net interest margin(4) ....................... 3.90% 4.06%
==== ====
Ratio of average interest- earning assets
to average interest-bearing liabilities ..... 104.13% 106.64%
========= ===========
(1) Average loan balances include non-accrual loans and loans held for resale.
(2) Includes interest-earning deposits with the National Credit Union
Administration Share Insurance Fund.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(4) Represents net interest earnings divided by average interest-earning
assets.
Net Income.
Our net income for the six months ended December 31, 1998, was $266,000, a
decrease of 53.33% from the $570,000 we earned for the six months ended
December 31, 1997. The decrease resulted principally from one-time expenses
associated with our charter conversion and the fact that the six-month period
ended December 31, 1997 did not contain any provision for income taxes because,
as a credit union, IGA was exempt from income tax.
52
Net Interest Income.
Net interest income for the six months ended December 31, 1998 was $3.03
million as compared to $3.08 million for the six months ended December 31,
1997. This negligible decrease of $50,000 resulted from an increase in average
interest-earning assets that was more than offset by a 16 basis point decrease
in the net interest margin.
Interest income decreased to $5.79 million for the six months ended
December 31, 1998 from $5.88 million for the six months ended December 31,
1997. This decrease of $91,000, or 1.53%, resulted from a decline of thirty-two
basis points in the average yield on interest earning assets to 7.44% in the
six months ended December 31, 1998 from 7.76% for the same period in 1997. This
decrease in average yield on interest earning assets reflected both declining
interest rates in 1998 and a conscious shift in emphasis by management from
higher-yielding consumer loans to secured residential real estate loans. This
shift in loan origination emphasis resulted principally from our conversion to
a savings bank charter. The decline in average yield was partially offset by an
increase in average interest earning assets of $7.88 million, or 5.00%, to
$165.44 million in the six months ended December 31, 1998 from $157.56 million
for the same period in 1997 and reflects our ability during the 1998 period to
attract new customers under our new charter. The yield on average net loans
decreased to 8.47% in the 1998 period from 9.04% in the comparable 1997 period
and the balance of average loans increased $1.08 million or 9.04% over the same
comparable periods. Interest income from investment securities increased
$145,000, or 10.59%, from $1.37 million in the six months ended December 31,
1997 to $1.51 million in for the same period 1998. This increase resulted from
a 27 basis point increase in the average yield earned on investment securities
from 5.29% to 5.56% and an increase in the average balance of investment
securities of $2.78 million, or 5.37%, from $51.72 million in the 1997 period
to $54.50 million in the 1998 period.
For the six months ended December 31, 1998, interest expense decreased
$44,000, or 1.57%, to $2.76 million compared to $2.81 million for the six
months ended December 31, 1997. The decrease in interest expense between 1998
and 1997 was due entirely to a decrease in the average rate paid on deposits.
This average rate declined to 3.70% in 1998 from 3.94% in 1997 due to declining
interest rates generally. Over the same period the average balance of deposits
increased $7.13 million, or 5.01%, to $149.25 million in the 1998 period
compared to $142.12 million in the 1997 period due to our ability to attract
new customers under our new charter.
Provision for Loan Losses.
The provision for loan losses decreased from $397,000 for the six months
ended December 31, 1997 to $300,000 for the six months ended December 31, 1998.
The decrease occurred primarily because the provision in 1997 was historically
high and reflected a restoration of the allowance after 1996 charge-offs
related to an increase in personal bankruptcies of members. These bankruptcies
occurred after a significant reduction in force by PECO and the resulting
charge-off of unsecured personal loans made to PECO members. IGA estimates that
at that time approximately 75% to 80% of its borrowers were PECO employees.
While this percentage has declined, PECO employees are still a material part of
IGA's customer base.
Noninterest Income.
Noninterest income was $804,000 for the six months ended December 31, 1998
compared to $459,000 for the six months ended December 31, 1997. This $345,000,
or 75.16%, increase resulted primarily from a $173,000 increase in fees in 1998
compared to 1997 and a $172,000 increase in securities gains.
Noninterest Expense.
Total noninterest expense increased $550,000 to $3.12 million for the six
months ended December 31, 1998 from $2.57 million for the six months ended
December 31, 1997. This increase was primarily attributable to one-time
expenses associated with our charter conversion.
Income Taxes.
Prior to July 1, 1998, IGA was a tax-exempt entity. Therefore no income
taxes were paid for the six months ended December 31, 1997. For the six months
ended December 31, 1998, IGA accrued income tax expense of $146,000.
53
Comparison of Results of Operations for the Fiscal Years Ended June 30, 1998
and 1997.
The following table is our average balance sheet for the years ended June
30, 1998 and 1997.
Year Ended June 30,
---------------------------------------------------------------------------
1998 1997
------------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------- ---------- ---------- ------------- --------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) ......................... $ 99,342 $ 8,734 8.79% $ 99,634 $ 8,651 8.68%
Investments(2) .............................. 53,456 2,742 5.13% 55,749 3,009 5.40%
--------- ------- --------- -------
Total earning assets ........................ 152,798 11,476 7.51% 155,383 11,660 7.50%
Non-interest earning assets ................. 5,007 5,391
--------- ---------
Total assets .............................. $ 157,805 $ 160,774
========= =========
Interest-bearing liabilities:
Savings deposits ............................ $ 63,361 $ 1,682 2.65% $ 62,097 $ 1,640 2.64%
NOW accounts ................................ 8,661 0 0.00% 8,585 0 0.00%
Money market accounts ....................... 8,298 316 3.81% 8,316 300 3.61%
Certificates of deposit ..................... 61,713 3,477 5.63% 67,354 3,715 5.52%
--------- ------- --------- -------
Total interest-bearing
liabilities .............................. 142,033 5,475 3.85% 146,352 5,655 3.86%
Non-interest bearing
liabilities ............................... 1,109 840
--------- ---------
Total liabilities ......................... 143,142 147,192
Equity ...................................... 14,663 13,582
--------- ---------
Total liabilities and equity .............. $ 157,805 $ 160,774
========= =========
Net interest-earning assets .................. $ 10,765 $ 9,031
========= =========
Net interest spread(3) ....................... $ 6,001 3.66% $ 6,005 3.64%
======= ==== ======= ====
Net interest margin(4) ....................... 3.93% 3.86%
==== ====
Ratio of average interest- earning assets
to average interest-bearing liabilities ..... 107.58% 106.17%
========= =========
(1) Average loan balances include non-accrual loans and loans held for resale.
(2) Includes interest-earning deposits with the National Credit Union
Administration Share Insurance Fund.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(4) Represents net interest earnings divided by average interest-earning
assets.
54
Net interest income is affected by the volume of interest-earning assets
and the yield from interest-earning assets and by the volume of
interest-bearing liabilities and the rates paid on interest-bearing
liabilities. The following table presents the dollar amount of changes in
income and expense attributable to changes in volume and the dollar amount
attributable to changes in rate.
Three Months Ended March 31,
1999 vs. 1998
Increase (decrease) due to
------------------------------------------------
Total
Rate/ Increase
Rate Volume Volume (Decrease)
---------- -------- ------------ ------------
(In Thousands)
Interest-earning assets:
Loans receivable(1) ......... $ (534) $763 $(184) $ 45
Investments(2) .............. 230 168 (295) 103
------ ---- ----- ----
Total earning assets ....... (304) 931 (479) 148
Interest-bearing
liabilities:
Savings deposits ........... (311) 115 142 (54)
NOW accounts ............... 0 0 0 0
Money market
accounts .................. (63) 63 (3) (3)
Certificates of deposit .... (195) 519 (251) 73
------ ---- ----- ----
Total interest-
bearing liabilities ...... (569) 697 (312) 16
------ ---- ----- ----
Change In net interest
income ..................... $ 265 $234 $(367) $132
====== ==== ===== ====
Six Months Ended December 31, Year Ended June 30,
1998 vs. 1997 1998 vs. 1997
Increase (decrease) due to Increase (decrease) due to
------------------------------------------------- ---------------------------------------------
Total Total
Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
---------- ---------- ----------- ------------ ---------- ------------ --------- -----------
(In Thousands) (In Thousands)
Interest-earning assets:
Loans receivable(1) ......... $ (563) $ 97 $ 230 $ (236) $ 218 $ (26) $ 0 $ 192
Investments(2) .............. 136 147 (138) 145 (148) (124) 6 (266)
------ ------ ------ ------ ------ ----- ---- ------
Total earning assets ....... (427) 244 92 (91) 70 (150) 6 (74)
Interest-bearing
liabilities:
Savings deposits ........... (450) (78) 272 (256) 8 33 1 42
NOW accounts ............... 0 0 0 0 0 0 0 0
Money market
accounts .................. (26) 35 (6) 3 17 (1) 0 16
Certificates of deposit .... (35) 458 (214) 209 80 (311) (7) (238)
------ ------ ------ ------ ------ ----- ---- ------
Total interest-
bearing liabilities ...... $ (511) 415 52 $ (44) 105 (279) (6) (180)
------ ------ ------ ------ ------ ----- ---- ------
Change In net interest
income ..................... $ 84 $ (171) $ 40 $ (47) $ (35) $ 129 $ 12 $ 106
====== ====== ====== ====== ====== ===== ==== ======
(1) Includes non-accrual loans and loans held for resale.
(2) Includes interest-earning deposits and investment and mortgage-backed
securities.
Net Income.
Our net income for the year ended June 30, 1998, was $663,000, a decrease
of 35.63% from the $1.03 million we earned for the year ended June 30, 1997.
The decrease resulted from flat net interest income, a higher provision for
loan losses and higher noninterest expense in 1998 compared to 1997 that was
only partially offset by higher noninterest income. Prospective investors
should be aware that our net income for these periods do not contain any
provision for income taxes because, as a credit union, IGA was exempt from
income tax. Accordingly, on a tax-adjusted basis, net income would have been
materially less.
Net Interest Income.
Net interest income for the fiscal year ended June 30, 1998 was $6.00
million as compared to $6.01 million for the fiscal year ended June 30, 1997.
Interest income decreased to $11.48 million for the fiscal year ended June
30, 1998 from $11.66 million for the fiscal year ended June 30, 1997. This
decrease of $184,000, or 1.58%, resulted from a decline in average interest
earning assets of $2.58 million, or 1.66%, to $152.80 million in 1998 from
$155.38 million in 1997 and is evidence of our inability to grow under our
credit union charter because of stagnant membership growth. This decline was
partially offset by an increase of one basis point in the average yield on
interest earning assets to 7.51% in 1998 from 7.50% in 1997. The yield on
average net loans, increased to 8.79% in 1998 from 8.68% in 1997 and the
balance of average loans decreased $292,000 or 0.29% over the same period.
Interest income from investment securities decreased $270,000, or 8.97% from
$3.01 million in 1997 to $2.74 million in 1998. This decrease resulted from a
27 basis point decrease in the average yield earned on investment securities
from 5.40% in 1997 to 5.13% in 1998 and a decrease in the average balance of
investment securities of $2.29 million, or 4.11%, from $55.75 million in 1997
to $53.46 million in 1998.
For the fiscal year ended June 30 1998, interest expense decreased
$180,000, or 3.18%, to $5.48 million compared to $5.66 million for the fiscal
year ended June 30, 1997. The decrease in interest expense between 1998 and
1997 was due almost entirely to a decrease of $4.32 million, or 2.95%, in the
average balance of deposits from $146.35 million in 1997 to $142.03 million in
1998 and again reflects stagnant growth under our credit union charter. During
this period the average rate paid on deposits declined only one basis point to
3.85% in 1998 from 3.86% in 1997.
55
Provision for Loan Losses.
The provision for loan losses increased from $847,000 for the fiscal year
ended June 30, 1997 to $1.04 million for the fiscal year ended June 30, 1998.
As previously described, the increase in provision for loan losses occurred
principally in the six months ended June 30, 1998 and was designed to comply
with the recommendation of the Office of Thrifts Supervision due to the inherent
risk in our loan portfolio. The provision in 1997 also was historically high and
reflected a restoration of the allowance after 1996 charge-offs related to an
increase in personal bankruptcies of members. These occurred after a significant
reduction in force by PECO and the resulting charge-off of unsecured personal
loans. See "Description of IGA -- Allowance and Provision for Possible Loan
Losses" for a discussion of how management determines the provision for possible
loan losses.
Noninterest Income.
Noninterest income was $958,000 for the fiscal year ended June 30, 1998
compared to $851,000 for the fiscal year ended June 30, 1997. This 12.57%
increase resulted primarily from an increase in ATM interchange income over the
same period.
Noninterest Expense.
Total noninterest expense increased $280,000 to $5.26 million for the
fiscal year ended June 30, 1998 from $4.98 million for the fiscal year ended
June 30, 1997. This increase was primarily attributable to increased
compensation and employee benefits expenses of $99,000 associated with normal
salary and benefit increases and an increased lending staff, an increase in
bank and ATM charges of $131,000 due to higher utilization. Management expects
noninterest expense to increase in future periods because of increased staffing
needs, including the chairman becoming a full time employee, and costs
associated with the Company's status as a public company.
Income Taxes.
Prior to July 1, 1998 IGA was a tax-exempt entity, therefore no income
taxes were paid in prior periods. However, IGA estimates that if we had been
taxable for the fiscal years ended June 30, 1998 and 1997, we would have paid
state and federal income taxes of $279,000 and $586,000, respectively,
resulting in net income after taxes of approximately $384,000 and $440,000,
respectively.
Financial Condition
March 31, 1999 Compared to December 31, 1998
Our total assets increased 3.73% from $171.09 million at December 31, 1998
to $177.47 million at March 31, 1999. During the same period, net loans
increased by 2.35% from $102.90 million to $105.32 million while investment and
mortgage backed securities increased by 8.39% from $45.54 million to $49.36
million. This increase in securities represents a continuation of our policy,
started in 1997, to initially decrease and then maintain the amount of funds we
hold in interest bearing deposits at other banks to an amount we believe
sufficient to meet our liquidity needs. We redeployed those funds and new funds
received into higher yielding investment and mortgage-backed securities.
Cash and cash equivalents, which include cash due from banks,
interest-bearing deposits in other financial institutions, and federal funds
sold, are all liquid funds. In a reflection of our decision to deploy new funds
into higher-yielding assets and maintain short-term investments principally for
liquidity purposes, the aggregate amount in these three categories remained
essentially unchanged, decreasing by only $238,000 to $18.11 million at March
31, 1999 from $18.35 million at December 31, 1998. Prepaid expenses and other
assets increased by $164,000, from $593,000 at December 31, 1998 to $757,000 at
March 31, 1999.
Total liabilities increased by $6.55 million, or 4.20%, from $155.82
million at December 31, 1998 to $162.37 million at March 31, 1999. During this
period, deposits increased by 4.22% from $154.89 million at year-end 1998 to
$161.43 at March 31, 1999. Within deposit categories the largest increase
occurred in savings accounts which increased from $90.07 million to $95.12
million, or 5.6%, while time deposits only increased from $64.82 million to
$66.31, or 2.30%.
56
Retained earnings increased $140,000, or 0.90%, to $15.70 million at March
31, 1999 from $15.56 million at December 31, 1998. The increase in retained
earnings is solely attributable to earnings. The change in net unrealized
depreciation on investment and mortgage-backed securities available for sale
was ($310,000) from ($284,000) at December 31, 1998 to ($594,000) at March 31,
1999. This increase was caused by the general increase in interest rates during
the period.
December 31, 1998 Compared to June 30, 1998
Our total assets increased 7.03% from $159.85 million at June 30, 1998 to
$171.09 million at December 31, 1998. During the same period, net loans
increased by 4.89% from $98.10 million to $102.90 million and investment and
mortgage-backed securities increased by 5.47% to $45.54 million from $43.18
million. Cash and cash equivalents increased by $5.37 million to $18.35 million
at December 31, 1998 from $12.98 million at June 30, 1998. Total deposits
increased by $10.96 million, or 7.61%, from $143.93 million at June 30, 1998 to
$154.89 million at December 31, 1998. This increase in deposits and cash and
cash equivalents reflects the influx of deposits that has occurred since our
conversion from a credit union to a savings bank and is directly attributable
to our ability to attract new customers who were not credit union members.
Retained earnings increased $20,000, or 1.33%, to $15.28 million at
December 31, 1998 from $15.08 million at June 30, 1998. The increase in
retained earnings is attributable to earnings. The change in net unrealized
depreciation on investment and mortgage-backed securities available for sale
was ($70,000) from ($214,000) at June 30, 1998 to ($284,000) at December 31,
1998.
June 30, 1998 Compared to June 30, 1997
Our total assets decreased 2.97% from $164.75 million at June 30, 1997 to
$159.85 million at June 30, 1998. During the same period, net loans decreased
by 2.29% to $98.10 million and investment and mortgage-backed securities
increased by 22.51% to $43.18 million. The increase in securities was due to
our decision to invest funds previously held in interest bearing deposits in
other financial institutions into higher yielding available for sale investment
and mortgage-backed securities. Cash due from banks, interest-bearing deposits
in other financial institutions, and federal funds sold are all liquid funds.
The aggregate amount in these three categories decreased by $3.61 million to
$12.98 million at June 30, 1998 from $16.59 million at June 30, 1997 reflecting
the previously mentioned shift to available for sale investment and
mortgage-backed securities. Equipment and leasehold improvements, net of
accumulated depreciation, increased from $1.69 million at year-end 1997 to
$1.88 million at year-end 1998. The increase of $190,000 was mainly
attributable to costs associated with the new Chesterbrook branch site. Prepaid
expenses and other assets increased by $198,000, from $743,000 at June 30, 1997
to $941,000 at June 30, 1998.
Total liabilities decreased by $5.74 million, or 3.81%, from $150.51
million at June 30, 1997 to $144.77 million at June 30, 1998. During this
period, deposits decreased by 3.95% from $149.85 million at year-end 1997 to
$143.93 at year-end 1998. The deposit mix changed considerably during 1998
because approximately $13.00 million in savings account deposits held in a
retirement account administered by PECO were withdrawn and transferred to
higher yield investments at other financial institutions. As a result, savings
accounts decreased from $80.23 million at June 30, 1997 to $68.26 million at
June 30, 1998. The decrease in savings accounts was partially offset by a $1.15
million increase in NOW accounts and a $5.18 million increase in certificates
of deposit.
Retained earnings increased $660,000, or 4.51%, to $15.29 million at June
30, 1998 from $14.63 million at June 30, 1997. The increase in retained
earnings is solely attributable to earnings. The change in net unrealized
depreciation on investment and mortgage-backed securities available for sale
was $170,000 from ($385,000) at June 30, 1997 to ($215,000) at June 30, 1998.
This increase was caused by the general decrease in interest rates during the
period. When interest rates fall, the fair market value of debt securities
generally increases, thereby increasing equity.
Asset Quality
Non-performing assets decreased from $806,000 at June 30, 1997 to $203,000
at March 31, 1999 because a number of credit card and unsecured personal loans
were charged off. Many of these loans were to individuals that declared
personal bankruptcy that resulted, in part, from PECO Energy layoffs of our
57
members. Because of this increase in bankruptcies, we tightened our credit
standards and implemented credit scoring criteria for these types of loans. As
a percentage of total assets, non-performing assets decreased from 0.49% at
June 30, 1997 to 0.11% at March 31, 1999. Non-performing assets are comprised
of non-accrual loans, accruing loans that are 90 days or more past due which
are insured for credit loss, foreclosed real estate (assets acquire in
foreclosures), and restructured loans. It is our policy to classify a loan,
other than a loan insured for credit loss, as non-accrual after the loan
becomes 90 days past due for either principal or interest.
The balance in the allowance for loan losses was $1.12 million or 1.06% of
total loans at March 31, 1999, compared to $1.01 million, or 1.00% of total
loans at June 30, 1997. The ratio of the allowance for loan losses to
non-performing loans was 549.75% at March 31, 1999, 631.76% at December 31,
1998, 419.47% at June 30, 1998 and 124.69% at June 30, 1997.
As a financial institution which assumes lending and credit risk as a
principal element of its business, we anticipate that credit losses will be
experienced in the normal course of business. Accordingly, we make a quarterly
determination as to an appropriate provision from earnings necessary to
maintain an allowance for loan losses that is adequate for probable and
reasonably estimated losses. The amount charged against earnings is based upon
several factors including, at a minimum, each of the following:
o a continuing review of delinquent, classified and non-accrual loans,
large loans, and overall portfolio quality. This continuous review
assesses the risk characteristics of both individual loans and the total
loan portfolio;
o analytical review of loan charge-off experience, delinquency rates and
other relevant historical and peer statistical ratios;
o our judgment with respect to local and general economic conditions and
their impact on the existing loan portfolio;
o regular examinations and reviews of the loan portfolio by our
regulators.
When it is determined that the prospect for recovery of the principal of a
loan has significantly diminished, that portion of the loan is immediately
charged against the allowance account. Subsequent recoveries, if any, are
credited to the allowance account. In addition, non-accrual and large
delinquent loans are reviewed monthly to determine potential losses.
We believe the allowance for loan losses was adequate to cover risks
inherent in our loan portfolio at March 31, 1999. However, there can be no
assurance that we will not have to increase our provision for loan losses in
the future as a result of changes in economic conditions or for other reasons.
Any such increase could adversely affect our results of operations.
Liquidity
Pursuant to federal regulations, financial institutions must maintain
liquidity to meet day-to-day requirements of depositor and borrower customers,
take advantage of market opportunities, and provide a cushion against
unforeseen needs. Liquidity needs can be met by either reducing assets or
increasing liabilities. Sources of asset liquidity are provided by investments
in U.S. Government and agency securities, time deposits with banks and federal
funds sold. These assets totaled $18.11 million at March 31, 1999, compared to
$18.35 million at December 31, 1998, $12.98 million at June 30, 1998 and $16.59
million at June 30, 1997. Maturing and prepayment of loans as well as the
monthly cash flow associated with certain mortgage-backed securities are other
sources of asset liquidity.
Sources of liability liquidity are provided by attracting deposits with
competitive rates, using repurchase agreements, buying federal funds or
utilizing the facilities of the Federal Home Loan Bank System. We historically
have relied exclusively on deposits. However, we expect that the influx of
capital from the conversion will cause us to begin to borrow funds in order to
increase earning assets and achieve an acceptable return on equity for our
shareholders.
We believe that IGA maintains and has maintained sufficient short-term and
liquid assets (including securities available-for- sale) to meet liquidity
requirements of its operations.
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Market Risk Analysis
Qualitative Analysis
As stated above, we derive our income primarily from the excess of
interest collected over interest paid. The rates of interest we earn on assets
and pay on liabilities generally are established contractually for a period of
time. Market interest rates change over time. Accordingly, our results of
operations, like those of many financial institutions, are affected by changes
in interest rates and the interest rate sensitivity of our assets and
liabilities.
In an attempt to manage our exposure to changes in interest rates and
comply with applicable regulations, we monitor IGA's interest rate risk. In
monitoring interest rate risk, we continually analyze and manage assets and
liabilities based on their payment streams and interest rates, the timing of
their maturities, and their sensitivity to actual or potential changes in
market interest rate.
An asset or liability is interest-rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more rapidly or to a greater extent than our liabilities,
then net portfolio value and net interest income would tend to increase during
periods of rising interest rates and decrease during periods of falling
interest rates. Conversely, if our assets mature or reprice more slowly or to a
lesser extent than our liabilities, then net portfolio value and net interest
income would tend to increase during periods of rising interest rates and
decrease during periods of rising interest rates and increase during periods of
falling interest rates. Our policy has been to address the interest rate risk
inherent in the historical savings institution business of originating
long-term loans funded by short-term deposits by maintaining sufficient liquid
assets for material and prolonged changes in interest rates.
Management regularly reviews our asset and liability position including
our interest rate risk and trends, liquidity and capital ratios and related
regulatory requirements. In addition, management reviews simulations of the
effect of changes in interest rates on IGA's capital, net interest income and
net income.
Quantitative Analysis
Net Portfolio Value
In order to encourage savings associations to reduce their interest rate
risk, the Office of Thrift Supervision adopted a rule incorporating an interest
rate risk ("IRR") component into the risk-based capital rules. The IRR
component is a dollar amount that will be deducted from total capital for the
purpose of calculating an institution's risk-based capital requirement and is
measured in terms of the sensitivity of its 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 by the change to its NPV as 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 50% of
that excess change. Based on IGA's asset size and risk-based capital, we have
been informed by the Office of Thrift Supervision that IGA is exempted from
this rule. Nevertheless, the following table presents an estimate of the change
in our NPV at March 31, 1999 as calculated by our personnel, based on quarterly
financial information.
PV of Assets Net Portfolio Value NPV as % of Change
in Rates $ Amount $ Change % Change NPV Ratio % Change
- -------------- ---------- ---------- ---------- ----------- ---------
+300 bp 12,496 -4,656 -27% 7.19% -234 bp
+200 bp 14,026 -3,126 -18% 7.98% -155 bp
+100 bp 15,539 -1,612 -9% 8.74% -79 bp
0 bp 17,152 9.53%
- -100 bp 19,865 2,714 +16% 10.85% +131 bp
- -200 bp 22,859 5,707 +33% 12.24% +271 bp
- -300 bp 26,192 9,040 +53% 13.74% +420 bp
59
In the above table, the first column on the left presents the basis point
increments of yield curve shifts. The second column presents the overall dollar
amount of NPV at each basis point increment. The fifth column presents IGA's
ratio of NPV to total assets. The remaining columns present IGA's actual
position in dollar change and percentage change in NPV at each basis point
increment.
Were IGA subject to the IRR component at March 31, 1999, it would not have
been considered to have had a greater than normal level of interest rate
exposure and a deduction from capital would not have been required. Although we
have been advised by the Office of Thrift Supervision that IGA is not subject
to the IRR component discussed above, it is still subject to interest rate risk
and, as can be seen above, rising interest rates will reduce IGA's NPV. The
Office of Thrift Supervision has the authority to require otherwise exempt
institutions to comply with the rule concerning interest rate risk. See
"Regulation Regulatory Capital Requirements."
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under the
various interest rate scenarios and should not be relied upon as indicative of
actual results. Certain shortcomings are inherent in the method of analysis
presented in the computation of NPV. Although certain assets and liabilities
may have similar maturities or periods within which they reprice, they may
react differently to changes in market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. In the event of a change in interest rates,
prepayments and early withdrawal levels could deviate significantly from those
assumed in making the calculations set forth above.
Impact of Inflation and Changing Prices
The 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. The primary impact of inflation on our
operations is reflected in increased operating costs. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
Year 2000 Issues
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a date after
December 31, 1999 (the "Y2K Issue"). The erroneous date can be interpreted in a
number of different ways; typically the year 2000 is interpreted as the year
1900. Correctly identifying the year 2000 as a leap year may also be an issue.
These misidentifications could result in a system failure or miscalculations
causing disruptions of operations, including among other things, a temporary
inability to process transactions, track important customer account
information, provide convenient access to this information or engage in normal
business operations.
IGA's board of directors and management have addressed the Y2K issue by
developing a Y2K Compliance Plan. This plan involves five separate phases:
awareness, assessment, renovation, validation and implementation.
During 1997, IGA completed the assessment phase, identifying each internal
and external system that could potentially be affected by the Y2K issue. Those
systems include IGA's internal data processing system as well as equipment such
as bank alarms that may contain microprocessors. For each such system, a
determination was made whether or not the system is Y2K compliant. Those
determinations involved obtaining Y2K compliant certification from third-party
processors and outside vendors.
As of December 31, 1998, IGA has completed its "awareness," "assessment,"
"renovation" and "validation" phases.
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In November 1998, IGA conducted in-house testing of its data processing
system. IGA performed various banking transactions on customers' accounts using
the dates September 30, 1998, January 1, 2000, January 30, 2000, January 31,
2000, February 29, 2000, September 9, 1999. All transactions were completed
successfully. IGA's data processing software vendor has completed much of its
Y2K testing but will continue testing and renovation throughout 1999. IGA will
be obligated to incur only the hardware costs associated with implementing the
changes required by our vendor; hardware costs are not expected to be material.
As of March 31, 1999, all other material outside vendors have certified
that they were Y2K compliant.
In certain cases, however, such as the potential loss of electrical power
or telecommunications services due to Y2K problems, testing by IGA is either
not practical or not possible. In those cases, contingency plans are being
designed that specify how IGA will deal with each such potential situation. IGA
has developed a contingency plan that addresses failure of the data processing
service bureau system. IGA has determined that if the service bureau system
were to fail, IGA would implement manual systems until the service bureau
system could be reestablished. IGA does not anticipate the potential use of
short-term manual systems would have a material impact upon the operations of
IGA.
In addition to expenses related to our own systems, we could incur losses
if loan payments are delayed due to year 2000 problems. In an effort to limit
our risk of delayed loan payments, we evaluate, during the loan origination
process, the year 2000 readiness of any commercial business or commercial real
estate borrower who borrows $250,000 or more. At June 30, 1999, we had five
commercial loans outstanding with principal balances of more than $250,000 each
and with an aggregate principal balance of approximately $2.0 million. Based on
the information these borrowers provided to us, we believe that they have
adequately addressed any year 2000 problems. We have not conducted any surveys
or evaluations of other customers. We have been communicating with our vendors
and to assess their progress in evaluating their systems and implementing any
corrective measures required by them to be prepared for the year 2000. To date,
we have not been advised by these vendors that they do not have plans in place
to address and correct the issues associated with the year 2000 problem;
however, no assurance can be given as to the adequacy of such plans or to the
timeliness of their implementation.
As of June 30, 1999, we have spent $30,000 to address year 2000 issues. We
estimate we will incur an additional $20,000 in connection with year 2000
issues.
Recent Accounting Pronouncements
FASB Statement on Stock-Based Compensation. In October 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under
SFAS No. 123, an entity may elect to recognize stock-based compensation expense
based on the fair value of the awards, or they may elect to account for
stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued
to Employees." If an entity elects to account for stock-based compensation
under APB No. 25, it is not required to recognize expense based on the fair
value of the awards. However, the entity must disclose in the financial
statements the effects of SFAS No. 123, as if the recognition provisions of
SFAS No. 123 were adopted.
Currently, IGA does not provide stock-based compensation to its employees.
Upon completion of the conversion, subject to stockholder approval, JADE
FINANCIAL will establish certain stock-based compensation plans. If
established, we have evaluated the alternatives available under the provisions
of SFAS No. 123 and currently expect that we will not adopt the recognition
provisions of the statement, but will provide the required footnote
disclosures. Therefore, we do not expect that the adoption of SFAS No. 123 will
have a material impact on our financial position or results of operations.
FASB Statement on Earnings Per Share. In February 1997, the FASB issued
SFAS No. 128, "Earnings Per Share." This statement established standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. SFAS No. 128 simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, "Earnings Per Share," and makes them more comparable with international
earnings per share standards.
IGA, as a mutual savings bank, does not have common stock authorized,
issued or outstanding and we do not calculate or present earnings per share.
Upon completion of the conversion, we will calculate and present earnings per
share in accordance with SFAS No. 128.
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FASB Statement on Reporting Comprehensive Income. In June 1997, the FASB
issued SFAS No. 130. SFAS No. 130 requires classification of items of other
comprehensive income by their nature in the financial statements and the
display of the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the statement of equity. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. IGA adopted SFAS No. 130 on July 1, 1998. The adoption
of this standard had no material impact on IGA's consolidated financial
statements.
FASB Statement on Disclosure of Information about Capital Structure. In
February 1997, the FASB issued SFAS No. 129. SFAS No. 129 incorporates the
disclosure requirements of APB Opinion No. 15, Earnings per Share, and makes
them applicable to all public and non-public entities that have issued
securities addressed by the Statement. APB Opinion No. 15 requires disclosure
of descriptive information about securities that is not necessarily related to
the computation of earnings per share. This statement continues the previous
requirements to disclose certain information about an entity's capital
structure found in APB Opinions No. 10, Omnibus Opinion-1966, and No. 15,
Earnings per Share, and FASB Statement No. 47, Disclosure of Long-Term
Obligations, for entities that were subject to the requirements of those
standards. SFAS No. 129 eliminates the exemption of non-public entities from
certain disclosure requirements of Opinion 15 as provided by FASB Statement No.
21, Suspension of the Reporting of Earnings per Share and Segment Information
by Non-public Enterprises. It supersedes specific disclosure requirements of
Opinions No. 10 and No. 15 and FASB Statement No. 47 and consolidates them in
this Statement for ease of retrieval and for greater visibility to non-public
entities. FASB No. 129 is effective for financial statements for periods ending
after December 15, 1997. SFAS No. 129 will be adopted by JADE FINANCIAL in the
initial period following consummation of the offering. The adoption of this
standard is not expected to have a material impact on JADE FINANCIAL's
consolidated financial statements.
FASB Statement on Disclosures about Segments of an Enterprise and Related
Information. In June 1997, the FASB issued SFAS No. 131. SFAS No. 131
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. IGA adopted SFAS No. 131 on July 1,
1999. The adoption of this standard had no material impact on IGA's
consolidated financial statements.
FASB Statement on Employers' Disclosures about Pensions and Other
Post-retirement Benefits. In February 1998, the FASB issued SFAS No. 132. SFAS
No. 132 revises employers' disclosures about pension and other post-retirement
benefit plans. SFAS No. 132 does not change the measurement or recognition of
those plans and is effective for fiscal years beginning after December 15,
1997. IGA adopted SFAS No. 132 on July 1, 1998. The adoption of this standard
had no material impact on IGA's consolidated financial statements.
FASB Statement on Accounting for Derivative Instruments and Hedging
Activities. In June 1998, the FASB issued SFAS No. 133. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts
(collectively referred to as "derivatives") and for hedging activities. SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (i) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(ii) a hedge of the exposure of variable cash flows of a forecasted
transaction, or (iii) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. IGA has no activity subject to SFAS
133 and JADE FINANCIAL is not expected to have any activity subject to SAFS
133.
FASB Statement on Accounting for Mortgage-backed Securities Retained After
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise. In October 1998, the FASB issued SFAS No. 134 which changes the way
mortgage banking firms account for certain securities and other interests they
62
retain after securitizing mortgage loans that were held for sale. Under current
practice, a bank that securitizes credit card receivables has a choice in how
it classifies any retained securities based on its intent and ability to hold
or sell those investments. SFAS No. 134 gives mortgage banking firms the
opportunity to apply the same intent-based accounting that is applied by other
companies. SFAS No. 134 is effective for the fiscal quarter beginning after
December 15, 1998. IGA adopted SFAS No. 134 on January 1, 1999. The adoption of
SFAS No. 134 had no material impact on IGA's financial condition or results of
operations.
BUSINESS OF JADE FINANCIAL
JADE FINANCIAL was organized at the direction of the Board of Directors of
IGA for the purpose of becoming a holding company to own all of the outstanding
capital stock of IGA. Upon completion of the conversion, IGA will become a
wholly-owned subsidiary of JADE FINANCIAL. For additional information, see
"JADE FINANCIAL CORP."
Following the conversion, JADE FINANCIAL will be primarily engaged in the
business of directing, planning and coordinating the business activities of
IGA. In the future, JADE FINANCIAL may become an operating company or acquire
or organize other operating subsidiaries, including other financial
institutions, though there are no current plans in this regard. Initially, JADE
FINANCIAL will not maintain offices separate from those of IGA or employ any
persons other than its officers who will not be separately compensated for such
service.
BUSINESS OF IGA
General
IGA originally was established in 1975 as IGA Federal Credit Union. The
credit union initially served the Independent Group Association, a labor
organization comprised of employees of PECO Energy, Inc., the electric utility
serving the Philadelphia metropolitan area. Over time, IGA's membership grew to
include other employee groups. However, as a credit union, IGA was legally
restricted to serve only customers who shared a "common bond" such as a common
employer. However, members that were employees of PECO or its affiliates (or
retirees or family members of PECO or its affiliates) continued to be a large
majority of IGA's members.
As a credit union, IGA did not experience membership growth in recent
years due to a reduction in the number of PECO employees from approximately
12,500 to 6,500. Moreover, IGA anticipated that membership would decline in the
future due to the nationwide consolidation of the electric utility industry and
the 1996 deregulation of the electric utility industry in Pennsylvania.
Therefore, after receiving the approval of the National Credit Union
Administration and IGA's members, on July 1, 1998, IGA converted from a credit
union to IGA Federal Savings, a federal mutual savings association. IGA can now
serve the general public in our community, rather than being limited to serving
only distinct employee groups.
IGA is primarily engaged in the business of attracting deposits from the
general public and originating consumer loans, including home equity, auto,
credit card and personal loans, and residential real estate loans, secured by
first mortgages on owner-occupied, one- to four-family residences in our market
area. IGA also originates a limited amount of commercial loans and invests in
investment and mortgage-related securities.
IGA's revenues are derived principally from interest on mortgage loans,
consumer loans and investment and mortgage-related securities.
IGA offers a variety of deposit accounts having a wide range of interest
rates and terms, which generally include passbook and statement savings
accounts, money market deposit accounts, NOW and non-interest bearing checking
accounts and certificates of deposit with varied terms ranging from 91 days to
60 months. IGA only solicits deposits in its market areas and it has not
accepted brokered deposits. Our deposits are insured by the Savings Association
Insurance Fund of the FDIC up to applicable limits.
Market Areas
IGA currently operates, through:
o Its main office located in Feasterville, Bucks County;
o 23rd and Market Streets in Center City, Philadelphia in the PECO office
building;
63
o Grays Ferry in Southwest Philadelphia;
o Chesterbrook in Chester County; and
o Media in Delaware County.
In addition, IGA participates in MAC, a regional automatic teller machine
network. IGA owns and operates three automatic teller machines.
IGA's market area consists of certain portions of the Philadelphia
metropolitan area which is comprised of Philadelphia and the surrounding
Pennsylvania counties of Bucks, Chester, Delaware and Montgomery. IGA also has
a number of out-of-market customers who are retirees or PECO employees at
out-of-market locations. IGA's five-county market area is included in the
Philadelphia Metropolitan Statistical Area. The Philadelphia Metropolitan
Statistical Area, which also includes three New Jersey counties, is the
nation's fourth largest metropolitan area in terms of total population. Based
on 1998 census data, the Pennsylvania counties in the Philadelphia Metropolitan
Statistical Area had an estimated population of 3.7 million, which is one-third
of Pennsylvania's total population.
Future growth opportunities for IGA depend on several different growth
indicators in the market area, particularly the future growth and stability of
the regional economy, demographic growth trends, and the nature and intensity
of the competitive environment. The population trends in Philadelphia and
Delaware counties are less favorable than the Philadelphia Metropolitan
Statistical Area averages, reflecting the urban flight typical of most
Northeastern United States urban areas. The surrounding counties of Bucks,
Montgomery and Chester, all of which are more suburban than Philadelphia and
Delaware Counties, have experienced relatively strong positive population
growth over the past several years. Household growth trends in these areas have
paralleled the population growth trends since 1990, exhibiting shrinkage in
overall number of households in Philadelphia and Delaware counties versus
positive growth for Bucks, Montgomery and Chester counties. In the near term
future, the population and household growth trends described above are
forecasted to continue following the same trends that were experienced over the
past several years. Although IGA's market in Philadelphia and Delaware Counties
has a shrinking population base, the remaining, large population base will
continue to provide access to lending and deposit opportunities. The Bank's
offices in the outlying Bucks and Chester counties and the proximity of
Montgomery County also can be expected to provide lending and deposit growth
opportunities, especially in light of the population growth trends in these
counties.
Employment in IGA's market area is derived from a broad base of employment
sectors, including manufacturing, services, wholesale/retail trade, state and
local government, transportation/utilities, finance, insurance, real estate,
and others.
Due to the large number of employers with a national or multi-national
scope of business in Philadelphia Metropolitan Statistical Area, the regional
economy is exposed to national and global recessionary trends. The following
table sets forth the unemployment rates in the United States, Pennsylvania and
IGA's five-country market area for the periods indicated.
March 1998 March 1999
Region Unemployment Unemployment
- ----------------------------- -------------- -------------
United States ............... 5.0% 4.4%
Pennsylvania ................ 5.2% 4.8%
Bucks County ................ 3.8% 3.6%
Montgomery County ........... 3.4% 3.2%
Philadelphia County ......... 6.2% 5.7%
Chester County .............. 2.8% 2.6%
Delaware County ............. 4.1% 3.7%
Competition
IGA faces strong competition, both in originating consumer, commercial
business, commercial real estate and residential real estate loans and in
attracting deposits. The Philadelphia Metropolitan Statistical Area has become
a center for financial services, and IGA competes with a number of very large
financial institutions
64
that are either headquartered or maintain offices in southeastern Pennsylvania.
Some of the larger commercial banks operating in our market area include First
Union National Bank, PNC Bank and Mellon Bank. IGA also competes with a number
of large thrifts who maintain branches in, or are headquartered in,
Southeastern Pennsylvania, including Sovereign Bank, Commonwealth Bank,
Firstrust Savings Bank, and Beneficial Mutual Savings Bank. At June 30, 1998,
there were over 1,700 financial institution branches in our market area.
Competition in originating residential real estate loans comes primarily from
other savings institutions, commercial banks, credit unions and mortgage
bankers. Competition for commercial business loans and commercial real estate
loans comes primarily from commercial banks and savings institutions. Other
savings institutions, commercial banks, credit unions and finance companies
provide vigorous competition in consumer lending.
IGA attracts all of its deposits through IGA's five branch offices.
Competition for those deposits is principally from other savings institutions,
commercial banks and credit unions located in the same region, as well as
mutual funds. IGA competes for these deposits by offering a variety of deposit
accounts at competitive rates and superior service. From 1996 to 1998, deposit
growth in Pennsylvania was positive for commercial banks and savings
institutions, with savings institutions recording the highest rate of growth
due primarily to the rapid expansion of Sovereign Bank, a large regional
thrift. During this period, commercial banks continued to maintain
approximately 78% of all deposits. Within IGA's five-county market area,
Philadelphia County recorded the highest growth in deposits from 1996 to 1998,
along with growth in Chester and Bucks Counties, minimal growth in Montgomery
County, and deposit shrinkage in Delaware County. Commercial banks have a
majority of deposit funds in IGA's market area.
Lending Activities
General.
IGA is primarily engaged in the business of attracting deposits from the
general public and originating consumer loans, including home equity, auto,
credit card and personal loans and residential real estate loans, secured by
first mortgages on owner-occupied, one- to four-family residences in our market
areas. IGA also originates a limited amount of commercial loans.
The following table sets forth the composition of IGA's loan portfolio at
March 31, 1999 and 1998, December 31, 1998 and 1997 (to reflect the recent
change in IGA's fiscal year-end from June 30 to December 31), and June 30, 1998
and 1997. For the periods presented, there is no significant concentration of
loans in any one industry. No loans have been made to borrowers outside the
United States.
March 31, December 31,
----------------------------------------------------- ------------------------
1999 1998 1998
--------------------------- ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
-------------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family ........ $ 40,740 38.28% $ 32,529 33.58% $ 40,114 38.57%
Commercial ................. 2,131 2.00% 0 0.00 1,408 1.35%
Construction ............... 0 0.00 0 0.00 0 0.00
------- ------ -------- ------ -------- ------
Total real estate loans .... 42,871 40.28% 32,529 33.58% 41,522 39.92%
Consumer Loans:
Home equity ................ 23,085 21.69% 23,707 24.47% 22,421 21.56%
Automobile ................. 20,762 19.51% 18,871 19.48% 18,746 18.03%
Credit cards ............... 9,870 9.27% 10,127 10.45% 10,920 10.50%
Unsecured loans ............ 5,462 5.13% 7,280 7.52% 6,329 6.09%
Other ...................... 3,634 3.41% 4,160 4.29% 3,658 3.52%
Commercial loans ........... 760 0.71% 197 0.21% 400 0.38%
------- ------ -------- ------ -------- ------
Total consumer loans ....... 63,573 59.72% 64,342 66.42% 62,474 60.08%
------- ------ -------- ------ -------- ------
Total loans ................ 106,444 100.00% 96,871 100.00% 103,996 100.00%
====== ====== ======
Less:
Deferred fees and
discounts ................. (8) 56 (22)
Allowance for losses ....... (1,116) (741) (1,074)
------- -------- --------
Total loans
receivable, net ........... $105,320 $ 96,186 $102,900
======== ======== ========
December 31, June 30,
------------------------ -------------------------------------------------
1997 1998 1997
------------------------ ----------------------- ------------------------
Amount Percent Amount Percent Amount Percent
----------- ----------- ---------- ----------- ----------- -----------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family ........ $ 30,627 30.96% $35,799 36.15% $ 31,429 31.02%
Commercial ................. 0 0.00 256 0.26% 0 0.00%
Construction ............... 0 0.00 0 0.00 0 0.00
-------- ------ ------- ------ -------- ------
Total real estate loans .... 30,627 30.96% 36,055 36.41% 31,429 31.02%
Consumer Loans:
Home equity ................ 24,505 24.77% 23,174 23.40% 24,154 23.84%
Automobile ................. 19,610 19.82% 18,844 19.03% 20,470 20.20%
Credit cards ............... 11,917 12.05% 10,269 10.37% 10,700 10.56%
Unsecured loans ............ 9,329 9.43% 6,577 6.64% 9,307 9.18%
Other ...................... 2,742 2.77% 3,871 3.91% 5,250 5.20%
Commercial loans ........... 197 0.20% 237 0.24 14 0.00
-------- ------ ------- ------ -------- ------
Total consumer loans ....... 68,300 69.04% 62,972 63.59% 69,895 68.98%
-------- ------ ------- ------ -------- ------
Total loans ................ 98,927 100.00% 99,027 100.00% 101,324 100.00%
====== ====== ======
Less:
Deferred fees and
discounts ................. 0 17 52
Allowance for losses ....... (1,042) (948) (1,005)
-------- ------- --------
Total loans
receivable, net ........... $ 97,885 $98,096 $100,371
======== ======= ========
65
The following table shows the composition of IGA's loan percentages
portfolio by fixed- and adjustable-rate at March 31, 1999 and 1998, December
31, 1998 and 1997 (to reflect the recent change in IGA's fiscal year-end from
June 30 to December 31), and June 30, 1998 and 1997.
March 31, December 31,
--------------------------------------------------- -------------------------
1999 1998 1998
-------------------------- ----------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------------- ----------- ---------- ----------- ------------ -----------
(Dollars in Thousands)
Fixed-Rate Loans:
- -----------------------------
Real estate:
One- to four-family ........ $39,155 36.78% $30,220 31.20% $ 38,446 36.97%
Commercial loans ........... 2,131 2.00% 0 0.00% 1,408 1.35%
Home equity ................. 17,533 16.47% 16,962 17.51% 17,054 16.40%
Automobile .................. 20,762 19.51% 18,871 19.48% 18,746 18.03%
Unsecured loans ............. 5,462 5.13% 7,280 7.52% 6,329 6.09%
Other ....................... 4,037 3.79% 4,035 4.17% 3,684 3.54%
------- ------ ------- ------ -------- ------
Total fixed-rate loans ..... 89,080 83.69% 77,368 79.87% 85,667 82.38%
Adjustable Rate Loans:
- ------------------------------
Real estate:
One- to four-family ........ 1,585 1.49% 2,309 2.38% 1,668 1.60%
Home equity ................. 5,552 5.22% 6,745 6.96% 5,367 5.16%
Credit cards ................ 9,870 9.27% 10,127 10.45% 10,920 10.50%
Other ....................... 357 0.34% 322 0.33% 374 0.36%
------- ------ ------- ------ -------- ------
Total adjustable-rate
loans ..................... 17,364 16.31% 19,503 20.13% 18,329 17.62%
------- ------ ------- ------ -------- ------
Total loans ................ 106,444 100.00% 96,871 100.00% 103,996 100.00%
====== ====== ======
Less:
- ------------------------------
Deferred fees and
discounts .................. (8) 56 (22)
Allowance for losses ........ (1,116) (741) (1,074)
------- ------- --------
Total loans receivable,
net ....................... $105,320 $96,186 $102,900
======== ======= ========
December 31, June 30,
----------------------- --------------------------------------------------
1997 1998 1997
----------------------- ----------------------- -------------------------
Amount Percent Amount Percent Amount Percent
---------- ----------- ---------- ----------- ------------ -----------
(Dollars in Thousands)
Fixed-Rate Loans:
- ------------------------------
Real estate:
One- to four-family ........ $ 28,067 28.37% $33,755 34.09% $ 28,675 28.30%
Commercial loans ........... 0 0.00% 256 0.26% -- --
Home equity ................. 17,528 17.72% 17,164 17.33% 16,818 16.60%
Automobile .................. 19,610 19.82% 18,844 19.03% 20,470 20.20%
Unsecured loans ............. 9,329 9.43% 6,577 6.64% 9,307 9.19%
Other ....................... 2,594 2.62% 3,315 3.35% 4,466 4.41%
-------- ------ ------- ------ -------- ------
Total fixed-rate loans ..... 77,128 77.96% 79,911 80.70% 79,736 78.69%
Adjustable Rate Loans:
- ------------------------------
Real estate:
One- to four-family ........ 2,560 2.59% 2,044 2.06% 2,754 2.72%
Home equity ................. 6,977 7.05% 6,010 6.07% 7,336 7.24%
Credit cards ................ 11,917 12.05% 10,269 10.37% 10,700 10.56%
Other ....................... 345 0.35% 793 0.80% 798 0.79%
-------- ------ ------- ------ -------- ------
Total adjustable-rate
loans ..................... 21,799 22.04% 19,116 19.30% 21,588 21.31%
-------- ------ ------- ------ -------- ------
Total loans ................ 98,927 100.00% 99,027 100.00% 101,324 100.00%
====== ====== ======
Less:
- ------------------------------
Deferred fees and
discounts .................. 0 17 52
Allowance for losses ........ (1,042) (948) (1,005)
-------- ------- --------
Total loans receivable,
net ....................... $ 97,885 $98,096 $100,371
======== ======= ========
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following schedule illustrates the contractual maturity of IGA's loan
portfolio at March 31, 1999. Mortgages which have adjustable or negotiable
interest rates are shown as maturing in the period during which the contract is
due. The schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
Real Estate
-----------------------------------------
One- to Four-Family Commercial Consumer Commercial Business Total
-------------------- -------------------- -------------------- -------------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ---------
(Dollars in Thousands)
Due During Year Ending
March 31, 2000(1) ........ 1,824 7.64 -- -- 12,593 12.09 -- -- 14,410 11.53
2001 and 2002 ............. 3,989 7.17 -- -- 13,956 8.81 81 10.42 18,018 8.46
2003 to 2004 .............. 4,766 7.12 1,758 8.25 18,313 8.05 38 9.49 24,867 7.89
2005 to 2019 .............. 24,589 6.98 373 8.50 17,983 8.66 608 8.61 43,544 7.71
2020 and beyond ........... 5,572 6.80 -- -- -- -- 33 9.85 5,605 6.82
- ------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after March 31, 1999 which have
predetermined interest rates is $89.08 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $17.36
million.
66
Residential Mortgage Lending.
IGA originates substantially all of its mortgage loans through its retail
branch network. IGA generally underwrites one- to four-family loans based on
the applicant's employment, credit history, and appraised value of the subject
property. Presently, IGA lends up to 95% of the lesser of the appraised value
or purchase price for one- to four-family residential loans. For loans with a
loan-to-value ratio in excess of 80%, IGA requires the borrowers to obtain
private mortgage insurance. As a result, IGA has not experienced any material
loss with respect to residential mortgage loans having a loan-to-value ratio of
greater than 80%. All first mortgage loans require title and hazard insurance,
and flood insurance, if necessary, in an amount not less than the value of the
property improvements. IGA also requires title insurance on properties securing
mortgage loans, in accordance with local practice.
In order to approve a property as security for a loan, IGA requires a
satisfactory appraisal by an approved independent appraiser. Independent
appraisers must abide by IGA's appraisal policies and must be approved by IGA's
Board of Directors.
IGA currently originates one- to four-family mortgage loans on either a
fixed or adjustable basis, as consumer demand dictates. IGA's pricing strategy
for mortgage loans includes setting interest rates that are competitive with
Fannie Mae and Freddie Mac, other local financial institutions, and IGA's
internal needs. Adjustable rate mortgage ("ARM") loans are offered with either
a one-year or three-year term to the initial repricing date. After the initial
period, the interest rate for each ARM loan generally adjusts annually for the
remainder of the term of the loan. IGA uses the United States Treasury Constant
Maturity Index to reprice ARM loans. For the three months ended March 31, 1999
and 1998, IGA originated no one- to four-family ARM loans, and $1.92 million
and $3.15 million, respectively, of one- to four-family fixed rate mortgage
loans. For the six months ended December 31, 1999 and 1998, IGA originated no
one- to four-family ARM loans, and $7.0 million and $5.54 million,
respectively, of one- to four-family fixed rate mortgage loans. For the fiscal
year ended June 30, 1998, IGA originated $229,000 of one- to four-family ARM
loans and $13.57 million of one- to four-family fixed-rate mortgage loans. For
the fiscal year ended June 30, 1997, IGA originated no one- to four-family ARM
loans and $3.93 million of one- to four-family fixed-rate mortgage loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset and Liability Management and Market Risk."
Fixed-rate loans secured by one- to four-family residences have
contractual maturities of up to 30 years, and are fully amortizing, with
payments due monthly. These loans normally remain outstanding, however, for a
substantially shorter period of time because of refinancing and other
prepayments. A significant change in the current level of interest rates could
alter considerably the average life of a residential loan in IGA's portfolio.
IGA's one- to four-family loans are generally not assumable, do not contain
prepayment penalties and do not permit negative amortization of principal.
IGA's real estate loans generally contain a "due on sale" clause allowing IGA
to declare the unpaid principal balance due and payable upon the sale of the
security property.
IGA's one- to four-family residential ARM loans are fully amortizing loans
with contractual maturities of up to 30 years, with payments due monthly. IGA's
ARM loans generally provide for specified minimum and maximum interest rates,
with a lifetime cap and floor, and an annual adjustment on the interest rate
over the rate in effect on the date of origination. As a consequence of using
caps, the yield on these loans may not be as rate sensitive as is our cost of
funds. IGA's ARM loans are not convertible into fixed-rate loans.
In order to remain competitive in its market areas, IGA currently
originates ARM loans at initial rates below the fully indexed rate, and
qualifies borrowers based on this initial discounted rate for IGA's three year
ARMs and at 2% over the initial rate for one-year ARMs.
ARM loans generally pose different credit risks than fixed-rate loans,
primarily because as interest rates rise, the borrower's payment rises,
increasing the potential for default. IGA has not experienced difficulty with
the payment history for these loans. See "-- Asset Quality -- Non-Performing
Assets" and "Asset Quality -- Delinquent Loans."
Mortgage loans must be approved by the Vice President of Lending. Mortgage
loans exceeding $250,000 must be approved by the President.
67
At March 31, 1999, $40.74 million, or 38.28%, of IGA's total loan
portfolio consisted of residential mortgage loans. At that date the fixed-rate
one- to four-family mortgage loan portfolio totaled $39.16 million, or 36.78%
of our gross loan portfolio, and IGA's one- to four-family ARM loan portfolio
totaled $1.59 million, or 1.49% of its gross loan portfolio.
IGA also makes a limited number of construction loans to individuals for
the construction of their residences. These loans generally have a construction
phase of six to nine months during which the borrower pays only interest on the
loan. Upon completion of the construction phase, the loan becomes a standard
one- to four-family mortgage loan. These loans are underwritten using the same
criteria as IGA's other one- to four-family mortgage loans. All of these loans
are secured by property located within our market areas. At March 31, 1999, IGA
had no residential construction loans outstanding.
Although IGA is committed to expanding its residential mortgage lending,
the number of consumer loan originations still significantly exceed residential
first mortgage loans. To facilitate liquidity and interest rate risk
management, IGA on occasion has sold fixed rate loans in the secondary mortgage
market. However, in order to increase its mortgage loan portfolio, IGA is
presently holding most new loans in its portfolio. IGA services the loans it
originates, including the loans it sells in the secondary mortgage market. As
of March 31, 1999, IGA serviced a portfolio consisting of $14.51 million of
residential mortgage loans owned by Fannie Mae, holders of Fannie Mae
mortgage-backed securities and other investors.
Commercial Loans
General. IGA recently took steps to expand its commercial real estate and
commercial business lending program by adopting a commercial lending policy and
hiring staff experienced in this area. IGA believes there is significant
opportunity in small business lending due to the consolidation of financial
institutions in IGA's market area.
Multi-family and Commercial Real Estate Lending. IGA offers a variety of
multi-family and commercial real estate loans. These loans are secured
primarily by multi-family dwellings, small retail establishments and small
office buildings located in IGA's market areas. IGA may, from time to time,
participate in commercial real estate construction loans with other lenders. At
March 31, 1999, multi-family and commercial real estate loans totaled $2.13
million or 2.00% of IGA's gross loan portfolio.
IGA's loans secured by multi-family and commercial real estate are
originated with either a fixed or adjustable interest rate. The interest rate
on adjustable-rate loans is based on a variety of indices, generally determined
through negotiation with the borrower. Loan-to-value ratios on IGA's
multi-family and commercial real estate loans typically do not exceed 80% of
the appraised value of the property securing the loan. These loans typically
require monthly payments and have maximum maturities of 25 years. While maximum
maturities may extend to 30 years, loans frequently have shorter maturities and
may not be fully amortizing, requiring balloon payments of unamortized
principal at maturity.
Loans secured by multi-family and commercial real estate are granted based
on the income producing potential of the property and the financial strength of
the borrower. The net operating income, which is the income derived from the
operation of the property less all operating expenses, must be sufficient to
cover the payments related to the outstanding debt. IGA generally require
personal guarantees of the borrowers covering a portion of the debt in addition
to the security property as collateral for such loans. IGA generally requires
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
multi-family and commercial real estate loans are performed by independent
state certified fee appraisers approved by the board of directors. See "-- Loan
Originations, Purchases, Sales and Repayments."
IGA generally maintains a tax or insurance escrow account for its loans
secured by multi-family and commercial real estate. In order to monitor the
adequacy of cash flows on income-producing properties of $1.0 million or more,
the borrower is notified annually to provide financial information including
rental rates and income, maintenance costs and an update of real estate
property tax payments, as well as personal financial information.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one-to
four-family residential mortgage loans. Such loans typically involve
68
large balances to single borrowers or groups of related borrowers. Because
payments on loans secured by multi-family and commercial real estate properties
are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. If the cash flow from the project is
reduced, or if leases are not obtained or renewed, the borrower's ability to
repay the loan may be impaired. See "-- Asset Quality -- Non-performing Loans."
Commercial Business Lending. IGA offers commercial business loans in the
form of lines of credit and fixed or adjustable rate term loans. These loans
are generally secured by commercial assets, the borrower's personal guarantees
and/or personal assets. At March 31, 1999, commercial business loans totaled
$760,000 or .71% of our gross loan portfolio.
Commercial business loans typically require monthly payments and have
maximum maturities of ten years.
Consumer Loans.
General. IGA offers a variety of consumer loans, including home equity
loans, auto loans, credit card loans, unsecured personal loans and loans
secured by a deposit account. At March 31, 1999, consumer loans accounted for
$62.81 million or 59.72% of IGA's total loan portfolio. Of this amount,
approximately 23.09 million, or 21.69% consisted of home equity loans, $20.76
million, or 19.51%, consisted of auto loans, $9.87 million, or 9.27%, consisted
of credit card loans and $5.46 million or 5.13% consisted of unsecured personal
loans.
Consumer loans generally have shorter terms to maturity, which reduces
IGA's exposure to changes in interest rates, and carry higher rates of interest
than do one- to four-family residential mortgage loans. In addition, management
believes that offering consumer loan products helps to expand and create
stronger ties to our existing customer base by increasing the number of
customer relationships and providing cross-marketing opportunities.
We do not originate any consumer loans on an indirect basis. Indirect
loans are contracts purchased from retailers of goods or services which have
extended credit to their customers.
The underwriting standards employed by IGA for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, with respect to any secured consumer loan the underwriting
process also includes a comparison of the value of the security in relation to
the proposed loan amount.
Home Equity. IGA originates home equity loans secured by second mortgages
on owner-occupied, one- to four-family residences. These loans are originated
as fixed-rate loans with terms of from one to fifteen years or as adjustable
rate lines of credit. Second mortgage loans are generally subject to a 80%
combined loan-to-value ratio limitation, including any other outstanding first
mortgages or liens. Home equity loans are underwritten based on the borrower's
income and equity in the home. As of March 31, 1999, we had $23.09 million in
home equity loans outstanding.
Auto Lending. IGA continues to grow its auto lending portfolio through
traditional car financing and with the addition of the "Alt-Lease" program,
which is a balloon term loan program started by IGA as an alternative to
leasing. IGA will finance up to 100% of the purchase price of a new or used
vehicle, subject to valuations from official new and used car guides. All auto
loans are secured by title encumbrances. IGA requires that the borrower
maintain proper auto insurance coverage to protect the collateral. Borrowers
are fully underwritten for creditworthiness.
Credit Cards. IGA has maintained an independent credit card program for
over 15 years as part of its mission to provide a full range of financial
services and products to customers. The credit card program has been
successfully introduced through cross-selling opportunities within IGA. IGA's
credit cards have no annual fee and currently carry an annual percentage
interest rate equal to the prime rate plus 4.65% on outstanding credit card
balances. Management continues to consider expansion of the program through
marketing campaigns, pre-approval screenings, direct mail and affinity
relationships.
69
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of unsecured consumer
loans and consumer loans which are secured by rapidly depreciable assets, such
as automobiles.
Loan Originations, Sales and Repayments
IGA originates loans through referrals from real estate brokers and
builders, its marketing efforts, and its existing and walk-in customers. While
IGA originates both adjustable-rate and fixed-rate loans, its ability to
originate loans is dependent upon the relative customer demand for loans in its
market. Demand is affected by local competition and the interest rate
environment. Competition from other lenders in our market area limits, to a
certain extent, the volume of loans IGA has been able to originate and place in
its portfolio. IGA sells a limited amount of loans and, as a result, loans are
originated according to secondary market guidelines. Furthermore, during the
past few years, IGA, like many other financial institutions, has experienced
significant prepayments on loans and mortgage-backed and related securities due
to the sustained low interest rate environment prevailing in the United States.
In periods of economic uncertainty, the ability of financial institutions,
including IGA, to originate large dollar volumes of loans may be substantially
reduced or restricted, with a resultant decrease in related interest income.
The following table shows the loan origination, sale and repayment
activities of IGA for the three months ended March 31, 1999 and 1998, the
six-month transition periods ended December 31, 1998 and 1997 to reflect the
recent change in IGA's fiscal year-end from June 30 to December 31, and the
years ended June 30, 1998 and 1997.
Three Months Six Months
Ended Ended
March 31, December 31, Year Ended June 30,
------------------------- --------------------------- ---------------------------
1999 1998 1998 1997 1998 1997
----------- ----------- ------------ ------------ ------------ ------------
(In Thousands)
Originations by type:
Adjustable rate(1):
Real estate -- one- to four-family $ 0 $ 0 $ 0 $ 0 $ 229 $ 0
-------- ------- --------- -------- -------- ---------
Total adjustable rate ............ 0 0 0 0 229 0
-------- ------- --------- -------- -------- ---------
Fixed Rate:
Real estate -- one- to four-family 1,916 3,148 7,000 5,539 13,574 3,927
Commercial ....................... 745 0 1,408 0 0 0
Consumer ......................... 7,876 4,536 12,656 10,372 20,379 31,869
-------- ------- --------- -------- -------- ---------
Total fixed-rate ................ 10,537 7,684 21,064 15,911 33,953 35,796
-------- ------- --------- -------- -------- ---------
Total loans originated ............ 10,537 7,684 21,064 15,911 34,182 35,796
-------- ------- --------- -------- -------- ---------
Sales and Repayments:
Principal repayments .............. (8,410) (9,807) (16,140) (18,224) (31,606) (27,566)
-------- -------
Loans sold ........................ 0 (298) 0 (4,576) (4,873) (2,073)
Increase (decrease) in other items,
net .............................. 0 0 (77) 0 22 (457)
-------- ------- --------- -------- -------- ---------
Net increase (decrease) ........... $ 2,127 ($ 2,421) $ 4,847 ($ 6,889) ($ 2,275) $ 5,700
======== ======= ========= ======== ======== =========
- ------------
(1) For the three months ended March 31, 1999 and 1998, IGA also originated
home equity lines of credit under which borrowers are permitted to borrow
up to an aggregate of $504,000 and $200,000, respectively.
Asset Quality
Delinquent Loans. Delinquent real estate loans are comprised of loans that
are 30 to 89 days past due and all other loans that are 31-89 days past due.
When a borrower fails to make a payment on a loan on or before the default
date, a late charge notice is mailed 15 days after the due date. When the loan
is 30 days past due, IGA mails a delinquent notice to the borrower. All
delinquent accounts are reviewed by a collection
70
officer, who attempts to cause the delinquency to be cured by contacting the
borrower. If the loan becomes 60 days delinquent, the collection officer will
generally send a personal letter to the borrower requesting payment of the
delinquent amount in full, or the establishment of an acceptable repayment plan
to bring the loan current within the next 90 days. If the account becomes 90
days delinquent, and an acceptable repayment plan has not been agreed upon, the
collection officer will generally refer the account to legal counsel, with
instructions to prepare a notice of intent to foreclose with respect to real
estate loans or to a collection agency with respect to other loans. The notice
of intent to foreclose allows the borrower up to 30 days to bring the account
current. During this 30-day period, the collection officer may accept a written
repayment plan from the borrower which would bring the account current within
the next 90 days. Once the loan becomes 120 days delinquent, and an acceptable
repayment plan has not been agreed upon, the collection officer, after
receiving approval from the appropriate officer as designed by IGA's board of
directors, will turn over the account to IGA's counsel with instructions to
initiate foreclosure.
The following table sets forth IGA's loans delinquent 30-89 days by type,
number, amount and percentage of type at March 31, 1999.
Real Estate Loans Delinquent for 30-89
Days
Percent of
Total Delinquent
Number Amount Loans
-------- -------- -----------------
(Dollars in Thousands)
Real Estate:
One- to four-family ......... 3 $258 41.6%
construction ................ 0 0 0.00%
commercial .................. 0 0 0.00%
Total ..................... 3 258 41.6%
Non-Real Estate Loans
Delinquent for 31-89 Days
Consumer:
Home equity ............. 3 128 20.6%
Automobile .............. 9 75 12.1%
Credit cards ............ 27 63 10.1%
Unsecured loans ......... 20 96 15.6%
Total ................. 59 362 58.4%
Nonperforming Assets. Non-performing assets are comprised of non-accrual
loans, accruing loans that are 90 days or more past due which are insured for
credit loss, foreclosed real estate (assets acquire in foreclosures), and
restructured loans. It is IGA's policy to classify a loan, other than a loan
insured for credit loss, as non-accrual after the loan becomes 90 days past due
for either principal or interest. Accrual of interest is discontinued for those
loans which are 90 days or more delinquent, or sooner if IGA believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
Upon discontinuance of interest accrual, all unpaid accrued interest is
reversed.
The following table sets forth the amounts and categories of
non-performing assets at March 31, 1999 and 1998, December 31, 1998 and 1997
(to reflect the recent change in IGA's fiscal year-end from June 30 to December
31), and June 30, 1998 and 1997. At all dates presented, IGA had no troubled
debt restructurings which involve forgiving a portion of interest or principal
on any loans or making loans at a rate materially less than that of market
rates.
71
March 31, December 31, June 30,
----------------------- ----------------------- -----------------------
1999 1998 1998 1997 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family .......... $ 47 $ 0 $ 16 $ 59 $ 16 $ 0
Home equity .................. 65 201 64 233 110 294
Automobile ................... 21 41 39 81 40 42
Credit cards ................. 16 32 41 259 39 174
Unsecured loans .............. 54 52 10 343 21 296
Other ........................ 0 0 0 0 0 0
------- ------- ------- ------- ------- -------
Total ..................... 203 326 170 975 226 806
Accruing loans delinquent 90
days or more:
One- to four-family .......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Home equity .................. 0 0 0 0 0 0
Automobile ................... 0 0 0 0 0 0
Credit cards ................. 0 0 0 0 0 0
Unsecured loans .............. 0 0 0 0 0 0
Other ........................ 0 0 0 0 0 0
------- ------- ------- ------- ------- -------
Total ..................... 0 0 0 0 0 0
Foreclosed assets ............... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Renegotiated loans .............. 0 0 0 0 0 0
Total non-performing assets ..... $ 203 $ 326 $ 170 $ 975 $ 226 $ 806
======= ======= ======= ======= ======= =======
Non-performing assets as a
percent of total loans ......... 0.19% 0.34% 0.16% 0.99% 0.23% 0.80%
======= ======= ======= ======= ======= =======
Non-performing assets as a
percent of total assets ........ 0.11% 0.20% 0.10% 0.64% 0.14% 0.49%
======= ======= ======= ======= ======= =======
IGA has no other material loans which are classified under applicable
regulatory guidelines. With respect to all other loans that were current with
respect to principal and interest payments at March 31, 1999, IGA, at present,
does not have serious doubt as to the ability of substantially all borrowers to
comply with present loan repayment terms. IGA does not currently anticipate
significant deterioration in the economic conditions in our market area. If
there is a material deterioration in economic conditions, delinquencies may
increase which would adversely affect IGA's results of operations.
Allowance and Provision for Loan Losses
IGA makes a quarterly determination as to an appropriate provision from
earnings necessary to maintain an allowance for loan losses that is adequate
for probable and reasonably estimated losses. The amount charged to earnings is
based upon several factors including a continuing review of delinquent,
classified and non-accrual loans, large loans, and overall portfolio quality,
regular examination and review of the loan portfolio by regulatory authorities,
analytical review of loan charge-off experience, delinquency rates, other
relevant historical and peer statistical ratios and IGA's judgment with respect
to local and general economic conditions and their impact on the existing loan
portfolio. See "Management's Discussion of Financial Condition and Results of
Operations -- Comparison of Results of Operations for the Three Months Ended
March 31, 1999 and March 31, 1998" for a discussion of our change in reserve
methodology associated with our conversion from a credit union to a savings
bank.
Assessing the adequacy of the allowance for loan losses is inherently
subjective because it requires making material estimates, including the amount
and timing of future cash flows expected to be received on impaired loans, that
may be susceptible to significant change. In the opinion of management, the
allowance when taken as a whole, is adequate to absorb reasonable estimated
loan losses inherent in IGA's loan portfolios.
72
The following table presents the activity in the allowance for loan losses
for the three months ended March 31, 1999 and 1998, the six-month transition
periods ended December 31, 1998 and 1997 to reflect the recent change in IGA's
fiscal year-end from June 30 to December 31, and the years ended June 30, 1998
and 1997.
Three Months Six Months
Ended Ended Year Ended
March 31, December 31, June 30,
------------------------ ----------------------- ------------------------
1999 1998 1998 1997 1998 1997
---------- ----------- ---------- ---------- ----------- ----------
(Dollars in Thousands)
Balance at beginning of period .............. $ 1,074 $ 1,042 $ 948 $ 1,005 $ 1,005 $ 558
Charge-offs:
Real estate .............................. 0 0 $ 27 10 37 0
Credit cards ............................. 72 283 137 128 479 208
Other consumer loans ..................... 64 423 90 254 757 282
------- -------- -------- ------- -------- -------
136 706 254 392 1,273 490
------- -------- -------- ------- -------- -------
Recoveries:
Real estate .............................. 16 0 0 0 0 0
Credit cards ............................. 0 0 0 0 0 0
Other consumer loans ..................... 27 29 80 37 178 90
------- -------- -------- ------- -------- -------
43 29 80 37 178 90
------- -------- -------- ------- -------- -------
Net charge-offs ............................. (93) (677) (174) (359) (1,095) (400)
Provision for loan losses ................... 135 $ 376 300 397 1,038 847
------- -------- -------- ------- -------- -------
Balance at end of period .................... $ 1,116 $ 741 $ 1,074 $ 1,042 $ 948 $ 1,005
======= ======== ======== ======= ======== =======
Ratio of net charge-offs during the period to
average loans outstanding during the
period ..................................... .09% .68% 0.17% .36% 1.10% 0.40%
======= ======== ======== ======= ======== =======
Ratio of net charge-offs during the period to
average non-performing assets .............. 57.06% 245.29% 102.35% 36.82% 212.21% 59.00%
======= ======== ======== ======= ======== =======
The following table sets forth the distribution of IGA's allowance for
losses on loans at March 31, 1999 and 1998, December 31, 1998 and 1997 (to
reflect the recent change in IGA's fiscal year-end from June 30 to December
31), and June 30, 1998 and 1997.
73
March 31,
------------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category
Loss by to Total Loss by to Total
Allowance Category Loans Allowance Category Loans
----------- ---------- ---------- ----------- ---------- ----------
(Dollars in Thousands)
One- to four-family ..... $ 33 $ 40,740 38.27% $ 22 $32,529 33.58%
Home Equity ............. 279 23,085 21.69% 185 23,707 24.47%
Automobile .............. 56 20,762 19.51% 37 18,871 19.48%
Credit cards ............ 279 9,870 9.27% 185 10,127 10.45%
Unsecured loans ......... 246 5,462 5.13% 163 7,280 7.52%
Other ................... 223 6,525 6.13% 149 4,357 4.50%
Unallocated ............. 0 0 0.00% 0 0 0.00%
------ -------- ------ ---- ------- ------
Total ................... $1,116 $106,444 100.00% $741 $96,871 100.00%
====== ======== ====== ==== ======= ======
December 31, June 30,
------------------------------------------------------------------------ -----------------------
1998 1997 1998
----------------------------------- ----------------------------------- -----------------------
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each Amount Loan
of Loan Amounts Category of Loan Amounts Category of Loan Amounts
Loss by to Total Loss by to Total Loss by
Allowance Category Loans Allowance Category Loans Allowance Category
----------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
(Dollars in Thousands) (Dollars in Thousands)
One- to four-family ..... $ 32 $ 40,114 38.57% $ 31 $30,627 30.96% $ 11 $35,799
Home Equity ............. 269 22,421 21.56% 261 24,505 24.77% 59 23,174
Automobile .............. 54 18,746 18.03% 52 19,610 19.82% 26 18,844
Credit cards ............ 269 10,920 10.50% 261 11,917 12.05% 69 10,269
Unsecured loans ......... 236 6,329 6.09% 229 9,329 9.43% 35 6,577
Other ................... 214 5,466 5.26% 208 2,939 2.97% 0 4,364
Unallocated ............. 0 -- 0.00% 0 0 0.00% 748 --
------ -------- ------ ------ ------- ------ ---- -------
Total ................... $1,074 $103,996 100.00% $1,042 $98,927 100.00% $948 $99,027
====== ======== ====== ====== ======= ====== ==== =======
June 30,
------------------------------------------------
1998
----------
Percent Percent
of Loans of Loans
in Each Amount Loan in Each
Category of Loan Amounts Category
to Total Loss by to Total
Loans Allowance Category Loans
---------- ----------- ---------- -----------
One- to four-family ..... 36.15% $ 5 $ 31,429 31.02%
Home Equity ............. 23.40% 198 24,154 23.84%
Automobile .............. 19.03% 34 20,470 20.19%
Credit cards ............ 10.37% 120 10,700 10.56%
Unsecured loans ......... 6.64% 258 9,307 9.19%
Other ................... 4.41% 0 5,264 5.20%
Unallocated ............. 0.00% 390 -- 0.00%
------ ------ -------- ------
Total ................... 100.00% $1,005 $101,324 100.00%
====== ====== ======== ======
74
Investment Activities
IGA must maintain minimum levels of investments that qualify as liquid
assets under Office of Thrift Supervision regulations. Liquidity may increase
or decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, IGA has
maintained liquid assets at levels above the minimum requirements imposed by
the Office of Thrift Supervision regulations and above levels believed adequate
to meet the requirements of normal operations, including potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At March 31, 1999, our liquidity ratio
(liquid assets as a percentage of net withdrawable savings deposits and current
borrowings) was 25%.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their assets in
investment grade commercial paper and corporate debt securities and mutual
funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly. IGA generally
invests in the foregoing types of investments. See "How We Are Regulated --
IGA" for a discussion of additional restrictions on our investment activities.
Mr. Mario Incollingo, IGA's President and Chief Executive Officer, and Ms.
Dorothy Bourlier, IGA's Senior Vice President and Chief Financial Officer, are
responsible for the management of IGA's investment portfolio, subject to the
direction and guidance of the asset/liability committee of IGA's board of
directors. Such officers consider various factors when making investment
decisions, including the marketability, maturity and tax consequences of the
proposed investment. The maturity structure of investments will be affected by
various market conditions, including the current and anticipated slope of the
yield curve, the level of interest rates, the trend of new deposit inflows, and
the anticipated demand for funds via deposit withdrawals and loans.
The general objectives of IGA's investment portfolio are to:
o provide and maintain liquidity within the guidelines prescribed by Office
of Thrift Supervision regulations;
o provide liquidity when loan demand is high and to assist in maintaining
earnings when loan demand is low; and
o maximize earnings while satisfactorily managing risk, including credit
risk, reinvestment risk, liquidity risk and interest rate risk. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Asset/Liability Management."
IGA's securities portfolio consists primarily of obligations of the U.S.
Government and its agencies, including mortgage-backed and related securities.
At March 31, 1999, IGA had $50.20 million in investment securities, $43.77
million of which were classified as available for sale.
IGA's mortgage-backed securities portfolio consists of securities issued
under government-sponsored agency programs. At March 31, 1999, we held $21.12
million of mortgage-backed securities, $5.59 million of which were classified
as held to maturity and $15.53 million of which were classified as available
for sale.
At March 31, 1999, IGA held collateralized mortgage obligations ("CMOs")
totalling $5.87 million, all of which were secured by underlying collateral
issued under government agency-sponsored programs. CMOs are special types of
pass-through debt securities in which the stream of principal and interest
payments on the underlying mortgages or mortgage-backed securities is used to
create classes with different maturities and, in some cases, amortization
schedules, as well as a residual interest, with each class possessing different
risk characteristics.
IGA's policy is to purchase only CMOs that are in the first or second
repayment tranche (investment class) and are AAA rated. The expected life of
IGA's CMOs is typically under five years at the time of purchase. Premiums
associated with CMOs purchased are not significant; therefore, the risk of
significant
75
yield adjustments because of accelerated prepayments is limited. Yield
adjustments are encountered as interest rates rise or decline, which in turn
slows or increases prepayment rates and affects the average lives of the CMOs.
The purpose of IGA's CMO investment strategy is to:
o assist in maintaining IGA's Qualified Thrift Lender Status (see "How We
Are Regulated -- Qualified Thrift Lender");
o generate high cash flow to lessen liquidity and reinvestment risk;
o preserve asset quality; and
o generate additional interest income.
At March 31, 1999, $2.84 million of CMOs were classified as held to maturity
and $3.03 million were classified as available for sale. At March 31, 1999,
IGA's CMOs did not qualify as high risk mortgage securities as defined under
Office of Thrift Supervision regulations.
While mortgage-backed and mortgage-related securities (such as CMOs) carry
a reduced credit risk as compared to whole loans, such securities remain
subject to the risk that a fluctuating interest rate environment, along with
other factors such as the geographic distribution of the underlying mortgage
loans, may alter the prepayment rate of such mortgage loans and so affect both
the prepayment speed, and value, of such securities.
The following tables set forth the composition of IGA's investment and
mortgage-backed and related securities portfolio at March 31, 1999 and 1998,
December 31, 1998 and 1997 (to reflect the recent change in IGA's fiscal
year-end from June 30 to December 31), and June 30, 1998 and 1997. IGA's
investment securities portfolio at March 31, 1999, contained neither tax-exempt
securities nor securities of any issuer with an aggregate book value in excess
of 10% of IGA's retained earnings, excluding those issued by the United States
Government or its agencies.
March 31,
-------------------------------------------------
1999 1998
----------------------- ------------------------
Book % of Book % of
Value Total Value Total
---------- ----------- ----------- -----------
(Dollars in Thousands)
Federal funds .......................... $ 8,315 13.92% $ 11,060 19.36%
Securities held-to-maturity:
Interest-bearing deposits in other
financial institutions .............. 1,234 2.07% 4,862 8.51%
Mortgage-backed securities(1) ......... 5,594 9.36% 11,097 19.42%
FHLB Stock ............................ 834 1.40% 0 0.00%
Securities available-for-sale:
U.S. Government and agency
obligations ......................... $23,126 38.71% $ 14,480 25.34%
Municipal securities .................. 5,114 8.56% 0 0.00%
Mortgage-backed securities(2) ......... $15,529 25.98% 15,641 27.37%
------- ------ -------- ------
Total investments and Federal
funds .............................. $59,746 100.00% $ 57,140 100.00%
======= ====== ======== ======
December 31,
-----------------------------------------------
1998 1997
---------------------- -----------------------
Book % of Book % of
Value Total Value Total
---------- ---------- ---------- -----------
(Dollars in Thousands)
Federal funds .......................... $ 8,726 15.49 $ 8,402 17.66%
Securities held-to-maturity:
Interest-bearing deposits in other
financial institutions .............. 1,237 2.20% 7,137 15.00%
Mortgage-backed securities(1) ......... 6,634 11.78% 11,895 25.00%
FHLB Stock ............................ 834 1.48% 0 0.00%
Securities available-for-sale:
U.S. Government and agency
obligations ......................... $23,824 42.29% $ 8,920 18.75%
Municipal securities .................. 4,902 8.70% 0 0.00%
Mortgage-backed securities(2) ......... 10,176 18.06% 11,223 23.59%
------- ------ ------- ------
Total investments and Federal
funds .............................. $56,333 100.00% $47,577 100.00%
======= ====== ======= ======
76
June 30,
--------------------------------------------------
1998 1997
----------------------- ------------------------
Book % of Book % of
Value Total Value Total
---------- ---------- ---------- -----------
(Dollars in Thousands)
Federal funds ...................................................... $ 5,034 9.79% $15,714 26.78%
Securities held-to-maturity:
Interest-bearing deposits in other financial institutions ......... 3,205 6.24% 7,731 13.17%
Mortgage-backed securities(1) ..................................... 9,570 18.61% 14,320 24.40%
Securities available-for-sale:
U.S. Government and agency obligations ............................ 19,340 37.61% 7,199 12.27%
Mortgage-backed securities(2) ..................................... 14,267 27.75% 13,724 23.38%
------- ------ ------- ------
Total investments and Federal funds ............................. $51,416 100.00% $58,688 100.00%
======= ====== ======= ======
- ------------
(1) At March 31, 1999 and 1998, mortgage-backed securities included $2.84
million and $6.65 million of CMOs, respectively. At December 31, 1998 and
1997, mortgage-backed securities included $3.62 million and $7.62 million
of CMOs, respectively. At June 30, 1998 and 1997, mortgage-backed
securities included $5.49 million and $9.01 million of CMOs, respectively.
(2) At March 31, 1999 and 1998, mortgage-backed securities included $3.03
million and $4.33 million of CMOs, respectively. At December 31, 1998 and
1997, mortgage-backed securities included $3.08 million and $4.52 million
of CMOs, respectively. At June 30, 1998 and 1997, mortgage-backed
securities included $3.90 million and $5.01 million of CMOs, respectively.
The following table sets forth the contractual maturities and weighted
average yield of IGA's investment securities at March 31, 1999.
Less Than 1 to 5
1 Year Years
-------------------- ----------------------
Amount Yield Amount Yield
-------- ---------- ---------- ----------
(Dollars in Thousands)
Securities held-to-maturity:
U.S. government and agency
securities .................... $ 0 0 $ 0 0
Other securities ................ 0 0 1,020 6.45%
Total securities held-to-
maturity .....................
Securities available for sale:
U.S. government and agency
securities .................... $1,000 4.27% $ 6,503 5.81%
Mortgage backed securities ...... 220 7.50% 7,948 6.99%
Other securities ................ 0 0.00% 0 0.00%
Total securities available
for sale ..................... $1,220 4.85% $14,451 6.59%
5 to 10 Over 10
Years Years Total
---------------------- -------------------- ----------------------
Amount Yield Amount Yield Amount Yield
---------- ---------- -------- ---------- ---------- ----------
(Dollars in Thousands)
Securities held-to-maturity:
U.S. government and agency
securities .................... $ 0 0 $ 0 0 $ 0 0
Other securities ................ 148 6.00% 4,354 6.43% $ 5,522 6.42%
Total securities held-to-
maturity ..................... $ 5,522 6.42%
Securities available for sale:
U.S. government and agency
securities .................... $16,010 6.09% 0 0.00% $23,513 5.97%
Mortgage backed securities ...... 1,413 5.08% 1,601 5.39% 11,182 6.41%
Other securities ................ 9,169 5.24% 0 0.00% 9,169 5.24%
Total securities available
for sale ..................... $26,592 5.74% $1,601 5.39% $43,769 5.94%
Sources of Funds
General. IGA's sources of funds are deposits, payment of principal and
interest on loans, interest earned on or maturation of other investment
securities and short-term investments, and funds provided from operations.
Deposits. IGA offers a variety of deposit accounts having a wide range of
interest rates and terms. IGA's deposits consist of savings accounts, money
market deposit accounts, NOW accounts and certificate of deposit
77
accounts currently ranging in terms from 91 days to five years. IGA only
solicits deposits from its market area and does not use brokers to obtain
deposits. IGA primarily relies on competitive pricing policies, advertising and
customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
IGA attracts deposits from new customers primarily by offering a wide
variety of services and accounts, competitive interest rates and convenient
service hours. IGA has become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. IGA
endeavors to manage the pricing of its deposits in keeping with its
asset/liability management, liquidity and profitability objectives. Based on
IGA's experience, management believes that IGA's savings and checking accounts
are relatively stable sources of funds. However, IGA's ability to attract and
maintain certificates of deposit and the rates paid on these deposits has been
and will continue to be significantly affected by market conditions.
The following table sets forth the deposit flows at IGA for the three
months ended March 31, 1999 and 1998, the six-month transition periods ended
December 31, 1998 and 1997 to reflect the recent change in IGA's fiscal
year-end from June 30 to December 31, and the years ended June 30, 1998 and
1997.
Three Months Six Months Year
Ended Ended Ended
March 31, December 31, June 30,
------------------------- --------------------------- --------------------------
1999 1998 1998 1997 1998 1997
----------- ----------- ----------- ------------- ------------ -----------
(In Thousands)
Beginning balance ................. $154,888 $137,223 $143,934 $ 149,846 $ 149,846 $145,828
Net increase (decrease)
before interest credited ......... 5,215 5,379 8,192 (15,428) (11,387) (1,627)
Interest credited ................. 1,326 1,309 2,762 2,805 5,475 5,655
-------- -------- -------- --------- --------- --------
Ending balance .................... $161,429 $143,911 $154,888 $ 137,223 $ 143,934 $149,846
======== ======== ======== ========= ========= ========
Net increase ...................... $ 6,541 $ 6,688 $ 10,954 $ (12,623) $ (5,912) $ 4,028
======== ======== ======== ========= ========= ========
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs IGA offered at March 31, 1999 and 1998,
December 31, 1998 and 1997 (to reflect the recent change in IGA's fiscal
year-end from June 30 to December 31), and June 30, 1998 and 1997.
March 31,
------------------------------------------------
1999 1998
----------------------- -----------------------
Percent Percent
Amount of Total Amount of Total
----------- ---------- ----------- ----------
(Dollars in Thousands)
Transaction Accounts:
Savings accounts ............. $ 74,129 45.92% $ 69,032 47.97%
NOW accounts ................. 10,746 6.66% 9,166 6.37%
Money market accounts ........ 10,240 6.34% 8,560 5.95%
-------- ------ -------- ------
Total non-certificates ..... 95,115 58.92% 86,758 60.29%
Certificates (by rate):
3.00 - 3.99% ................. 2,736 1.69% 0 0.00%
4.00 - 4.99% ................. 23,001 14.25% 2,015 1.40%
5.00 - 5.99% ................. 31,113 19.27% 44,329 30.80%
6.00 - 6.99% ................. 7,931 4.91% 9,354 6.50%
7.00 - 7.99% ................. 1,533 0.95% 1,455 1.01%
-------- ------ -------- ------
Total certificates ......... 66,314 41.08% 57,153 39.17%
-------- ------ -------- ------
Total Deposits ............... $161,429 100.00% $143,911 100.00%
======== ====== ======== ======
December 31,
-----------------------------------------------
1998 1997
---------------------- -----------------------
Percent Percent
Amount of Total Amount of Total
---------- ---------- ---------- -----------
(Dollars in Thousands)
Transaction Accounts:
Savings accounts ............. $ 70,282 45.38% $ 63,790 46.49%
NOW accounts ................. 10,526 6.80% 8,929 6.51%
Money market accounts ........ 9,265 5.98% 9,581 6.98%
-------- ------ -------- ------
Total non-certificates ..... 90,073 58.15% 82,300 59.98%
Certificates (by rate):
3.00 - 3.99% ................. 1,622 1.05% 0 0.00%
4.00 - 4.99% ................. 11,717 7.21% 1,985 1.45%
5.00 - 5.99% ................. 41,900 27.05% 42,609 31.05%
6.00 - 6.99% ................. 8,608 5.56% 8,315 6.06%
7.00 - 7.99% ................. 1,514 0.98% 2,014 1.47%
-------- ------ -------- ------
Total certificates ......... 64,815 41.85% 54,923 40.02%
-------- ------ -------- ------
Total Deposits ............... $154,888 100.00% $137,223 100.00%
======== ====== ======== ======
78
June 30,
----------------------------------------------------
1998 1997
------------------------ -------------------------
Percent Percent
Amount of Total Amount of Total
----------- ---------- ----------- -----------
(Dollars in Thousands)
Transaction Accounts:
Savings accounts ................. $ 68,268 47.43% $ 80,233 53.55%
NOW accounts ..................... 9,305 6.46% 8,162 5.45%
Money market accounts ............ 8,311 5.78% 8,577 5.72%
-------- ------ -------- ------
Total non-certificates ......... 85,884 59.67% 96,972 64.72%
Certificates (by rate):
4.00 - 4.99% ..................... 2,025 1.41% 2,771 1.85%
5.00 - 5.99% ..................... 44,850 31.16% 41,170 27.47%
6.00 - 6.99% ..................... 9,700 6.74% 7,243 4.83%
7.00 - 7.99% ..................... 1,475 1.02% 1,690 1.13%
-------- ------ -------- ------
Total certificates ............. 58,050 40.33% 52,874 35.28%
-------- ------ -------- ------
Total Deposits ................... $143,934 100.00% $149,846 100.00%
======== ====== ======== ======
The following table shows rate and maturity information for IGA's
certificates of deposit as of March 31, 1999.
Less Than 1 to 2 2 to 3 3 to 4 4 to 5
1 Year Years Years Years Years Total
----------- ---------- -------- -------- --------- ----------
(In Thousands)
3.00 - 3.99% ......................... $ 2,736 -- -- -- -- $ 2,736
4.00 - 4.99% ......................... 19,863 $ 3,028 $ 110 -- -- 23,001
5.00 - 5.99% ......................... 22,395 6,660 1,010 52 996 31,113
6.00 - 6.99% ......................... 1,649 4,781 253 574 674 7,931
7.00 - 7.99% ......................... 610 923 -- -- -- 1,533
------- ------- ------ --- --- -------
Total certificates of deposit ........ $47,253 $15,392 $1,373 $626 $1,670 $66,314
======= ======= ====== ==== ====== =======
The following table presents the amount of our certificates of deposit of
$100,000 or more by the time remaining until maturity at March 31, 1999.
Maturity Amount
- -------------------------------- ---------
(In Thousands)
Three months or less ......... $4,638
3 to 6 months ................ 526
6 to 12 months ............... 897
Over 12 months ............... 2,919
------
Total ........................ $8,980
======
Borrowings. IGA is a member of the Federal Home Loan Bank of Pittsburgh.
As a member of the Federal Home Loan Bank of Pittsburgh, IGA is eligible to
obtain advances from the Federal Home Loan Bank of Pittsburgh upon the security
of the Federal Home Loan Bank of Pittsburgh common stock IGA owns, provided
certain standards related to creditworthiness have been met. See "How We Are
Regulated -- Federal Home Loan Bank System." Such advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. Federal Home Loan Bank of Pittsburgh advances are
generally available to meet seasonal demand and other withdrawals of deposit
accounts and to expand lending, as well as to aid the efforts of members to
establish better asset and liability management through the extension of
maturities of liabilities.
79
IGA had no borrowings from the Federal Home Loan Bank of Pittsburgh or
under its line of credit during the three months ended March 31, 1999 and 1998,
the six-month transition periods ended December 31, 1998 and 1997, or the years
ended June 30, 1998 and 1997.
Subsidiary Activities
As a federally chartered savings bank, IGA is permitted by the Office of
Thrift Supervision regulations to invest up to 2% of its assets, or $3.5
million at March 31, 1999, in the stock of, or unsecured loans to, service
corporation subsidiaries. IGA may invest an additional 1% of its assets in
service corporations where such additional funds are used for inner-city or
community development, purposes. IGA's only subsidiary is CUIGA Services
Corporation, a wholly-owned Pennsylvania corporation, which is presently
inactive.
Employees
At March 31, 1999, IGA had a total of 74 employees, including 4 part-time
employees. IGA's employees are not represented by any collective bargaining
group. Management considers its employee relations to be good.
Properties
IGA conducts its business through IGA's branch offices. All property is
owned or leased by IGA. IGA believes that its current facilities are adequate
to meet the present and foreseeable needs of IGA and JADE FINANCIAL. The total
net book value of IGA's premises and equipment (including land, building and
leasehold improvements and furniture, fixtures and equipment) at March 31, 1999
was $1.88 million. See Note 2 of Notes to Consolidated Financial Statements.
IGA owns the branch office located at 213 West Street Road, Feasterville,
Pennsylvania. This facility is approximately 23,000 square feet and also serves
as IGA and JADE FINANCIAL's executive offices. IGA also owns the branch office
located at 1501 S. Newkirk Street, Philadelphia, Pennsylvania. This facility is
approximately 1,000 square feet.
IGA leases a space of approximately 1,000 square feet for the branch
office located at 606 East Baltimore Pike, Media, Pennsylvania. IGA's annual
lease expense in calendar year 1998 was $18,052. Effective August 1, 1999, IGA
will move this branch into an approximately 2,500 square feet space at 521 E.
Baltimore Pike, Media, pennsylvania. IGA will lease this space for a term of 5
years at an annual lease expense of $45,000.
IGA leases a space of approximately 1,800 square feet for the branch
office located at 2301 Market Street, Philadelphia, Pennsylvania. IGA's annual
Lease expense in calendar year 1998 was $22,644, and will be $22,800 in
calendar year 1999.
IGA leases a space of approximately 1,800 square feet for the branch
office located at 500 Chesterbrook Boulevard, Wayne, Pennsylvania. IGA's annual
lease expense in calendar year 1998 was $27,127, and will be $34,000 in
calendar year 1999. This Lease has a five year term expiring on March 31, 2003.
Legal Proceedings
From time to time IGA is involved as plaintiff or defendant in various
legal actions arising in the normal course of business. Presently, IGA is not
involved as a defendant in any legal proceedings.
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MANAGEMENT
Management of JADE FINANCIAL
The Board of Directors of JADE FINANCIAL consists of John J. O'Connell,
Mario L. Incollingo, Jr., Edward D. McBride, Francis J. Moran and Dennis P.
Wesley, each of whom is also a director of IGA. Each director of JADE FINANCIAL
has served as such since JADE FINANCIAL's incorporation in July 1998. Directors
of JADE FINANCIAL will serve staggered three-year terms so that approximately
one-third of the directors will be elected at each annual meeting of
shareholders. One class of directors, consisting of Edward D. McBride, has a
term of office expiring at JADE FINANCIAL's first annual meeting of
shareholders, a second class, consisting of Mario L. Incollingo, Jr. and
Francis J. Moran, has a term of office expiring at JADE FINANCIAL's second
annual meeting of shareholders, and a third class, consisting of John J.
O'Connell and Dennis P. Wesley, has a term expiring at JADE FINANCIAL's third
annual meeting of shareholders. For biographical information regarding each
director of JADE FINANCIAL, see "-- Management of IGA."
The following individuals are executive officers of JADE FINANCIAL and
hold the offices set forth below opposite their names.
Executive Position Held with JADE FINANCIAL
- ----------------------------------- --------------------------------------------------
John J. O'Connell ................. Chairman of the Board and Chief Executive Officer
Mario L. Incollingo, Jr. .......... President and Chief Operating Officer
Dorothy M. Bourlier ............... Senior Vice President and Chief Financial Officer
The executive officers of JADE FINANCIAL 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. Information
concerning the principal occupations, employment and compensation of the
directors and officers of JADE FINANCIAL is set forth under "-- Management of
IGA." Directors of JADE FINANCIAL initially will not be compensated by JADE
FINANCIAL but will serve and be compensated by IGA. JADE FINANCIAL may
determine that such compensation is appropriate in the future.
Management of IGA
Because IGA is a mutual savings association, its members have elected its
board of directors. Upon completion of the conversion, the directors of IGA
immediately prior to the conversion, will continue to serve as directors of IGA
after the conversion. The board of directors of IGA after the conversion will
consist of nine directors divided into three classes, with approximately
one-third of the directors elected at each annual meeting of shareholders.
Because JADE FINANCIAL will own all the issued and outstanding capital stock of
IGA after the conversion, the board of directors of JADE FINANCIAL will elect
the directors of IGA.
Each executive officer of IGA will continue as an executive officer of IGA
after the conversion. Officers of IGA are elected annually by the board of
directors of IGA.
The following table sets forth certain information regarding the directors
of JADE FINANCIAL and IGA.
Term of
Position(s) Director Office
Name Age(1) Held with IGA(2) Since Expires
- ---------------------------------- -------- -------------------------------------- ---------- --------
Robert E. Adelsberger ............ 68 Director 1977 2001
Thomas P. Calabrese .............. 56 Director 1976 2001
William L. Harm .................. 48 Director 1984 2002
Mario L. Incollingo, Jr. ......... 60 Director and Chief Executive Officer 1998 2002
Edward D. McBride ................ 48 Director 1981 2000
Frances J. Moran ................. 59 Director 1998 2000
John J. O'Connell ................ 63 Director and Chairman of the Board 1975 2000
Clyde A. Warden .................. 57 Director 1980 2001
Dennis P. Wesley ................. 46 Director, Vice Chairman 1975 2002
- ------------
(1) As of March 31, 1999
(2) Includes time as a director of IGA Federal Credit Union.
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The following table sets forth certain information regarding the executive
officers of IGA who are not directors of IGA. Executive officers of IGA are
elected annually by the board of directors of IGA and serve at the pleasure of
the board of directors.
Position(s)
Name Age(1) Held with IGA
- ----------------------------- -------- ------------------------------------------
Dorothy M. Bourlier ......... 39 Senior Vice President and Chief Financial
Officer
- ------------
(1) As of March 31, 1999
The business experience of each director and executive officer for at
least the past five years is set forth below.
Robert E. Adelsberger. Mr. Adelsberger was a founding member of IGA
Federal Credit Union in 1975. In 1990, Mr. Adelsberger retired from PECO Energy
where he was employed as a salesman for 38 years. Mr. Adelsberger volunteers
his time to the Abington Memorial Hospital and the Germantown Meals on Wheels
program.
Thomas P. Calabrese. In 1995, Mr. Calabrese retired from PECO Energy where
he was employed as an Estimator/Designer of Electrical Installation for 38
years.
William L. Harm. Mr. Harm has been employed since 1974 as Senior Engineer
of System Planning for PJM Interconnection, LLC the electrical control center
for the Mid-Atlantic states.
Mario L. Incollingo, Jr. Mr. Incollingo has served as President and Chief
Executive Office of IGA since 1992. In 1988, Mr. Incollingo joined IGA as Vice
President of Lending. Prior thereto, he served as Executive Vice President of
Pennsylvania Savings Bank from 1985 to 1988. Mr. Incollingo is active in the
local community through his membership in the Feasterville Businessmen's
Association. Mr. Incollingo serves as Treasurer of the Playwicki Foundation, a
local foundation dedicated to preservation of the Playwicki Historic Farm.
Edward D. McBride. Mr. McBride has been employed since 1969 as the County
Affairs Manager for Philadelphia County for PECO Energy. Mr. McBride is
Chairman of the Board of the Variety Club, a Delaware Valley organization
dedicated to assisting handicapped children. He also is a member of the
Executive Board of the West Philadelphia Partnership, a community organization
dedicated to safety, education, and economic development; the Executive Board
of the Central Philadelphia Development Corporation, whose goal is to improve
quality of life and economic development in the center city area; and the Board
of Directors of the Greater Northeast Chamber of Commerce.
Francis J. Moran. Mr. Moran has worked as a self-employed attorney since
1962. Mr. Moran has served as general counsel to IGA since 1976.
John J. O'Connell. Mr. O'Connell was a founding member of IGA Federal
Credit Union in 1975. Mr. O'Connell was a registered lobbyist and, until July
1, 1998, was employed as Manager of State and Regional Governmental Affairs at
PECO Energy. Mr. O'Connell elected to accept early retirement from PECO Energy,
and as of July 1, 1998 he became the full-time Chairman of the Board of IGA.
Mr. O'Connell has been appointed by Pennsylvania Governor Ridge to the
Governor's Commission on Economic Development through Labor Management
Partnerships. He also serves as Legislative Advisor to the American Cancer
Society of Southeastern Pennsylvania.
Clyde A. Warden. Since 1995, Mr. Warden has served as President of Cable
Management Consulting Associates, Inc., a training company specializing in
electrical cable. Mr. Warden retired from PECO Energy in 1995 where he was
employed as a Safety Instructor for 28 years.
Dennis P. Wesley. Mr. Wesley was a founding member of IGA Federal Credit
Union in 1975. Since 1997, Mr. Wesley has been employed by PECO Energy as
Manager of Acquisition Integration. From 1984 to 1997, Mr. Wesley was employed
by PECO Energy as Manager, Business Services, of the Limerick Generating
Station.
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Dorothy M. Bourlier. Ms. Bourlier has served as Senior Vice President and
Chief Financial Officer of IGA since 1993. Ms. Bourlier has been employed by
IGA since 1981.
Director Compensation
Prior to July 1, 1998, IGA was a credit union. Under National Credit Union
Administration regulations, directors receive no compensation. Moreover, for a
period of two years after the conversion of a credit union, directors may not
receive any fees. Therefore, directors do not currently receive any
compensation for their service as directors of IGA.
Executive Compensation
The executive officers of JADE FINANCIAL have received no compensation
from JADE FINANCIAL since its formation. The following table sets forth
information regarding the compensation of Mr. Incollingo, President and Chief
Executive Officer of IGA and Mr. John J. O'Connell, Chairman of the Board of
IGA, for each of the fiscal years ended December 31, 1998 and June 30, 1998 and
1997. The amounts below represent the aggregate compensation. No other
executive officer of IGA received compensation in excess of $100,000 for the
fiscal year ended December 31, 1998 or June 30, 1998.
Summary Compensation Table(1)
Annual
Compensation(2)
------------------------ All Other
Name and Principal Salary($) Compensation($)
Position Year (3)(4) Bonus($) (5)(6)(7)(8)
- -------------------------- ------------------- ----------- ---------- ----------------
Mario L. Incollingo, Jr. December 31, 1998 $131,823 $ 20,000 $ 52,043
President and CEO June 30, 1998 78,453 10,000 52,099
June 30, 1997 75,304 9,500 52,733
John J. O'Connell December 31, 1998 $109,268 $ 20,000 $ 0
Chairman June 30, 1998 47,091 5,000 0
June 30, 1997 49,707 0 0
- ------------
(1) In 1998, IGA's fiscal year-end was changed from June 30 to December 31.
Accordingly, compensation for 1998 is presented for the twelve-month
period ended December 31, 1998 to reflect IGA's new fiscal year-end, and
for the prior fiscal years ended June 30, 1998 and 1997. Compensation paid
from January 1, 1998 through June 30, 1998 is included in the compensation
reported for the fiscal years ended December 31, 1998 and June 30, 1998.
(2) As a mutual institution, IGA does not have any stock compensation plans.
JADE FINANCIAL intends to adopt stock compensation plans following the
conversion, subject to shareholder approval. See "-- Benefit Plans."
(3) Includes amounts which were deferred pursuant to IGA's 401(k) plan. Under
the 401(k) plan, employees who elect to participate may elect to have
earnings reduced and to cause the amount of such reduction to be
contributed to the 401(k) plan's related trust in an amount up to 15% of
earnings. Any employee who has completed 1 year of service and attained
the age of 21 is eligible to participate in the 401(k) plan.
(4) IGA provided other benefits to Messrs. Incollingo and O'Connell in
connection with their employment. The value of such personal benefits,
which is not directly related to job performance, is not included in the
table above because the value of such benefits does not exceed the lesser
of $50,000 or 10% of the salary and bonus paid to them.
(5) Includes $0, $937, and $3,083 accrued by IGA for the benefit of Mr.
Incollingo under IGA's defined contribution pension plan in fiscal years
ended December 31, 1998, June 30, 1998, and 1997, respectively. Mr.
O'Connell did not participate in IGA's defined contribution pension plan
in the reported periods.
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(6) Includes $3,549, $2,668 and $1,156 contributed by IGA under IGA's 401(k)
plan for the benefit of Mr. Incollingo in fiscal years ended December 31,
1998 and June 30, 1998 and 1997, respectively. IGA makes a matching
contribution equal to 100% of the employee's salary reduction up to a
maximum of 3% of the employee's salary. Mr. O'Connell did not participate
in IGA's 401(k) in the reported periods.
(7) Includes $36,494 of insurance premiums paid by IGA in each of the years in
the three fiscal years ended December 31, 1998 and June 30, 1998 and 1997
with respect to a split dollar term life insurance policy.
(8) Includes $12,000 of deferred compensation paid by IGA in each of the years
in the three fiscal years ended December 31, 1998 and June 30, 1998 and
1997 under a deferred compensation agreement for Mr. Incollingo.
Benefits
General. IGA currently provides health and welfare benefits to its
employees, including hospitalization, major medical, dental, life and
disability insurance, subject to certain deductibles and copayments by
employees.
IGA Federal Savings 401(k) Plan. IGA maintains the IGA Federal Savings
401(k) Plan which is a qualified, tax-exempt profit sharing plan with a
cash-or-deferred feature under Section 401(k) of the Internal Revenue Code. All
employees who have attained age 21 and have completed one year of employment
are eligible to participate. Assets of the 401(k) Plan are managed by the
401(k) Plan's trustees. John J. O'Connell, Edward D. McBride and Clyde A.
Warden presently serve as trustees to the 401(k) Plan.
Under the 401(k) Plan, participants are permitted to make pre-tax salary
reduction contributions to the plan equal to a percentage of up to 15 % of
compensation. "Compensation" includes total compensation (including salary
reduction contributions made under the 401(k) Plan sponsored by IGA), but does
not include compensation in excess of the Internal Revenue Code Section
401(a)(17) limits (presently $160,000). IGA may also annually make a
discretionary profit sharing contribution to the 401(k) Plan.
All employee contributions and profit sharing contributions to the 401(k)
plan and earnings thereon are fully and immediately vested.
Plan benefits will be paid to each participant as a joint and survivor or
single life annuity. In addition, a participant may, under certain
circumstances, elect a lump sum or period certain payment upon normal
retirement, death or disability, or after termination of employment. During the
years ended December 31, 1998 and June 30, 1998 and 1997, IGA made matching
contributions of $2,668 and $1,156, respectively, to the account of Mr.
Incollingo.
Employee Stock Ownership Plan and Trust. JADE FINANCIAL has established
the employee stock ownership plan for eligible employees of JADE FINANCIAL and
IGA. The employee stock ownership plan is a tax-qualified plan subject to the
requirements of the Internal Revenue Code. Employees with a 12-month period of
employment with JADE FINANCIAL or IGA during which they worked at least 1,000
hours and who have attained age 21 are eligible to participate. The employee
stock ownership plan will borrow funds from JADE FINANCIAL and use the funds to
purchase up to 8% of the common stock of JADE FINANCIAL to be issued in the
conversion, or 123,250 shares and 166,750 shares at the minimum and maximum of
the estimated valuation range. If there are insufficient shares available in
the conversion to satisfy the employee stock ownership plan's purchase order,
then, with Office of Thrift Supervision approval, the employee stock ownership
plan may, following the conversion, purchase shares of common stock in the open
market.
The common stock purchased by the employee stock ownership plan will serve
as collateral for the employee stock ownership plan loan to the employee stock
ownership plan. The loan will be repaid principally from IGA's contributions to
the employee stock ownership plan over a period of up to ten years. Shares
purchased by the employee stock ownership plan will be held in a suspense
account for allocation among participants as the loan is repaid. Shares
released from the suspense account in an amount proportional to the repayment
of the loan to the employee stock ownership plan will be allocated among
participants on the basis of compensation in the year of allocation, up to an
annual adjusted maximum level of compensation (currently $160,000).
84
Benefits under the employee stock ownership plan generally become 100%
vested after the third year of service or upon normal retirement (as defined in
the employee stock ownership plan), disability or death of the participant. If
a participant terminates employment for any other reason prior to fully
vesting, his nonvested account balance will be forfeited. Forfeitures will be
reallocated among remaining participating employees in the same proportion as
contributions. Benefits may be payable upon death, retirement, early
retirement, disability or separation from service. JADE FINANCIAL's
contributions to the employee stock ownership plan will not be fixed, so
benefits payable under the employee stock ownership plan cannot be estimated.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of New Accounting Standards."
A committee appointed by the Board of Directors will administer the
employee stock ownership plan. An unrelated corporate trustee for the employee
stock ownership plan will be appointed prior to the completion of the
conversion. The employee stock ownership plan committee may instruct the
trustee regarding investment of funds contributed to the employee stock
ownership plan. The employee stock ownership plan trustee must vote all
allocated shares held in the employee stock ownership plan in accordance with
the instructions of the participating employees, and unallocated shares and
shares held in the suspense account in a manner calculated to most accurately
reflect the instructions the employee stock ownership plan trustee has received
from participants regarding the allocated stock, subject to and in accordance
with the fiduciary duties under ERISA owed by the employee stock ownership plan
trustee to the employee stock ownership plan participants. If no shares are
allocated to participants' accounts at the time common stock of JADE FINANCIAL
is to be voted or if no direction is received by the trustee from a participant
with respect to allocated shares, the trustee will vote the shares of common
stock in its discretion.
GAAP requires that any third party borrowing by the employee stock
ownership plan be reflected as a liability on JADE FINANCIAL's statement of
financial condition. Since the employee stock ownership plan is borrowing from
JADE FINANCIAL, such obligation is not treated as a liability, but will be
excluded from shareholders' equity. If the employee stock ownership plan
purchases newly issued shares from JADE FINANCIAL, total shareholders' equity
would neither increase nor decrease, but per share shareholders' equity and per
share net earnings would decrease as the newly issued shares are allocated to
the employee stock ownership plan participants.
The employee stock ownership plan will be subject to the requirements of
ERISA, and the regulations of the IRS and the Department of Labor thereunder.
Stock Compensation Plan. The Board of Directors of JADE FINANCIAL intends
to approve a stock compensation plan prior to the 2000 annual meeting of
shareholders of JADE FINANCIAL; and, at such meeting, the Board intends to seek
shareholder approval of the stock compensation plan. The stock compensation
plan cannot be presented to the shareholders for approval until at least six
months after completion of the conversion. Certain directors, officers and
employees of JADE FINANCIAL will be eligible to participate in the stock
compensation plan. The stock compensation plan will authorize the grant of
stock options, stock appreciation rights and restricted stock awards equal to
up to 10% of the number of shares of common stock sold in the conversion.
Pursuant to the stock compensation plan, a committee of the Board, upon
recommendation of the Chief Executive Officer and subject to ratification by
the disinterested members of the Board, may make grants of options to purchase
common stock intended to qualify as incentive stock options under Internal
Revenue Code Section 422, options that do not so qualify and are referred to as
nonqualified or compensatory stock options, stock appreciation rights and
restricted stock awards. No stock options, stock appreciation rights or
restricted stock awards will be granted under the stock compensation plan until
July 1, 2000.
The purpose of the stock compensation plan is to provide additional
incentive to directors and employees of JADE FINANCIAL by facilitating their
ownership of stock. The stock compensation plan will have a term of ten years
from the date of its approval by JADE FINANCIAL shareholders (unless the plan
is earlier terminated by the Board of Directors of JADE FINANCIAL) after which
no awards may be made. Pursuant to the stock compensation plan, a number of
shares equal to 10% of the shares of common stock that are issued in the
conversion would be reserved for future issuance by JADE FINANCIAL, in the form
of newly-issued or treasury shares, upon exercise of stock options or stock
appreciation rights, or the grant of
85
restricted stock. If options, stock appreciation rights, and restricted stock
should expire, become unexercisable or be forfeited for any reason without
having been exercised or without becoming vested in full, the shares of common
stock will, unless the stock compensation plan has been terminated, be
available for the grant of additional stock options, stock appreciation rights
and restricted stock awards under the stock compensation plan.
The stock compensation plan will be administered by a committee of at
least three directors of JADE FINANCIAL who are designated by the Board of
Directors and who are "non-employee directors" within the meaning of the
federal securities laws. The compensation committee will select the directors,
officers and employees for participation, the number of shares to be granted or
awarded, and the terms and conditions attached to such shares (provided that
any discretion exercised by the compensation committee must be consistent with
the terms of the stock compensation plan).
It is intended that options granted under the stock compensation plan will
constitute both incentive stock options (options that afford favorable tax
treatment to recipients upon compliance with certain restrictions pursuant to
Section 422 of the Internal Revenue Code, and that do not result in tax
deductions to the Company unless participants fail to comply with Section 422
of the Internal Revenue Code) and options that do not so qualify. The stock
compensation plan permits the compensation committee to impose transfer
restrictions, such as a right of first refusal, on the common stock that
optionees may purchase. It is possible that the compensation committee will
impose transfer restrictions on shares subject to options granted on the stock
compensation plan's effective date. No option shall be exercisable after the
expiration of ten years from the date it is granted; provided, however, that in
the case of any employee who owns more than 10% of the outstanding common stock
at the time an incentive stock option is granted, the option price for the
incentive stock option shall not be less than 110% of the price at which the
common stock is sold in the offering, and the incentive stock option shall not
be exercisable after the expiration of five years from the date it is granted.
An otherwise unexpired option, unless otherwise determined by the compensation
committee, shall cease to be exercisable upon an employee's termination of
employment for "just cause" (as defined in the compensation plan), the date
three months after an employee terminates service for a reason other than just
cause, death, or disability, the date one year after an employee terminates
service due to disability, or the date two years after termination of such
service due to the employee's death. Options granted to non-employee directors
will automatically expire one year after termination of service on the Board of
Directors (two years in the event of death). Options granted at the time of the
implementation of the stock compensation plan are expected to be exercisable
six months after the date such options are granted.
A stock appreciation right may be granted in tandem with all or any part
of any option or without any relationship to any option. Whether or not a stock
appreciation right is granted in tandem with an option, exercise of the stock
appreciation right will entitle the optionee to receive, as the compensation
committee prescribes in the grant, all or a percentage of the excess of the
then fair market value of the shares of common stock subject to the stock
appreciation right at the time of its exercise, over the aggregate exercise
price of the shares subject to the stock appreciation right. Payment to the
optionee may be made in cash or shares of common stock, as determined by the
compensation committee.
Restricted stock is common stock which is nontransferable and forfeitable
until a grantee's interest vests. Nevertheless, the grantee is entitled to vote
the restricted stock and to receive dividends and other distributions made with
respect to the restricted stock. To the extent that a grantee becomes vested in
his restricted stock at any time during the restriction period (as defined in
the stock compensation plan) and has satisfied applicable income tax
withholding obligations, JADE FINANCIAL may deliver unrestricted shares of
common stock to the grantee. Vesting of restricted stock may be accelerated at
the discretion of the compensation committee. At the end of the restriction
period, the grantee will forfeit to JADE FINANCIAL any shares of restricted
stock as to which he did not earn a vested interest during the restriction
period.
JADE FINANCIAL will receive no monetary consideration for the grants under
the stock compensation plan, and will receive no monetary consideration other
than the option exercise price for each share issued to optionees upon the
exercise of options. The option exercise price may be paid in cash or common
stock. The exercise of options and stock appreciation rights and the conditions
under which restricted stock vests will be subject to such terms and conditions
established by the compensation committee as are set forth in a written
agreement between the compensation committee and the optionee (to be entered
into at the date of grant).
86
Although directors and officers of JADE FINANCIAL generally would be
prohibited under the federal securities laws from profiting from certain
purchases and sales of shares of common stock within any six-month period, they
generally will not be prohibited by such laws from exercising options and
immediately selling the shares they receive. As a result, JADE FINANCIAL
directors and officers generally will be permitted to benefit in the event the
market price for the shares exceeds the exercise price of their options,
without being subject to loss in the event the market price falls below the
exercise price.
Notwithstanding the provisions of any option, stock appreciation right or
restricted stock award that provides for its exercise or vesting in
installments, all shares of restricted stock shall become fully vested upon a
"change in control" (as defined in the stock compensation plan) and, for a
period of 60 days beginning on the date of such change in control, all options
and stock appreciation rights shall be immediately exercisable and fully
vested. In the event of a change in control, the compensation committee may
permit the holders of exercisable options to surrender their options in
exchange for cash in an amount equal to the excess of the fair market value of
the common stock subject to the options over their exercise price. Stock
options, stock appreciation rights and restricted stock awards are not
assignable or transferable except by will or the laws of descent and
distribution, or pursuant to the terms of a "qualified domestic relations
order" (within the meaning of Section 414(p) of the Code and the regulations
and rulings thereunder).
The initial grant of options under the stock compensation plan is expected
to take place on the date of the receipt of shareholder and regulatory approval
of the stock compensation plan, and the option exercise price would be the fair
market value of the common stock on the date of grant. No decisions concerning
the number of options to be granted to any director or officer have been made
at this time. No stock appreciation rights or restricted stock awards are
expected to be granted when the stock compensation plan becomes effective, and
no Awards would be made prior to the receipt of shareholder approval of the
stock compensation plan.
The exercise price of the incentive stock options and nonqualified options
granted under the stock option plan will be at least equal to the fair market
value of the common stock at the date the option is awarded. Options will
generally be exercisable only after a period of employment from the date of
grant specified in the option agreement. Except in the case of retirement,
death, permanent total disability or termination deemed to be "at the
convenience of JADE FINANCIAL," the option holder must be employed at the time
of exercise. Options may be exercised within limited times specified in the
stock option plan following termination of employment as a result of death,
permanent and total disability or at the convenience of JADE FINANCIAL (as
determined in the sole discretion of the stock option committee).
Options will expire on the date specified in the option agreement entered
into at the time of the award, unless the holder is earlier terminated, dies,
retires, becomes totally and permanently disabled or ceases to be employed by
JADE FINANCIAL. In no event will the term of an incentive stock option extend
beyond ten years from the grant date (five years if held by a 10% or greater
shareholder of JADE FINANCIAL). The term of a nonqualified stock option must
expire not later than ten years and one month from the grant date.
The number of shares subject to unexercised options and exercise prices on
outstanding options will be adjusted in the event of certain capital changes
such as stock splits, stock dividends and reclassifications. Because the
exercise of options may result in the issuance of authorized but unissued
shares of common stock, such exercise may have a dilutive effect on the common
stock holdings of existing shareholders.
Under current federal income tax law, an option holder will not recognize
taxable income upon grant or exercise of any incentive stock option, provided
that such shares are not disposed of by such option holder within two years
after the date of grant or within one year after the date of exercise. No
compensation deduction may be taken by JADE FINANCIAL as a result of the grant
or exercise of incentive stock options. In the case of a nonqualified stock
option, an option holder will be deemed to receive ordinary income upon
exercise of the stock option in an amount equal to the difference between the
exercise price and the fair market value of the common stock purchased by
exercising the option on the date of exercise. The amount of any ordinary
income recognized by an option holder upon the exercise of a nonqualified stock
option or due to a disposition of common stock acquired upon the exercise of an
incentive stock option prior to the expiration of two years from the date the
incentive option was granted or one year from the date the common stock was so
acquired will be a deductible compensation expense for tax purposes for JADE
FINANCIAL.
87
Management Recognition Plan. JADE FINANCIAL intends to establish a
management recognition plan as a method of providing senior officers of JADE
FINANCIAL with a proprietary interest in JADE FINANCIAL and to reward such
persons for their service and encourage such persons to remain in the service
of JADE FINANCIAL. Pursuant to the management recognition plan, the board of
directors will award certain senior officers of JADE FINANCIAL with "plan share
awards" representing the right to earn shares of common stock over a period of
five years from the date of the plan share award. Each year, participants in
the management recognition plan will earn (become vested in) 20% of the common
stock represented by each plan share award.
No awards will be granted under the management recognition plan until July
1, 2000, subject to shareholder approval of this plan. The board of directors
intends to present the management recognition plan for shareholder approval at
the 2000 annual meeting of shareholders of JADE FINANCIAL. The management
recognition plan cannot be presented to the shareholders for approval until six
months after completion of the conversion.
Unless an officer is terminated for cause (as defined in the management
recognition plan), awards will continue to vest according to the vesting
schedule following termination of employment or service or if JADE FINANCIAL is
involved in a business combination. Termination of employment by a participant
for reasons other than retirement, death or disability constitutes a revocation
of the participant's plan share award.
When a participant's shares become vested in accordance with the
management recognition plan, the participant will recognize income equal to the
fair market value of the common stock so vested at that time, unless the
participant has made an irrevocable election to be taxed on the shares of
common stock awarded to him in the year of the award. The amount of
compensation income recognized by a participant will be a deductible expense of
JADE FINANCIAL for Federal income tax purposes.
When shares become vested and are actually distributed in accordance with
the management recognition plan, participants will also receive amounts equal
to any accrued dividends with respect thereto. Prior to vesting, recipients of
awards under the management recognition plan may vote the shares of common
stock allocated to them. The management recognition plan committee will vote
shares as to which no instructions are received and any unallocated shares in
the same proportion as allocated shares for which instructions are given are
voted.
JADE FINANCIAL intends to contribute sufficient funds so that the
management recognition plan's trustee can purchase a number of shares of common
stock equal to up to 4% of the common stock issued in the conversion. The
management recognition plan may purchase such shares from authorized but
unissued shares of JADE FINANCIAL, treasury shares or in the open market. In
the event that the management recognition plan acquires shares of common stock
from authorized but unissued shares, existing shareholders will experience
dilution of their ownership interest.
Certain Transactions
Loans to directors and executive officers are made in the ordinary course
of business and on the same terms and conditions as those of comparable
transactions with the general public prevailing at the time, in accordance with
our underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features.
All loans we make to our directors and executive officers are subject to
the Office of Thrift Supervision regulations restricting loan and other
transactions with affiliated persons of IGA. Loans to all directors and
executive officers and their associates totaled approximately $1.12 million at
March 31, 1999, which was 7.42% of our equity at that date. All loans to
directors and executive officers were performing in accordance with their terms
at March 31, 1999.
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HOW WE ARE REGULATED
Set forth below is a brief description of certain laws and regulations
which are applicable to IGA and JADE FINANCIAL. The description of these laws
and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States Congress
that may affect the operations of IGA and JADE FINANCIAL. In addition, the
regulations governing IGA and JADE FINANCIAL may be amended from time to time
by the Office of Thrift Supervision. Any such legislation or regulatory changes
in the future could adversely affect IGA or JADE FINANCIAL. No assurance can be
given as to whether or in what form any such changes may occur.
General
IGA, as a federally chartered savings institution, is subject to federal
regulation and oversight by the Office of Thrift Supervision extending to all
aspects of its operations. IGA also is subject to regulation and examination by
the FDIC, which insures the deposits of IGA to the maximum extent permitted by
law, and requirements established by the Federal Reserve Board. Federally
chartered savings institutions are required to file periodic reports with the
Office of Thrift Supervision and are subject to periodic examinations by the
Office of Thrift Supervision and the FDIC. The investment and lending authority
of savings institutions are prescribed by federal laws and regulations, and
such institutions are prohibited from engaging in any activities not permitted
by such laws and regulations. Such regulation and supervision primarily is
intended for the protection of depositors and not for the purpose of protecting
shareholders. This regulatory oversight will continue to apply to IGA following
the conversion.
The Office of Thrift Supervision regularly examines IGA and prepares
reports for the consideration of IGA's board of directors on any deficiencies
that it may find in IGA's operations. The FDIC also has the authority to
examine IGA in its role as the administrator of the Savings Association
Insurance Fund. IGA's relationship with its depositors and borrowers also is
regulated to a great extent by both federal and state laws, especially in such
matters as the ownership of savings accounts and the form and content of IGA's
mortgage requirements. Any change in such regulations, whether by the FDIC,
Office of Thrift Supervision or Congress, could have a material adverse impact
on IGA or JADE FINANCIAL and their operations.
JADE FINANCIAL
Upon completion of the conversion, JADE FINANCIAL will become a unitary
savings and loan holding company. As such, JADE FINANCIAL will be required to
register with and be subject to Office of Thrift Supervision examination and
supervision as well as certain reporting requirements.
In addition, the Office of Thrift Supervision has enforcement authority
over JADE FINANCIAL which also permits the Office of Thrift Supervision to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings bank.
As a unitary savings and loan holding company, JADE FINANCIAL generally is
not subject to activity restrictions. If JADE FINANCIAL acquires control of
another savings bank as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of JADE FINANCIAL and any
of its subsidiaries (other than IGA or any other Savings Association Insurance
Fund - insured savings bank) would become subject to activity restrictions by
the Office of Thrift Supervision.
If IGA fails the qualified thrift lender test, JADE FINANCIAL must obtain
the approval of the Office of Thrift Supervision prior to continuing after such
failure, directly or through its other subsidiaries, any business activity
other than those approved for multiple savings and loan holding companies or
their subsidiaries. In addition, within one year of such failure, JADE
FINANCIAL must register as, and will become subject to, the restrictions
applicable to bank holding companies. The activities authorized for a bank
holding company are more limited than are the activities authorized for a
unitary or multiple savings and loan holding company. See "--Qualified Thrift
Lender Test."
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JADE FINANCIAL must obtain approval from the Office of Thrift Supervision
before acquiring control of any other Savings Association Insurance
Fund-insured association. Such acquisitions are generally prohibited if they
result in a multiple savings and loan holding company controlling savings banks
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 bank.
IGA
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, IGA is required
to file periodic reports with the Office of Thrift Supervision and is subject
to periodic examinations by the Office of Thrift Supervision and the FDIC. The
last regular Office of Thrift Supervision examination of IGA was as of May
1999. Under agency scheduling guidelines, it is likely that another examination
will be initiated within 12 to 18 months after the most recent examination.
When these examinations are conducted by the Office of Thrift Supervision and
the FDIC, the examiners may require IGA to provide for higher general or
specific loan lose reserves. All savings institutions are subject to a
semi-annual assessment, based upon the savings institution's total assets, to
fund the operations of the Office of Thrift Supervision. IGA was not required
to pay an assessment to the Office of Thrift Supervision in 1998. The Office of
Thrift Supervision assessment for the six month period ended June 30, 1999 was
$21,252.
The Office of Thrift Supervision also has extensive enforcement authority
over all savings institutions and their holding companies, including JADE
FINANCIAL. This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist or removal orders
and to initiate injunctive actions. In general, these enforcement actions may
be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the Office of
Thrift Supervision. Except under certain circumstances, public disclosure of
final enforcement actions by the Office of Thrift Supervision is required.
In addition, the investment, lending and branching authority of IGA is
prescribed by federal laws and IGA is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the Office of Thrift Supervision. Federal savings institutions are
also generally authorized to branch nationwide. IGA is in compliance with the
noted restrictions.
IGA's general permissible lending limit for loans-to-one-borrower is equal
to 15% of unimpaired capital and surplus (except for loans fully secured by
certain readily marketable collateral, in which case this limit is increased to
25% of unimpaired capital and surplus). At March 31, 1999, IGA's lending limit
under this restriction was $2.52 million. IGA is in compliance with the
loans-to-one-borrower limitation.
The Office of Thrift Supervision has adopted guidelines establishing
safety and soundness standards on such matters as loan underwriting and
documentation, asset quality, earnings standards, internal controls and audit
systems, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards must
submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC
IGA is a member of the Savings Association Insurance Fund, which is
administered by the FDIC. Deposits are insured up to the applicable limits by
the FDIC and such insurance is backed by the full faith and credit of the
United States Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of, and to require reporting
by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the Savings Association Insurance Fund or Bank
Insurance Fund. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the Office of Thrift Supervision an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
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The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier
1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Savings Association
Insurance Fund will be less than the designated reserve ratio of 1.25% of
Savings Association Insurance Fund insured deposits. In setting these increased
assessments, the FDIC must seek to restore the reserve ratio to that designated
reserve level, or such higher reserve ratio as established by the FDIC. The
FDIC may also impose special assessments on Savings Association Insurance Fund
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," for an explanation
on the special Savings Association Insurance Fund assessment amount paid by
IGA.
Effective January 1, 1999, the premium schedule for Bank Insurance Fund
and Savings Association Insurance Fund insured institutions ranged from 0 to 27
basis points. IGA is in the category of institutions that pay no deposit
insurance premiums. However, all insured institutions are required to pay a
Financing Corporation assessment, in order to fund the interest on bonds issued
to resolve thrift failures in the 1980s. The current rate for Savings
Association Assurance Fund insured institutions is 6.1 basis points for each
$100 in domestic deposits, while Bank Insurance Fund insured institutions pay
an assessment equal to 1.22 basis points for each $100 in domestic deposits.
After January 1, 2000, Savings Association Insurance Fund and Bank Insurance
Fund insured institutions will be the same. These assessments, which may be
revised based upon the level of Bank Insurance Fund and Savings Association
Insurance Fund deposits, will continue until the bonds mature in the year 2017.
Regulatory Capital Requirements
Federally insured savings institutions, such as IGA, are required to
maintain a minimum level of regulatory capital. The Office of Thrift
Supervision has established capital standards, including a tangible capital
requirement, a leverage ratio, or core capital, requirement and a risk-based
capital requirement applicable to such savings institutions. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The Office of Thrift Supervision is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common shareholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At March 31, 1999, IGA did not have any intangible assets.
At March 31, 1999, IGA had tangible capital of $15.50 million, or 8.71% of
adjusted total assets, which is approximately $12.83 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings institution must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At March 31, 1999, IGA
had no intangibles which were subject to these tests.
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At March 31, 1999, IGA had core capital equal to $15.50 million, or 8.71%
of adjusted total assets, which is $10.16 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
The Office of Thrift Supervision risk-based requirement requires savings
institutions to have total capital of at least 8.0% of risk-weighted assets.
Total capital consists of core capital, as defined above, and supplementary
capital. Supplementary capital consists of certain permanent and maturing
capital instruments that do not qualify as core capital and general valuation
loan and lease loss allowances up to a maximum of 1.25% of risk-weighted
assets. Supplementary capital may be used to satisfy the risk-based requirement
only to the extent of core capital. The Office of Thrift Supervision is also
authorized to require a savings institution to maintain an additional amount of
total capital to account for concentration of credit risk and the risk of
non-traditional activities. At March 31, 1999, IGA had $1.12 million of general
loan loss reserves, which was less than 1.25% maximum of risk-weighted assets
permitted.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from O% to 100%, based on the risk inherent in the type of asset. For example,
the Office of Thrift Supervision has assigned a risk weight of 50% for
prudently underwritten permanent one- to four-family first lien mortgage loans
not more than 90 days delinquent and having a loan to value ratio of not more
than 80% at origination unless insured to such ratio by an insurer approved by
the Fannie Mae or Freddie Mac.
On March 31, 1999, IGA had total risk-based capital of $16.61 million
(including $15.50 million in core capital and $1.11 million in supplementary
capital) and risk-weighted assets of $100.17 million; or total capital of
16.58% of risk-weighted assets. This amount was $8.60 million above the 8.0%
requirement in effect on that date.
The Office of Thrift Supervision and the FDIC are authorized and, under
certain circumstances required, to take certain actions against savings
institutions that fail to meet their capital requirements. The Office of Thrift
Supervision is generally required to take action to restrict the activities of
"undercapitalized institution," which is an institution with less than either a
4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8.0%
risk-based capital ratio. Any such institution must submit a capital
restoration plan and until such plan is approved by the Office of Thrift
Supervision may not increase its assets, acquire another institution, establish
a branch or engage in any new activities, and generally may not make capital
distributions. The Office of Thrift Supervision is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
institutions.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or has
Tier 1 risk-based or core capital ratios of less than 3% or a risk-based
capital ratio of less than 6% and is considered "significantly
undercapitalized" must be made subject to one or more of additional specified
actions and operating restrictions which may cover all aspects of its
operations and include a forced merger or acquisition of the institution. An
institution that becomes "critically undercapitalized" because it has a
tangible capital ratio of 2% or less is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized institutions. In addition, the Office of Thrift Supervision
must appoint a receiver, or conservator with the concurrence of the FDIC, for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authority of the Office of Thrift
Supervision and the FDIC, including the appointment of a conservator or a
receiver.
The Office of Thrift Supervision is also generally authorized to
reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in
unsafe or unsound practices or is in an unsafe or unsound condition.
The imposition by the Office of Thrift Supervision or the FDIC of any of
these measures on IGA may have a substantial adverse effect on its operations
and profitability.
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Limitations on Dividends and Other Capital Distributions
Office of Thrift Supervision regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.
A savings institution may make a capital distribution without prior notice
to the Office of Thrift Supervision, unless it is a subsidiary of a holding
company, provided that it has a regulatory rating in the two top categories, is
not of supervisory concern, and would remain adequately capitalized, as defined
in the Office of Thrift Supervision prompt corrective action regulations,
following the proposed distribution, and the aggregate distribution in any
calendar year is less than the net income for that year to date, plus the
retained earnings for the prior two years. As IGA will be a subsidiary of a
holding company, it will need to give thirty days prior notice to the Office of
Thrift Supervision before making any dividend. Savings institutions that would
remain adequately capitalized following the proposed distribution but do not
meet the other noted requirements must notify the Office of Thrift Supervision
30 days prior to declaring a capital distribution. A savings institution may
not make a capital distribution without prior approval of the Office of Thrift
Supervision and the FDIC if it is undercapitalized before, or as a result of,
such a distribution. The Office of Thrift Supervision may object to a capital
distribution if it would constitute an unsafe or unsound practice.
Liquidity
All savings institutions, including IGA, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the
average daily balance of its liquidity base during the preceding calendar
quarter or a percentage of the amount of its liquidity base at the end of the
preceding quarter. For a discussion of what IGA includes in liquid assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Commitments." This liquid asset ratio requirement
may vary from time to time between 4% and 10% depending upon economic
conditions and savings flows of all savings institutions. At the present time,
the minimum liquid asset ratio is 4%.
Penalties may be imposed upon institutions for violations of the liquid
asset ratio requirement. At March 31, 1999, IGA was in compliance with the
requirement, with an overall liquid asset ratio of 25%.
Qualified Thrift Lender Test
All savings institutions, including IGA, are required to meet a qualified
thrift lender test to avoid certain restrictions on their operations. This test
requires a savings institution to have at least 65% of its portfolio assets, as
defined by regulation, in qualified thrift investments on a monthly average for
nine out of every 12 months on a rolling basis. As an alternative, the savings
institution may maintain 60% of its assets in those assets specified in Section
7701(a)(19) of the Internal Revenue Code. Under either test, such assets
primarily consist of residential housing related loans and investments. At
March 31, 1999, IGA met the test and has always met the test since its
effectiveness.
Any savings institution that fails to meet the qualified thrift lender
test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender and thereafter remains a qualified thrift lender. If an
institution does not requalify and converts to a national bank charter, it must
remain Savings Association Insurance Fund insured until the FDIC permits it to
transfer to the Bank Insurance Fund. If such an institution has not yet
requalified or converted to a national bank, its new investments and activities
are limited to those permissible for both a savings institution and a national
bank, and it is limited to national bank branching rights in its home state. In
addition, the institution is immediately ineligible to receive any new Federal
Home Loan Bank borrowings and is subject to national bank limits for payment of
dividends. If such an institution has not requalified or converted to a
national bank within three years after the failure, it must divest itself of
all investments and cease all activities not permissible for a national bank.
In addition, it must repay promptly any outstanding Federal Home Loan Bank
borrowings, which may result in prepayment penalties. If any institution that
fails the qualified thrift lender test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "--JADE FINANCIAL."
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Community Reinvestment Act
Under the Community Reinvestment Act, every FDIC insured institution has a
continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular Community,
consistent with the Community Reinvestment Act. The Community Reinvestment Act
requires the Office of Thrift Supervision, in connection with the examination
of IGA, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by IGA. An
unsatisfactory rating may be used as the basis for the denial of an application
by the Office of Thrift Supervision. Due to the heightened attention being
given to the Community Reinvestment Act in the past few years, IGA may be
required to devote additional funds for investment and lending in its local
community. IGA was examined for Community Reinvestment Act compliance in May
1999, and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings institution or its subsidiaries
and its affiliates are required to be on terms as favorable to the institution
as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the institution's capital. Affiliates of IGA include JADE FINANCIAL and any
company which is under common control with IGA. In addition, a savings
institution may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Office of Thrift Supervision has the discretion to treat subsidiaries of
savings institutions as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must generally be made on terms substantially
the same as for loans to unaffiliated individual.
Federal Securities Law
The stock of JADE FINANCIAL will be registered with the SEC under the
Securities Exchange Act of 1934, as amended. JADE FINANCIAL will be subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Securities Exchange Act of 1934.
JADE FINANCIAL stock held by persons who are affiliates of JADE FINANCIAL
may not be resold without registration or unless sold in accordance with
certain resale restrictions. Affiliates are generally considered to be
officers, directors and principal shareholders. If JADE FINANCIAL meets
specified current public information requirements, each affiliate of JADE
FINANCIAL is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts, primarily checking, NOW and Super NOW checking accounts. At March 31,
1999, IGA was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve
Board may be used to satisfy liquidity requirements that may be imposed by the
office of Thrift Supervision. See "--Liquidity."
Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds,
including Federal Home Loan Bank borrowings, before borrowing from the Federal
Reserve Bank.
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Federal Home Loan Bank System
IGA is a member of the Federal Home Loan Bank of Pittsburgh which is one
of 12 regional Federal Home Loan Banks, that administers the home financing
credit function of savings institutions. Each Federal Home Loan Bank 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 Federal Home loan Bank System. It makes loans or advances to
members in accordance with policies and procedures, established by the board of
directors of the Federal Home Loan Bank, which are subject to the oversight of
the Federal Housing Finance Board. All advances from the Federal Home Loan Bank
are required to be fully secured by sufficient collateral as determined by the
Federal Home Loan Bank. in addition, all long-term advances are required to
provide funds for residential home financing.
As a member, IGA is required to purchase and maintain stock in the Federal
Home Loan Bank of Pittsburgh. For the calendar year ended December 31, 1998,
IGA had an average outstanding balance of $833,500 in Federal Home Loan Bank
stock, which-was in compliance with this requirement. In the past calendar year
such dividends have averaged 6.50%.
Under federal law the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions and to contribute to
low- and moderately-priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and moderate-
income housing projects. These contributions have affected adversely the level
of Federal Home Loan Bank dividends paid and could continue to do so in the
future. These contributions could also have an adverse effect on the value of
Federal Home Loan Bank stock in the future. A reduction in value of IGA's
Federal Home Loan Bank stock may result in a corresponding reduction in IGA's
capital.
For the calendar year ended December 31, 1998, dividends paid by the
Federal Home Loan Bank of Pittsburgh to IGA totaled $21,225.
TAXATION
Federal Taxation
General. JADE FINANCIAL and IGA will be subject to federal income taxation
in the same general manner as other corporations with some exceptions discussed
below. The following discussion of federal taxation is intended only to
summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to JADE FINANCIAL or IGA.
IGA was not subject to federal income tax prior to July 1, 1998.
Following the conversion, JADE FINANCIAL anticipates that it will file a
consolidated federal income tax return with IGA, commencing with the first
taxable year after completion of the conversion. Accordingly, it is anticipated
that any cash distributions made by JADE FINANCIAL to its shareholders would be
considered to be taxable dividends and not as a non-taxable return of capital
to shareholders for federal and state tax purposes.
Method of Accounting. For federal income tax purposes, IGA currently
reports its income and expenses on the accrual method of accounting and uses a
calendar year for filing its federal income tax return.
Bad Debt Reserves. As a result of the Small Business Job Protection Act,
savings associations must now use the specific charge-off method in computing
bad debt deductions.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax
at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum taxable income. The alternative minimum
tax is payable to the extent such alternative minimum taxable income is in
excess of an exemption amount. Net operating losses can offset no more than 90%
of alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years. IGA
has not been subject to the alternative minimum tax nor does IGA have any such
amounts available as credits for carryover.
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Net Operating Loss Carryovers. A financial institution may carryback net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. For losses incurred in the
taxable years prior to August 6, 1997, the carryback period was three years and
the carryforward period was 15 years. At March 31, 1999, IGA had no net
operating loss carryforwards for federal income tax purposes.
Corporation Dividends-Received Deduction. JADE FINANCIAL may eliminate
from its income dividends received from IGA as a wholly-owned subsidiary of
JADE FINANCIAL if, as expected, it elects to file a consolidated return with
IGA.
State Taxation
JADE FINANCIAL will be subject to Pennsylvania's mutual thrift
institutions tax, which is generally levied upon "taxable net income" from all
sources, as determined in accordance with generally accepted accounting
principles, at the rate of 11.5%. "taxable net income" is net income after
apportionment and any deduction for net operating loss carryover. Income or
loss from (i) U.S. obligations, which by federal law are exempt from state and
local taxation, and (ii) Pennsylvania obligations that by state law are exempt
from taxation by Pennsylvania, are excluded from "taxable net income."
RESTRICTIONS ON ACQUISITION
OF JADE FINANCIAL AND IGA
The principal federal regulatory restrictions which affect the ability of
any person, firm or entity to acquire JADE FINANCIAL, IGA or their respective
capital stock are described below. Also discussed are certain provisions of
Pennsylvania's Business Corporation Law and JADE FINANCIAL's articles of
incorporation and bylaws which may be deemed to affect the ability of a person,
firm or entity to acquire JADE FINANCIAL.
Federal Law
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings institution unless the Office of Thrift Supervision has
been given 60 days prior written notice. The Home Owners Loan Act provides that
no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock of a savings institution, where certain enumerated "control factors" are
also present in the acquisition. The Office of Thrift Supervision may prohibit
an acquisition of control if:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o the competence, experience or integrity of the acquiring person indicates
that it would not be in the interest of the depositors or of the public to
permit the acquisition of control by such person.
These restrictions do not apply to the acquisition of a savings institution's
capital stock by one or more tax-qualified employee stock benefit plans,
provided that the plans do not have beneficial ownership of more than 25% of
any class of equity security of the savings institution.
For a period of three years following completion of the conversion, Office
of Thrift Supervision regulations generally prohibit any person from acquiring
or making an offer to acquire beneficial ownership of more than 10% of the
stock of JADE FINANCIAL or IGA without Office of Thrift Supervision approval.
96
Pennsylvania Law
Chapter 25 of the Pennsylvania Business Corporation Law contains certain
"anti-takeover" provisions which apply to a "registered corporation," unless
the registered corporation elects not to be governed by such provisions. The
Company will be a "registered corporation" within the meaning of Chapter 25 of
the Pennsylvania Business Corporation Law because the common stock of JADE
FINANCIAL is entitled to vote generally in the election of directors and will
be registered under the Securities Exchange Act of 1934, as amended. The
relevant provisions are contained in Subchapters 25E through 25H of the
Pennsylvania Business Corporation Law.
Subchapter 25E of the Pennsylvania Business Corporation Law (relating to
control transactions) provides that if any person or group acquires 20% or more
of the voting power of a covered corporation, the remaining shareholders may
demand from such person or group the fair value of their shares, including a
proportionate amount of any control premium.
Subchapter 25F of the Pennsylvania Business Corporation Law (relating to
business combinations) delays for five years and imposes conditions upon
"business combinations" between an "interested shareholder" and the
corporation. The term "business combination" is defined broadly to include
various transactions utilizing a corporation's assets for purchase price
amortization or refinancing purposes. For this purpose, an "interested
shareholder" is defined generally as the beneficial owner of at least 20% of a
corporation's voting shares.
Subchapter 25G of the Pennsylvania Business Corporation Law (relating to
control-share acquisitions) prevents a person who has acquired 20% or more of
the voting power of a covered corporation from voting such shares unless the
"disinterested" shareholders approve such voting rights. Failure to obtain such
approval exposes the owner to the risk of a forced sale of the shares to the
issuer.
Subchapter 25H of the Pennsylvania Business Corporation Law (relating to
disgorgement) applies in the event that (i) any person or group publicly
discloses that the person or group may acquire control of the corporation or
(ii) a person or group acquires (or publicly discloses an offer or intent to
acquire) 20% or more of the voting power of the corporation and, in either
case, sells shares within 18 months thereafter. Any profits from sales of
equity securities of the corporation by, the person or group during such
18-month period belong to the corporation if the securities that were sold were
acquired during the 18-month period or within 24 months prior thereto.
Subchapter 25I of the Pennsylvania Business Corporation Law (relating to
severance payments) provides for a minimum severance payment to certain
employees terminated within two years of the approval of a control-share
acquisition under Subchapter 25G of the Pennsylvania Business Corporation Law.
Subchapter 25J of the Pennsylvania Business Corporation Law (relating to labor
contracts) prohibits, in connection with a control-share acquisition under
Subchapter 25G of the Pennsylvania Business Corporation Law, the abrogation of
certain labor contracts, if any, prior to their stated date of expiration.
JADE FINANCIAL has elected not to "opt out" of coverage under Subchapter
25 of the Pennsylvania Business Corporation Law, and therefore, the foregoing
provisions of Subchapter 25 of the Pennsylvania Business Corporation Law will
be applicable to JADE FINANCIAL. Subchapters 25E through 25H of the
Pennsylvania Business Corporation Law contain a wide variety of transactional
and status exemptions, exclusions and safe harbors.
Articles of Incorporation and Bylaws of JADE FINANCIAL
The following discussion is a summary of certain provisions of JADE
FINANCIAL's articles of incorporation and bylaws that relate to corporate
governance. The description is necessarily general and qualified by reference
to the articles of incorporation and bylaws.
Directors. Certain provisions of JADE FINANCIAL's articles of
incorporation and bylaws will impede changes in majority control of JADE
FINANCIAL's board of directors. JADE FINANCIAL's articles of incorporation
provide that the board of directors of JADE FINANCIAL will be divided into
three classes, with directors in each class elected for three-year staggered
terms except for the initial directors. Thus, assuming a Board of three
directors or more, it would take two annual elections to replace a majority of
JADE FINANCIAL's Board.
97
JADE FINANCIAL's bylaws provide 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. In addition, the bylaws impose
certain notice and information requirements in connection with the nomination
by shareholders of candidates for election to JADE FINANCIAL's board of
directors or the proposal by shareholders of business to be acted upon at an
annual meeting of shareholders.
The articles of incorporation provide that a director may only be removed
by shareholders for cause and upon the affirmative vote of at least a majority
of the votes cast by shareholders.
Restrictions on Call of Special Meetings. JADE FINANCIAL's articles of
incorporation provide that a special meeting of shareholders may be called only
pursuant to a resolution of JADE FINANCIAL's board of directors and for only
such business as directed by the board of directors. Shareholders are not
authorized to call a special meeting.
Absence of Cumulative Voting. JADE FINANCIAL's articles of incorporation
does not provide for cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The articles of incorporation of JADE
FINANCIAL authorizes 5,000,000 shares of preferred stock, $.01 par value. JADE
FINANCIAL is authorized to issue preferred stock from time to time in one or
more series subject to applicable provisions of law, and JADE FINANCIAL's board
of directors is authorized to fix the designations, powers, preferences and
relative participating, optional and other special rights of such shares,
including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of JADE FINANCIAL that the board of directors does not
approve, it might be possible for the board of directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. If JADE FINANCIAL issued any
preferred stock which disparately reduced the voting rights of the common stock
within the meaning of Rule 19c-4 under the Exchange Act of 1934, as amended,
the common stock could be required to be delisted from the Nasdaq Stock Market.
An effect of the possible issuance of preferred stock, therefore, may be to
deter a future takeover attempt. The board of directors has no present plans or
understandings for the issuance of any preferred stock and does not intend to
issue any preferred stock except on terms which the board deems to be in the
best interests of JADE FINANCIAL and its shareholders.
Limitation on Voting Rights. JADE FINANCIAL's articles of incorporation
provide 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. This limitation would not inhibit any
person from soliciting (or voting) proxies from other beneficial owners for
more than 10% of the common stock or from voting such proxies. Beneficial
ownership is to be determined pursuant to Rule 13d-3 of the General Rules and
Regulations of the Exchange Act of 1934, as amended, and includes shares
beneficially owned by any affiliate of such person, shares which such person or
his affiliates (as defined in the articles of incorporation) have the right to
acquire upon the exercise of conversion rights or options and shares as to
which such person and his affiliates have or share investment or voting power,
but shall not include shares beneficially owned by directors, officers and
employees of JADE FINANCIAL or IGA. This provision will be enforced by the
board of directors to limit the voting rights of persons beneficially owning
more than 10% of the stock and thus could be utilized in a proxy contest or
other solicitation to defeat a proposal that is desired by a majority of the
shareholders.
Procedures for Certain Business Combinations. JADE FINANCIAL's articles of
incorporation require that certain business combinations (including
transactions initiated by management) between JADE FINANCIAL (or any
majority-owned subsidiary thereof) and a 5% or more shareholder be approved by
at least 80% of the total number of outstanding voting shares, voting as a
single class, if the transaction is not approved, in advance, by board of
directors.
It should be noted that, since the board or directors and management (10
persons) intend to purchase approximately $1.33 million of the shares offered
in the conversion and may control the voting of additional
98
shares through the employee stock ownership plan and proposed restricted stock
plan and stock option plan, the board and management may be able to block the
approval of combinations requiring an 80% vote even where a majority of the
shareholders vote to approve such combinations.
Amendment to Articles of Incorporation and Bylaws. Amendments to JADE
FINANCIAL's articles of incorporation must be approved by JADE FINANCIAL's
board of directors and also by a majority of the outstanding shares of JADE
FINANCIAL'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 number, classification, election and removal of
directors; amendment of bylaws; call of special shareholder meetings; offers to
acquire and acquisitions of control; director liability; certain business
combinations; power of indemnification and amendments to provisions relating to
the foregoing in the articles of incorporation).
The bylaws may be amended by the board of directors, subject to the right
of shareholders to change such action by the affirmative vote of at least
66-2/3% of the total votes eligible to be voted at a duly constituted meeting
of shareholders; provided, however, that bylaw provisions relating to
limitations on directors' liabilities and indemnification may not be amended to
increase exposure to liability for directors or to decrease indemnification of
directors and officers except by the affirmative vote of 66-2/3% of the board
of directors or by the affirmative vote of shareholders entitled to cast at
least 80% of the votes all shareholders are entitled to cast.
Purpose and Takeover Defensive Effects of JADE FINANCIAL's Articles of
Incorporation and Bylaws. We believe that the provisions described above are
prudent and will reduce JADE FINANCIAL'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 us in the orderly
deployment of the conversion proceeds into productive assets during the initial
period after the conversion. We believe these provisions are in the best
interest of JADE FINANCIAL and IGA and JADE FINANCIAL's shareholders. In our
judgment, JADE FINANCIAL's board will be in the best position to determine the
true value of JADE FINANCIAL and to negotiate more effectively for what may be
in the best interests of its shareholders. Accordingly, we believe that it is
in the best interests of JADE FINANCIAL and its shareholders to encourage
potential acquirors to negotiate directly with the board of directors of JADE
FINANCIAL and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also our view that these provisions
should not discourage persons from proposing a merger or other transaction at
prices reflective of the true value of JADE FINANCIAL and which is in the best
interests of all shareholders.
Attempts to take over financial institutions and their holding companies
have recently become increasingly common. Takeover attempts which have not been
negotiated with and approved by the board of directors present to shareholders
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 JADE FINANCIAL and
its shareholders, with due consideration given to matters such as the
management and business of the acquiring corporation and maximum strategic
development of JADE FINANCIAL's assets.
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 then
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, shareholders 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 which is under different management and whose objectives may not be
similar to those of the remaining shareholders. The concentration of control,
which could result from a tender offer or other takeover attempt, could also
deprive JADE FINANCIAL's remaining shareholders of the benefits of certain
protective provisions of the Exchange Act of 1934, as amended, if the number of
beneficial owners becomes less than the 300 required for Exchange Act
registration.
Despite our belief as to the benefits to shareholders of these provisions
of JADE FINANCIAL's articles of incorporation and bylaws, these provisions may
also have the effect of discouraging a future takeover attempt which would not
be approved by JADE FINANCIAL's board, but pursuant to which shareholders may
99
receive a substantial premium for their shares over then current market prices.
As a result, shareholders 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 JADE FINANCIAL's board of directors and of management more
difficult. JADE FINANCIAL will enforce the voting limitation provisions of the
articles of incorporation in proxy solicitations and accordingly could utilize
these provisions to defeat proposals that are favored by a majority of the
shareholders. We, however, have concluded that the potential benefits outweigh
the possible disadvantages.
DESCRIPTION OF CAPITAL STOCK OF JADE FINANCIAL
General
JADE FINANCIAL is authorized to issue 10,000,000 shares of common stock,
par value $.01 per share, and 5,000,000 shares of preferred stock, having such
par value as the board of directors of JADE FINANCIAL shall fix and determine.
JADE FINANCIAL is offering for sale between 1,540,628 and 2,084,379 shares.
Inclusive of shares contributed to the foundation, JADE FINANCIAL currently
expects to issue between 1,591,982 and 2,153,858 shares (or, as permitted by
the plan of conversion, in the event the employee stock ownership plan
purchases shares in excess of the maximum of the estimated valuation range in
order to satisfy its 8% subscription, up to 2,476,936 shares), subject to
adjustment, of the common stock and no shares of preferred stock in the
conversion. JADE FINANCIAL has reserved for future issuance under the stock
option plan, the employee stock ownership plan and management recognition plan
an amount of authorized but unissued shares of common stock equal to 10% of the
shares to be issued in the conversion.
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 JADE
FINANCIAL, except to the extent that shares of preferred stock issued in the
future may have voting rights, if any. Each holder of shares of the common
stock will be entitled to one vote for each share held of record on all matters
submitted to a vote of holders of shares of the common stock. Holders of common
stock will not be entitled to cumulate their votes for election of directors.
Dividends
We may, from time to time, declare dividends to the holders of common
stock, who will be entitled to share equally in any such dividends. For
additional information as to cash dividends, see "Dividend Policy."
Liquidation
In the event of any liquidation, dissolution or winding up of any or all
of IGA, JADE FINANCIAL, as holder of all of the capital stock of IGA, would be
entitled to receive all assets of IGA after payment of all debts and
liabilities of IGA and after distribution of the balance in the liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders.
In the event of a liquidation, dissolution or winding up of JADE FINANCIAL,
each holder of shares of common stock would be entitled to receive, after
payment of all debts and liabilities of JADE FINANCIAL, a pro rata portion of
all assets of JADE FINANCIAL available for distribution to holders of common
stock. If any preferred stock is issued, the holders thereof may have a
priority in liquidation or dissolution over the holders of the common stock.
Other Characteristics
Holders of the common stock will not have preemptive rights with respect
to any additional shares of common stock that may be issued. The common stock
is not subject to call for redemption, and the outstanding shares of common
stock, when issued and upon receipt by JADE FINANCIAL of the full purchase
price therefor, will be fully paid and nonassessable.
100
Preferred Stock
None of the 5,000,000 authorized shares of preferred stock of JADE
FINANCIAL will be issued in the conversion. After the conversion is completed,
the board of directors of JADE FINANCIAL will be authorized, without
shareholder approval, to issue 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. The preferred stock
may rank prior to the common stock as to dividend rights or liquidation
preferences, or both, and may have full or limited voting rights. The board of
directors has no present intention to issue any of the preferred stock. Should
the board of directors of JADE FINANCIAL subsequently issue preferred stock, no
holder of any such stock shall have any preemptive right to subscribe for or
purchase any stock or any other securities of JADE FINANCIAL other than such,
if any, as the board of directors, in its sole discretion, may determine and at
such price or prices and upon such other terms as the board of directors, in
its sole discretion, may fix.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for JADE FINANCIAL's common stock is
Registrar & Transfer Company.
EXPERTS
The financial statements of IGA as of December 31, 1998 and for the six
months ended December 31, 1998, as of June 30, 1998 and 1997 and for each of
the three years in the period ended June 30, 1998 included in this prospectus
have been audited by Stockton Bates, LLP, independent auditors, as stated in
their report appearing herein and elsewhere in the registration statement, and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to IGA setting forth its opinion as to the estimated pro forma market
value of the common stock upon conversion and its letter with respect to
subscription rights.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax consequences of
the conversion will be passed upon for IGA by Stevens & Lee, P.C., Wayne,
Pennsylvania, special counsel to IGA and JADE FINANCIAL. The Pennsylvania income
tax consequences of the conversion will be passed upon by Stockton Bates, LLP,
Philadelphia, Pennsylvania. The federal income tax consequences of the
deductibility of a contribution of JADE FINANCIAL common stock to the private
foundation, and applicability of the self-dealing rules to such contribution
will be passed upon for IGA by Stevens & Lee, P.C. Certain legal matters will be
passed upon for Charles Webb & Company by Silver, Freedman & Taff, L.L.P.,
Washington, D.C.
ADDITIONAL INFORMATION
JADE FINANCIAL 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, including the Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of such material can be obtained from the SEC at prescribed
rates. In addition, the SEC maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including JADE
FINANCIAL. The statements contained in this prospectus as to the contents of
any contract or other document filed as an exhibit to the Registration
Statement are, of necessity, brief descriptions thereof and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
101
JADE FINANCIAL has filed an Application for conversion with the Office of
Thrift Supervision. This prospectus omits certain information contained in the
Application. The Application may be examined at the principal office of the
Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552 and
at the Central Regional Office of the Office of Thrift Supervision located at
200 West Madison Street, Suite 1300, Chicago, Illinois 60606.
JADE FINANCIAL will register its common stock with the SEC under Section
12 of the Securities Exchange Act of 1934, as amended, and, upon such
registration JADE FINANCIAL and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% shareholders,
the annual and periodic reporting and certain other requirements of the
Securities Exchange Act of 1934. Under the plan of conversion, JADE FINANCIAL
has undertaken that it will not terminate such registration for a period of at
least three years following the conversion.
A copy of the plan of conversion and the articles of incorporation and
bylaws of JADE FINANCIAL and IGA are available without charge from IGA.
Requests for such information should be directed to: Shareholder Relations, IGA
Federal Savings, 213 West Street Road, Feasterville, Pennsylvania 19053.
102
IGA FEDERAL SAVINGS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
Independent Auditors' Report ............................................................. F-2
Consolidated Statements of Financial Condition at March 31, 1999 (Unaudited), December
31, 1998 and June 30, 1998 .............................................................. F-3
Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998
(Unaudited), for the Six Months Ended December 31, 1998 and 1997 (Unaudited) and for the
Years Ended June 30, 1998 and 1997 ...................................................... F-4
Consolidated Statements of Equity for the Three Months Ended March 31, 1999 and 1998
(Unaudited), for the Six Months Ended December 31, 1998 and 1997 (Unaudited) and for the
Years Ended June 30, 1998 and 1997 ...................................................... F-6
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999
(Unaudited), for the Six Months Ended December 31, 1998 and for the Years Ended June 30,
1998 and 1997 ........................................................................... F-7
Notes to Consolidated Financial Statements ............................................... F-9
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
The financial statements of JADE FINANCIAL have been omitted because JADE
FINANCIAL has not yet issued any stock, has no assets, no liabilities and has
not conducted any business other than that of an organizational nature.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
IGA Federal Savings Bank
213 West Street Road
Feasterville, Pennsylvania 19053
We have audited the accompanying consolidated statements of financial
condition of IGA Federal Savings Bank and Subsidiary as of December 31, 1998
and June 30, 1998 and the related consolidated statements of income, equity and
cash flows for the six months ended December 31, 1998 and the years ended June
30, 1998 and 1997. These consolidated financial statements are the
responsibility of the Savings Bank's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the 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 IGA Federal
Savings Bank and Subsidiary as of December 31, 1998 and June 30, 1998 and the
results of their operations and their cash flows for the six months ended
December 31, 1998, and the two years ended June 30, 1998 and 1997 in conformity
with generally accepted accounting principles.
/s/ Stockton Bates, LLP
Certified Public Accountants
Philadelphia, Pennsylvania
March 18, 1999
May 26, 1999 with respect to (Note 18)
F-2
IGA Federal Savings Bank And Subsidiary
Consolidated Statement Of Financial Condition
March 31, December 31, June 30,
1999 1998 1998
----------- -------------- -----------
Unaudited
(Dollars in Thousands)
ASSETS
Cash and Cash Equivalents:
Cash and due from banks ..................................... $ 8,564 $ 8,388 $ 4,742
Interest bearing deposits in other financial institutions . . 1,234 1,237 3,205
Federal funds ............................................... 8,315 8,726 5,034
Restricted cash ............................................. 0 0 760
-------- -------- --------
Total cash and cash equivalents ........................... 18,113 18,351 13,741
Investment securities, available-for-sale .................... 28,240 28,726 19,340
Mortgage-backed securities available-for-sale ................ 15,529 10,176 14,267
Investment securities held-to-maturity (fair value of $499) -- -- 499
Mortgage-backed securities held-to-maturity (fair value of
$5,521, $6,541 and $8,950) .................................. 5,594 6,635 9,071
Loans receivable, net ........................................ 105,320 102,900 98,096
Property, equipment and leasehold improvements, net of
accumulated depreciation .................................... 1,879 1,962 1,883
Federal home loan bank stock, at cost ........................ 834 834
Accrued interest receivable .................................. 964 646 695
Share insurance fund ......................................... 29 1,319
Reorganization costs, net .................................... 194 195 144
Deferred tax asset, net ...................................... 46 44
Prepaid expenses and other assets ............................ 757 593 797
-------- -------- --------
TOTAL ASSETS .............................................. $177,470 $171,091 $159,852
======== ======== ========
LIABILITIES AND EQUITY
LIABILITIES:
Deposits .................................................... $161,429 $154,888 $143,934
Advances from borrowers for taxes ........................... 574 521 571
Accounts payable and accrued expenses ....................... 371 406 267
-------- -------- --------
Total liabilities ......................................... 162,374 155,815 144,772
EQUITY:
Commitments and contingencies (Note 16)
Retained earnings, (See Notes 11 and 12) .................... 15,690 15,560 15,294
Accumulated other comprehensive income ...................... (594) (284) (214)
-------- -------- --------
Total Equity .............................................. 15,096 15,276 15,080
-------- -------- --------
Total Liabilities and Equity .............................. $177,470 $171,091 $159,852
======== ======== ========
See Accompanying Notes
F-3
IGA Federal Savings Bank And Subsidiary
Consolidated Statement Of Income
Three Months Ended Six Months Ended
March 31, December 31,
--------------------------- ---------------------
1999 1998 1998 1997
------------ ------------ --------- ---------
Unaudited Unaudited
(Dollars in Thousands)
INTEREST INCOME:
Interest on loans .................................. $2,154 $2,137 $4,275 $4,510
Investments and mortgage-backed securities ......... 645 489 1,210 842
Interest-earning deposits .......................... 15 22 51 56
Federal funds ...................................... 128 173 253 472
------ ------ ------ ------
Total interest income ........................... 2,942 2,821 5,789 5,880
INTEREST EXPENSE:
Interest on deposits ............................... 1,325 1,310 2,762 2,805
------ ------ ------ ------
Net interest income ............................. 1,617 1,511 3,027 3,075
PROVISION FOR LOAN LOSSES ........................... 135 376 300 397
------ ------ ------ ------
Net interest income after provision for loan
losses ........................................ 1,482 1,135 2,727 2,678
NONINTEREST INCOME:
Loan fees .......................................... 13 22 80 58
Service charges .................................... 112 29 258 236
Other income ....................................... 99 51 268 139
Gain on securities ................................. 198 26
------ ------ ------ ------
Total noninterest income ........................ 224 102 804 459
NONINTEREST EXPENSES:
Compensation and employee benefits ................. 733 656 1,496 1,328
Office and occupancy costs ......................... 507 391 817 677
Printing and postage ............................... 15 15 28 26
Loan servicing ..................................... 44 43 77 87
Professional fees .................................. 43 30 312 64
Bank and MAC charges ............................... 126 32 264 253
Advertising, marketing and promotions .............. 42 22 102 112
Insurance expenses ................................. 8 11 23 20
Other .............................................. 0 0 0 0
------ ------ ------ ------
Total noninterest expenses ...................... 1,518 1,200 3,119 2,567
------ ------ ------ ------
INCOME BEFORE PROVISION FOR INCOME
TAXES .............................................. 188 37 412 570
Provision for federal and state income taxes:
(See Note 1 - Income Taxes)
Current .......................................... 60 N/A 190 N/A
Deferred ......................................... (2) N/A (44) N/A
------ ------ ------ ------
Total income tax provision ...................... 58 N/A 146 N/A
------ ------ ------ ------
NET INCOME .......................................... $ 130 $ 37 $ 266 $ 570
====== ====== ====== ======
See Accompanying Notes
F-4
IGA Federal Savings Bank And Subsidiary
Consolidated Statement Of Income
Year Ended
June 30,
------------------------------
1998 1997
---------------- -----------
(Dollars in Thousands)
INTEREST INCOME:
Interest on loans ............................................. $ 8,734 $ 8,651
Investments and mortgage-backed securities .................... 2,002 2,595
Interest-earning deposits ..................................... 430 364
Federal funds ................................................. 310 50
------- -------
Total interest income ....................................... 11,476 11,660
INTEREST EXPENSE:
Interest on deposits .......................................... 5,475 5,655
------- -------
Net interest income ......................................... 6,001 6,005
PROVISION FOR LOAN LOSSES ...................................... 1,038 847
------- -------
Net interest income after provision for loan losses ......... 4,963 5,158
NONINTEREST INCOME:
Loan fees ..................................................... 295 251
Service charges ............................................... 592 509
Other income .................................................. 71 91
------- -------
Total noninterest income .................................... 958 851
NONINTEREST EXPENSES:
Compensation and employee benefits ............................ 2,612 2,513
Office and occupancy costs .................................... 942 842
Printing and postage .......................................... 246 241
Loan servicing ................................................ 183 167
Professional fees ............................................. 165 143
Bank and MAC charges .......................................... 642 626
Advertising, marketing and promotions ......................... 104 145
Insurance expenses ............................................ 155 123
Other ......................................................... 209 183
------- -------
Total noninterest expenses .................................. 5,258 4,983
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES
Provision for federal and state income taxes:
(See Note 1 -- Income Taxes) ...............................
Current .................................................... N/A N/A
Deferred ................................................... N/A N/A
------- -------
Total income tax provision .................................. N/A N/A
------- -------
NET INCOME ..................................................... $ 663 $ 1,026
======= =======
See Accompanying Notes
F-5
IGA Federal Savings Bank And Subsidiary
Consolidated Statement Of Equity
Restricted, Accumulated
Regular Unrestricted Other
Reserve Undivided Comprehensive Total Comprehensive
Fund Earnings Income Equity Income
------------- -------------- --------------- ----------- --------------
BALANCE, June 30, 1996 ........................... $ 3,925 $ 9,680 $ (687) $ 12,918 $ --
Transfers to reflect provision for loan losses (847) 847
Transfers to regular reserve fund in
accordance with Section 116 of the
Federal Credit Union Act ...................... 602 (602)
Net income ...................................... 1,026 1,026 1,026
Change in unrealized loss on investment
and mortgage-backed securities
available-for-sale, net of taxes .............. 302 302 302
BALANCE, June 30, 1997 ........................... 3,680 10,951 (385) 14,246 1,328
Transfers to reflect provision for loan losses (1,038) 1,038
Transfers to regular reserve fund in
accordance with Section 116 of the
Federal Credit Union Act ...................... 604 (604)
Net income ...................................... 663 663 663
Change in unrealized loss on investment
and mortgage-backed securities
available-for-sale, net of taxes .............. 171 171 171
BALANCE, June 30, 1998 ........................... 3,246 12,048 (214) 15,080 834
Transfers of balance on 7/1/98 when Credit
Union converted to Savings Bank ............... (3,246) 3,246
Net income ...................................... 266 266 266
Change in unrealized loss on investment
and mortgage-backed securities
available-for-sale, net of taxes .............. (70) (70) (70)
-------- ------- ------- -------- ------
BALANCE, December 31, 1998 ....................... 15,560 (284) 15,276 196
Net income (unaudited) ........................... 130 130 130
Change in unrealized loss on investment
and mortgage-backed securities
available-for-sale, net of taxes
(unaudited) ................................... (310) (310) (310)
-------- ------- ------- -------- ------
BALANCE, March 31, 1999
(UNAUDITED) ..................................... $ $15,690 $ (594) $ 15,096 (180)
======== ======= ======= ======== ======
See Accompanying Notes
F-6
IGA Federal Savings Bank And Subsidiary
Consolidated Statement Of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Three Months Ended
March 31,
--------------------------
1999 1998
------------- -----------
Unaudited
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................... $ 130 $ 37
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Amortization of premiums on investments and mortgage-backed securities .............. 44 31
Depreciation and amortization ....................................................... 97 85
Discount on first mortgage sales .................................................... 1
(Gain) loss on sale of investment securities ........................................
Gain on sale/disposal of asset ......................................................
Provision for losses on loans ....................................................... 135 376
Change in operating assets and liabilities:
Increase in deferred taxes ......................................................... (2)
(Increase) decrease in accrued interest receivable ................................. (318) (59)
Increase in prepaid expenses and other assets ...................................... (165) (16)
Increase (decrease) in accounts payable and accrued expenses ....................... (35) 68
------- -------
Net cash provided by (used in) operating activities .............................. (114) 523
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities, available-for-sale ............................... (7,128) (8,105)
Purchase of FHLB Stock ...............................................................
Sales of investment securities, available-for-sale ...................................
Mortgage-backed security purchases, available-for-sale ............................... (2,547) (3,013)
Mortgage-backed security maturities and principal repayments, available-for-sale ..... 103 --
Mortgage-backed security maturities and principal repayments, held-to-maturity ....... 962 868
Maturities and principal repayments of investment securities, available-for-sale ..... 4,297 1,000
(Increase) decrease in total loans receivable, net ................................... (2,420) 1,699
Capital expenditures ................................................................. (14) (242)
(Increase) decrease in Share Insurance Fund .......................................... 29 (635)
------- -------
Net cash provided by (used in) investing activities ................................ (6,718) (8,428)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net ................................................. 6,541 6,688
Net increase (decrease) in advances for borrowers' taxes and insurance ............... 53 39
------- -------
Net cash provided by (used in) financing activities ................................ 6,594 6,727
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................................. 238 (1,178)
Cash and cash equivalents, beginning of period ....................................... 18,351 18,941
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............................................. $18,113 $17,763
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest on deposits ................................. $ 1,325 $ 1,310
Income taxes paid .................................................................... 177 0
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Increase (decrease) in unrealized loss on investment mortgage-backed securities
available-for-sale, net of taxes .................................................... $ 310 $ 46
======= =======
Six Months Ended
December 31,
-------------------------
1998 1997
------------ -----------
Unaudited
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................... $ 266 $ 570
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Amortization of premiums on investments and mortgage-backed securities .............. 82 73
Depreciation and amortization ....................................................... 134 93
Discount on first mortgage sales ....................................................
(Gain) loss on sale of investment securities ........................................ (198) (26)
Gain on sale/disposal of asset ...................................................... 7
Provision for losses on loans ....................................................... 300 397
Change in operating assets and liabilities:
Increase in deferred taxes ......................................................... (44)
(Increase) decrease in accrued interest receivable ................................. 49 41
Increase in prepaid expenses and other assets ...................................... (204) (46)
Increase (decrease) in accounts payable and accrued expenses ....................... 139 (24)
--------- ---------
Net cash provided by (used in) operating activities .............................. 524 1,085
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities, available-for-sale ............................... (42,810) (2,253)
Purchase of FHLB Stock ............................................................... (834)
Sales of investment securities, available-for-sale ................................... 27,000
Mortgage-backed security purchases, available-for-sale ............................... (502)
Mortgage-backed security maturities and principal repayments, available-for-sale ..... 3,632 1,907
Mortgage-backed security maturities and principal repayments, held-to-maturity ....... 2,907 1,902
Maturities and principal repayments of investment securities, available-for-sale ..... 7,278 1,500
(Increase) decrease in total loans receivable, net ................................... (4,804) 2,486
Capital expenditures ................................................................. (478) (109)
(Increase) decrease in Share Insurance Fund .......................................... 1,291 713
--------- ---------
Net cash provided by (used in) investing activities ................................ (6,818) 5,644
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net ................................................. 10,954 (12,623)
Net increase (decrease) in advances for borrowers' taxes and insurance ............... (50) 92
--------- ---------
Net cash provided by (used in) financing activities ................................ 10,904 (12,531)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................................. 4,610 (5,802)
Cash and cash equivalents, beginning of period ....................................... 13,741 24,743
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............................................. $ 18,351 $ 18,941
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest on deposits ................................. $ 2,762 $ 2,805
Income taxes paid .................................................................... 91 0
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Increase (decrease) in unrealized loss on investment mortgage-backed securities
available-for-sale, net of taxes .................................................... $ 69 $ 173
========= =========
See Accompanying Notes
F-7
IGA Federal Savings Bank And Subsidiary
Consolidated Statement Of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Year Ended June 30,
----------------------------
1998 1997
------------ -------------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................................. $ 663 $ 1,026
Adjustments to reconcile net income to net provided by in operating activities:
Amortization of premiums on investments and mortgage-backed securities ................. 90 330
Depreciation and amortization .......................................................... 334 282
Write-down and expenses of real estate owned ........................................... 9
Loss on sale of investment securities .................................................. 7
(Premium) discount on first mortgage sales ............................................. 19 (4)
(Gain) loss on sale/disposal of asset .................................................. 17 (5)
Provision for losses on loans .......................................................... 1,038 847
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable .................................... (135) 142
Increase in prepaid expenses and other assets ......................................... (197) (272)
Increase (decrease) in accounts payable and accrued expenses .......................... 59 (104)
--------- -------
Net cash provided by operating activities ........................................... 1,897 2,249
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities, available-for-sale .................................. (15,500) (6,000)
Sales of investment securities, available-for-sale ...................................... 11,143
Mortgage-backed security purchases, available-for-sale .................................. (5,776)
Mortgage-backed security sales, available-for-sale ...................................... 1,853
Mortgage-backed security maturities and principal repayments, available-for-sale ........ 4,875 3,696
Mortgage-backed security maturities and principal repayments, held-to-maturity .......... 4,668 2,168
Maturities and principal repayments of investment securities, available- for-sale ....... 3,881 3,005
Increase in total loans receivable, net ................................................. (3,848) (8,620)
Proceeds from sale of real estate owned net of expenses ................................. 203
Proceeds from sale of loans ............................................................. 4,854 2,078
Proceeds from sale of equipment ......................................................... 50 22
Capital expenditures .................................................................... (590) (301)
Increase in Share Insurance Fund ........................................................ 78 9
--------- -------
Net cash provided by (used in) investing activities ................................. (7,105) 9,053
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net .................................................... (5,912) 4,028
Net increase in advances for borrowers' taxes and insurance ............................. 119 37
--------- -------
Net cash provided by (used in) financing activities ................................. (5,793) 4,065
--------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ..................................... (11,001) 15,367
Cash and cash equivalents, beginning of year ............................................ 24,742 9,375
--------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................................... $ 13,741 $24,742
========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest on deposits ...................................... $ 5,475 $ 5,655
========= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Loans transferred to real estate owned .................................................. $ 247 $ --
========= =======
Increase (decrease) in unrealized loss on investment mortgage-backed securities
available-for-sale,
net of taxes ........................................................................... $ (171) $ 302
========= =======
See Accompanying Notes
F-8
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Organization:
IGA Federal Savings Bank & Subsidiary (the "Bank") is organized as a
federal mutual savings bank primarily serving customers in the Southeastern
Pennsylvania, counties of Philadelphia, Bucks, Chester and Delaware. The Bank,
through its five branches provide financial services to individuals, families
and small business. Historically the Bank has emphasized the origination of
consumer loans, including auto, credit card and personal loans, and real estate
loans, including home equity loans and one-to-four family first mortgage loans,
the Bank is also starting to offer a variety of commercial loan products.
IGA Federal Savings originally was established in 1975 as IGA Federal
Credit Union. The Bank on July 1, 1998 converted from a credit union to IGA
Federal Savings, a federal mutual savings bank.
The Bank competes with other banking and financing institutions in its
primary market. Commercial banks, savings banks, savings and loan associations,
mortgage bankers and brokers, credit unions and money market funds actively
compete for deposits and loans in the Bank's market area. Such institutions, as
well as consumer finance, mutual funds, insurance companies, and brokerage and
investment banking firms, may be considered competitors of the Bank with
respect to one or more of the services it renders.
Principles of Presentation:
The consolidated financial statements include the accounts of IGA and its
wholly-owned subsidiary, CUIGA Services Corporation, d/b/a Members Edge, a
Pennsylvania corporation established to provide credit life and credit
disability insurance to IGA. All significant intercompany accounts and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the requirements for presentation of interim
financial statements and, therefore, do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations, and cash flows in conformity with generally accepted accounting
principals. In the opinion of management, all adjustments consisting only of
normal recurring adjustments that are necessary for a fair presentation for
interim periods presented have been reflected.
Year 2000 Issue:
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a date after
December 31, 1999 (the "Y2K Issue"). The erroneous date can be interpreted in a
number of different ways; typically the year 2000 is interpreted as the year
1900. Correctly identifying the year 2000 as a leap year may be an issue. These
misidentifications could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, track important customer account information, provide
convenient access to this information or engage in normal business operations.
The Bank's Board of Directors and management have addressed the Y2K issue
by developing a Y2K Compliance Plan. This plan involves four separate phases:
awareness, assessment, renovation, validation and implementation.
During 1997, the Bank completed the systems assessment phase, identifying
each internal and external system that could potentially be affected by the Y2K
issue. Those systems include alarms, etc, that may contain microprocessors. For
each such system, a determination was made whether or not the system is Y2K
compliant. Those determinations involved obtaining Y2K compliant certification
from third-party processors and outside vendors.
F-9
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
As of December 31, 1998, the Bank has completed its "awareness",
"assessment", "renovation" and "validation" phases.
On November 11-13, 1998 the Bank conducted in-house testing of their
present Aftech data processing system. The Bank performed various banking
transactions on customers' accounts using the dates September 30, 1998, January
1, 2000, January 30, 2000, January 31, 2000, February 29, 2000, September 9,
1999. All transactions were completed successfully. Aftech representatives have
completed much of its Y2K testing but will continue testing throughout 1999.
The Bank will be obligated to incur only the hardware costs associated with
implementing the changes required by Aftech; however, hardware costs are not
expected to be material.
As of March 31, 1999, all other material outside vendors have certified
that they were Y2K compliant.
In certain cases, however, such as the potential loss of electrical power
or telecommunications services due to Y2K problems, testing by the Bank is
either not practical or not possible. In those cases, contingency plans are
being designed that specify how the Bank will deal with each such potential
situation. The Bank has developed a contingency plan which will address failure
of the data processing bureau system. The Bank has determined that is the
service bureau system were to fail, the Bank would implement manual systems
until such systems could be reestablished. The Bank does not anticipate the
potential use of short-term manual systems would have a material impact upon
the operations of the Bank. Aftech also has developed their own contingency
plan.
To the extent the Bank systems are not fully Year 2000 compliant, there
can be no assurance that potential system interruptions would not have a
materially adverse effect on the Bank's business, financial condition, results
of operations and business prospects. Further, any Year 2000 failure on part of
the Bank customers could result in additional expense or loss to the Bank.
Cash and Cash Equivalents:
Cash and cash equivalents include unrestricted cash on hand, demand
deposits maintained in depository institutions, other readily convertible
investments with original contractual terms to maturity of three months or less
and restricted cash.
Restricted Cash:
At June 30, 1998 Federal regulations require IGA, at the time a Credit
Union, to set aside specified amounts of cash as reserves against transaction
and time deposits. The reserve funds were held in a noninterest-bearing account
with Mid-Atlantic Corporate Credit Union.
Securities:
The Bank divides its securities portfolio into two segments: (a)
held-to-maturity and (b) available-for-sale. Securities in the held-to-maturity
category are accounted for at cost, adjusted for amortization of premiums and
accretion of discounts, using the level yield method, based on the Bank's
intent and ability to hold the securities until maturity. Marketable securities
included in the available-for-sale category are accounted for at fair value,
with unrealized gains or losses, net of taxes, being reflected as adjustments
to equity. The fair value of marketable securities available-for-sale is
determined from publicly quoted market prices. Securities available for sale
which are not readily marketable, which include Federal Home Loan Bank of
Pittsburgh stock, are carried at cost which approximates fair value.
At the time of purchase, the Bank makes a determination of whether or not
it will hold the securities to maturity, based upon an evaluation of the
probability of future events. Securities, which the Bank believes
F-10
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
may be involved in interest rate risk, liquidity, or other asset/liability
management decisions, which might reasonably result in such securities not
being held-to-maturity, are classified as available-for-sale. If securities are
sold, a gain or loss is determined by specific identification method and is
reflected in the operating results in the period the trade occurs.
Loans and Allowance for Loan Losses:
Loans that IGA has the intent and ability to hold for the foreseeable
future or until maturity or payoff are stated at the amount of unpaid
principal, reduced by deferred loan fees and an allowance for loan losses and
increased by deferred loan origination costs. Interest on loans is recognized
over the term of the loan and is calculated using the simple-interest method on
principal amounts outstanding. The allowance for loan losses is established
through a provision for loan losses charged to expenses. Loans are charged
against the allowance for possible loan loss when management believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing
loans that may become uncollectible, based on evaluations of the collectibility
of loans and prior loan loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrower's ability to pay.
Accrual of interest is discontinued for those loans which are 90 days or
more delinquent, or sooner if management believes, after considering economic
and business conditions and collection efforts, that the borrower's financial
condition is such that the collection of interest is doubtful. When a loan is
placed on non-accrual, all uncollected interest is charged off.
Loan Origination Fees and Loan Origination Costs:
Loan origination fees received in excess of loan origination costs are
deferred and amortized over the contract lives of the loans, using the level
yield method. In the event that the related loans are sold, such deferred fees
are recognized as income in the period of sale. Deferred origination costs
relating to consumer loans are amortized over the estimated life of the
consumer loan portfolio.
Property, Equipment and Leasehold Improvements:
Land is carried at cost. Property, equipment and leasehold improvements
are stated at cost less accumulated depreciation and amortization. Depreciation
is computed based on cost using the straight-line method over estimated useful
lives of 35 years for buildings and improvements, 2-15 years for office
furniture, equipment and leasehold improvements and 3 years for transportation
equipment. Improvements to leased property are amortized over the lesser of the
life of the lease or life of the improvements.
Maintenance and repairs of property, equipment and leasehold improvements
are charged to operations and major improvements are capitalized. Upon
retirement, sale or other disposition of property, equipment and leasehold
improvements, the cost and accumulated depreciation and amortization are
eliminated from the accounts and gain or loss is included in operations.
Financial Statement Presentation:
Certain items in prior years financial statements have been reclassified
to conform with the presentation in these consolidated financial statements.
These classifications did not effect previously reported net income or retained
earnings.
F-11
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Advertising:
Advertising costs are charged to operations when incurred and amounted to
$42,000 and $22,000 for the three months ended March 31, 1999 and 1998
(unaudited), respectively, and $102,000 and $112,000 for the 6 months ended
December 31, 1998 and 1997 (unaudited), respectively, and $104,000 and $145,000
for the years ended June 30, 1998 and 1997, respectively.
Reorganization Costs:
On April 24, 1998, the IGA Board of Directors approved a resolution to
convert to a Federal Mutual Savings Association. Costs incurred with this
conversion were capitalized and will be amortized over 5 years using the
straight-line method beginning January 1, 1999.
Use of Estimates:
The preparation of financial estimates in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The principal estimate that is susceptible to significant change in the
near term relates to the allowance for loan losses. The evaluation of the
adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different
loan portfolios, and takes into consideration current economic and market
condition, the capability of specific borrowers to pay specific loan
obligations, as well as current loan collateral values. However, actual losses
on specific loans, which also are encompassed in the analysis, may vary from
estimated losses.
Mortgage Servicing Rights:
The Bank recognizes mortgage servicing rights as assets, regardless of how
such assets were acquired. Impairment of mortgage servicing rights is assessed
based upon a fair market valuation of those rights on a disaggregated basis.
Impairment, if any, is recognized in the statement of operations. There has
been no impairment reflected in the mortgage servicing rights. Mortgage
servicing rights are included in other assets and amortization of mortgage
servicing rights is netted against service fee income.
Cash Deposited in Financial Institutions:
IGA maintains cash balances at other financial institutions. Accounts at
these financial institutions are insured by the Federal Deposit Insurance
Corporation up to one hundred thousand dollars. In the normal course of
business, IGA has deposits at its correspondent banks that exceed the FDIC
insured balance. IGA annually evaluates the creditworthiness of these
correspondent banks.
Effect of New Accounting Standards:
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, is effective for the Bank for the period beginning July
1, 1998, and establishes reporting and display of comprehensive income in the
financial statements. Comprehensive income represents net earnings and certain
amounts reported directly in stockholders' equity, such as the net unrealized
gain or loss on available-for-sale securities. The Bank adopted SFAS No. 130
effective June 30, 1998.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, will be effective for the Bank for years beginning July 1, 1999.
The Bank currently has no activity subject to SFAS No. 133.
F-12
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held-for-Sale by a Mortgage Banking Enterprise. SFAS No. 134 changes the way
mortgage banking firms account for certain securities and other interests they
retain after securitizing mortgage loans that were held for sale. Under current
practice, a bank that securitizes credit card receivables has a choice in how
it classifies any retained securities based on its intent and ability to hold
or sell those investments. SFAS No. 134 gives the mortgage banking firms the
opportunity to apply the same intent-based accounting that is applied by other
companies. SFAS No. 134 is effective for the fiscal quarter beginning after
December 15, 1998. Management of the Bank anticipates that the implementation
of SFAS No. 134 will not have a material impact on the Bank's financial
condition or results of operations.
Loans Available-For-Sale:
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or market calculated on an aggregate basis
with any unrealized losses reflected in the statement of operations. There were
no loans available-for-sale.
Income Taxes:
The Bank utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to difference between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Additionally, the recognition of net deferred tax assets is based upon the
likelihood of realization of tax benefits in the future. A valuation allowance
would be provided for deferred tax assets which are determined more than likely
not to be realized.
Prior to July 1, 1998 IGA Credit Union was exempt, by statute, from
federal and state income taxes.
CUIGA Services Corporation, (The Company), d/b/a Member's Edge, a
wholly-owned subsidiary of IGA, is subject to federal and state income taxes.
At December 31, 1998, net operating loss carryforwards approximately $85,374
are available for federal income tax purposes. These carryforwards are
available to offset future federal taxable income of the Company and expire in
varying amounts between December 31, 2003 and June 30, 2013.
The Company incurred a net loss of $2,600 for the three month period ended
March 31, 1999, a $4,114 net loss for the six month period ended December 31,
1998 and a $7,275 net loss for the year ended
June 30, 1998.
F-13
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES:
The following is a summary of the Bank's investment in available-for-sale
and held-to-maturity securities as of March 31, 1999.
Available-for-Sale
March 31, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(Dollars in Thousands) -- Unaudited
Investment Securities:
Debt:
FHLB Notes .................................... $18,012 $ 1 $(287) $17,726
FHLMC ......................................... 500 (2) 498
FNMA ..........................................
Federal Farm Credit ........................... 5,000 (98) 4,902
Municipals .................................... 5,157 (43) 5,114
------- --- ------- -------
28,669 1 (430) 28,240
Mortgage-backed Securities:
Collateralized mortgage obligations ........... 3,105 -- (72) 3,033
FHLMC ......................................... 926 (7) 919
GNMA .......................................... 2,547 2,547
Small Business Administration ................. 4,137 (44) 4,093
FNMA .......................................... 4,979 (42) 4,937
------- --- ------- -------
15,694 (165) 15,529
------- --- ------- -------
Total available-for-sale Securities ......... 44,363 1 (595) 43,769
------- --- ------- -------
Held-to-Maturity
March 31, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(Dollars in Thousands) -- Unaudited
Mortgage-backed Securities:
Collateralized mortgage obligations ......... 2,840 (1) 2,839
FNMA ........................................ 475 (6) 469
GNMA ........................................ 2,279 (66) 2,213
------- --- ----- -------
Total Held-to-Maturity Securities ......... 5,594 (73) 5,521
------- --- ----- -------
TOTAL INVESTMENTS AND
MORTGAGE-BACKED SECURITIES ............... $49,957 $ 1 $(668) $49,290
======= === ======= =======
F-14
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES: -- (Continued)
The following is a summary of the Bank's investment in available-for-sale
and held-to-maturity securities:
Available-for-Sale
December 31, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(Dollars in Thousands)
Investment Securities:
Debt:
FHLB Notes .................................... $14,924 $11 $(125) $14,810
FHLMC ......................................... 500 (4) 496
Federal Farm Credit ........................... 6,000 1 (25) 5,976
Small Business Administration ................. 2,568 (26) 2,542
Municipals .................................... 4,908 (6) 4,902
------- --- ----- -------
28,900 12 (186) 28,726
Mortgage-backed Securities:
Collateralized mortgage obligations ........... 3,148 (68) 3,080
FHLMC ......................................... 1,277 (6) 1,271
FNMA .......................................... 5,861 (36) 5,825
------- --- ----- -------
10,286 (110) 10,176
------- --- ----- -------
Total available-for-sale Securities ......... 39,186 12 (296) 38,902
------- --- ------- -------
Held-to-Maturity
December 31, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(Dollars in Thousands)
Investment Securities:
Mortgage-backed Securities:
Collateralized mortgage obligations ......... $ 3,617 $ 1 $ -- $ 3,618
FNMA ........................................ 538 (2) 536
GNMA ........................................ 2,480 (93) 2,387
------- --- ----- -------
Total Held-to-Maturity Securities ......... 6,635 1 (95) 6,541
------- --- ----- -------
TOTAL INVESTMENTS AND
MORTGAGE-BACKED SECURITIES ............... $45,821 $13 $(391) $45,443
======= === ===== =======
F-15
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES: -- (Continued)
The following is a summary of the investment in available-for-sale and
held-to-maturity securities as of June 30, 1998:
Available-for-Sale
June 30, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(Dollars in Thousands)
Investment Securities:
Debt:
FHLB Notes .................................... $ 8,504 $ 3 $ (23) $ 8,484
SLMA .......................................... 998 1 999
FHLMC ......................................... 4,000 (25) 3,975
FNMA .......................................... 2,501 2 (5) 2,498
Federal Farm Credit ........................... 1,501 1,501
Small Business Administration ................. 1,892 (9) 1,883
------- --- ----- -------
19,396 6 (62) 19,340
------- --- ----- -------
Mortgage-backed Securities:
Collateralized mortgage obligations ........... 4,032 3 (137) 3,898
FHLMC ......................................... 2,614 2 (6) 2,610
FNMA .......................................... 7,779 10 (30) 7,759
------- --- ----- -------
14,425 15 (173) 14,267
------- --- ----- -------
Total available-for-sale securities ......... 33,821 21 (235) 33,607
------- --- ----- -------
Held-to-Maturity
June 30, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(Dollars in Thousands) - Unaudited
Investment Securities:
Debt:
FNMA ......................................... $ 499 $-- $ (1) $ 498
Mortgage-backed Securities:
Collateralized mortgage obligations .......... 5,487 (35) 5,452
FNMA ......................................... 613 (6) 607
GNMA ......................................... 2,971 (80) 2,891
------- --- ----- -------
Total Held-to- Maturity Securities ......... 9,570 (122) 9,448
------- --- ----- -------
TOTAL INVESTMENTS AND
MORTGAGE-BACKED SECURITIES ................ $43,391 $21 $(357) $43,055
======= === ======= =======
F-16
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES: -- (Continued)
The amortized cost and estimated market values of securities at March 31,
1999 by contractual maturities are as follows. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
All collateralized mortgage obligations are backed by FNMA or FHLMC
mortgages.
Estimated
Amortized Market
Cost Value
----------- ----------
Unaudited
(Dollars in Thousands)
March 31, 1999:
Due less than one year ......................... $ 1,000 $ 986
Due after one year through five years .......... 3,500 3,474
Due after five years through ten years ......... 19,854 19,512
Due after ten years ............................ 4,315 4,268
------- -------
28,669 28,240
Mortgage-backed securities ..................... 21,288 21,050
------- -------
$49,957 $49,290
======= =======
Proceeds from sales and maturities of securities available-for-sale during
the year ended March 31, 1999 totaled $6,420,000. Of the proceeds, $96,000 were
from maturities, $3,500,000 were from security call options, and $2,824,000
were from principal repayments. No gains or losses were realized from those
transactions.
The amortized cost and market value of securities at December 31, 1998 by
contractual maturities, are as follows:
Estimated
Amortized Market
Cost Value
----------- ----------
(Dollars in Thousands)
December 31, 1998:
Due less than one year ......................... $ 500 $ 496
Due after one year through five years .......... 9,492 9,463
Due after five years through ten years ......... 15,678 15,540
Due after ten years ............................ 3,230 3,227
------- -------
28,900 28,726
Mortgage-backed securities ................... 16,921 16,717
------- -------
$45,821 $45,443
======= =======
Proceeds from sales and maturities of securities available-for-sale during
the six months ended December 31, 1998 totaled $34,277,935 of the proceeds,
$-0- were from maturities, $1,500,000 were from security call options, and
$3,326,316 were from principal repayments. No gains or losses were realized
from those transactions.
F-17
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES: -- (Continued)
The amortized cost and estimated market values of securities at June 30,
1998 by contractual maturities are as follows. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
----------- ----------
(Dollars in Thousands)
June 30, 1998:
Due less than one year ......................... $ 1,996 $ 1,990
Due after one year through five years .......... 13,002 12,977
Due after five years through ten years ......... 3,006 2,988
Due after ten years ............................ 1,892 1,883
------- -------
19,896 19,838
Mortgage-backed securities ................... 23,496 23,217
------- -------
$43,392 $43,055
======= =======
Proceeds from sales and maturities of securities available-for-sale during
the year ended June 30, 1998 totaled $8,756,044. Of the proceeds, $1,500,000
were from maturities, $2,500,000 were from security call options, and
$4,756,044 were from principal repayments. No gains or losses were realized
from those transactions.
3. LOANS RECEIVABLE:
Loans receivable consist of the following:
March 31, December 31, June 30,
1999 1998 1998
------------- -------------- -----------
Unaudited
(Dollars in Thousands)
Real Estate Loans:
One-to-four family ..................... $ 40,740 $ 40,114 $35,799
Commercial ............................. 2,131 1,408 256
-------- -------- -------
42,871 41,522 36,055
Consumer Loans:
Automobile ............................. 20,762 18,746 18,844
Signature loans ........................ 5,462 6,329 6,577
Credit card loans ...................... 9,870 10,920 10,269
Home equity loans ...................... 23,085 22,421 23,174
Other .................................. 3,634 3,658 3,871
-------- -------- -------
62,813 62,474 62,735
Commercial Loans ........................ 760 400 237
-------- -------- -------
106,444 103,996 99,027
Less allowance for loan losses ......... (1,116) (1,074) (948)
Less deferred loan costs, net .......... (8) (22) 17
-------- -------- -------
$105,320 $102,900 $98,096
======== ======== =======
F-18
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
3. LOANS RECEIVABLE: -- (Continued)
Loans receivable at March 31, 1999, December 31, 1998 and June 30, 1998
includes $88,079,822, $85,667,043 and $79,910,631 of fixed rate loans and
$17,363,601, $18,329,158 and $19,116,366 of adjustable rate loans,
respectively.
A summary of loan maturities at March 31, 1999 is as follows:
Consumer
One to Commercial and
Four Real Home Commercial Total
Family Estate Equity Business Loans
---------- ------------ ---------- ------------ -----------
(Dollars in Thousands -- Unaudited)
Amounts due:
Non-accrual ..................... $ 47 $ -- $ 65 $ 91 $ 203
------- ------ ------- ------- --------
Within one year .................. 1,737 203 12,307 14,247
------- ------ ------- ------- --------
After one year:
1 to 3 years .................... 3,738 2,213 11,643 17,594
4 to 5 years .................... 4,350 1,758 4,711 14,202 25,021
6 to 10 years ................... 15,760 373 8,348 2,074 26,555
Over 10 years ................... 15,108 7,545 171 22,824
------- ------ ------- ------- --------
Total due after one year ......... 38,956 2,131 22,817 28,090 91,994
------- ------ ------- ------- --------
TOTAL AMOUNTS DUE ................ $40,740 $2,131 $23,085 $40,488 $106,444
======= ====== ======= ======= ========
A summary of loan maturities at December 31, 1998 is as follows:
Consumer
One to Commercial and
Four Real Home Commercial Total
Family Estate Equity Business Loans
---------- ------------ ---------- ------------ -----------
(Dollars in Thousands)
Amounts due:
Non-accrual ..................... $ -- $ -- $ 64 $ 90 $ 154
------- ------ ------- ------- --------
Within one year .................. 2,375 190 13,573 16,138
------- ------ ------- ------- --------
After one year:
1 to 3 years .................... 3,738 2,335 11,299 17,372
4 to 5 years .................... 4,350 4,192 12,972 21,514
6 to 11 years ................... 15,760 635 8,924 2,499 27,818
Over 11 years ................... 13,891 373 6,716 20 21,000
------- ------ ------- ------- --------
Total due after one year ......... 37,739 1,008 22,167 26,790 87,704
------- ------ ------- ------- --------
TOTAL AMOUNTS DUE ................ $40,114 $1,008 $22,421 $40,453 $103,996
======= ====== ======= ======= ========
F-19
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
3. LOANS RECEIVABLE: -- (Continued)
A summary of loan maturities at June 30, 1998 is as follows:
Consumer
One to Commercial and
Four Real Home Commercial Total
Family Estate Equity Business Loans
---------- ------------ ---------- ------------ ---------
(Dollars in Thousands)
Amounts due:
Non-accrual ..................... $ -- $ -- $ 109 $ 100 $ 209
------- ---- ------- ------- -------
Within one year .................. 1,623 6 3,054 13,615 18,298
------- ---- ------- ------- -------
After one year:
1 to 3 years .................... 4,001 13 5,911 17,707 27,631
4 to 5 years .................... 4,853 14 4,260 7,818 16,946
6 to 11 years ................... 17,362 60 6,405 474 24,301
Over 11 years ................... 7,960 163 3,435 84 11,642
------- ---- ------- ------- -------
Total due after one year ......... 34,176 250 20,011 26,083 80,520
------- ---- ------- ------- -------
TOTAL AMOUNTS DUE ................ $35,799 $256 $23,174 $39,798 $99,027
======= ==== ======= ======= =======
A summary of changes in the allowance for loan losses is as follows:
March 31, December 31, June 30,
1999 1998 1998 1997 1998 1997
--------- --------- ---------- --------- ----------- ---------
(Unaudited) (Unaudited)
(Dollars in Thousands)
BALANCE, BEGINNING OF
PERIOD ................................. $1,074 $1,042 $ 948 $1,005 $ 1,005 $ 558
Provision charged to operation ......... 135 376 300 397 1,038 847
Recoveries of amounts charged off
and other ............................ 43 29 80 32 178 90
------ ------ ------ ------ -------- ------
1,252 1,447 1,328 1,434 2,221 1,495
Amounts charged off .................... (136) (706) (254) (392) (1,273) (490)
------ ------ ------ ------ -------- ------
BALANCE, END OF PERIOD .................. $1,116 $ 741 $1,074 $1,042 $ 948 $1,005
====== ====== ====== ====== ======== ======
The provision for loan losses charged to expense is based upon past loan
and loss experience and an evaluation of inherent losses in the current loan
portfolio, including the evaluation of impaired loans under SFAS Nos. 114 and
118. A loan is considered to be impaired when, based upon current information
and events, it is probable that IGA will be unable to collect all amounts due
according to the contractual terms of the loan. IGA discontinues the accrual of
interest on all impaired loans. As of March 31, 1999, December 31, 1998 and
June 30, 1998, 100% of the impaired loan balance was measured for impairment
based on the fair value of the loans' collateral. Impairment losses are
included in the provision for loan losses. SFAS Nos. 114 and 118 do not apply
to large groups of smaller balance homogeneous loans that are collectively
evaluated for impairment, except for those loans restructured under a trouble
debt restructuring. Loans collectively evaluated for impairment include
consumer loans and residential real estate loans. At March 31, 1999
(unaudited), December 31, 1998 and June 30, 1998, the Bank's impaired loans
consisted of smaller loans and residential real estate loans.
Loans on which the accrual of interest has been discontinued amounted to
$203,309, $170,835 and $225,790 at March 31, 1999 (unaudited), December 31,
1998 and June 30, 1998, respectively. If interest on those loans had been
accrued, accrued interest would have increased by $2,743, $2,988 and $2,307 at
March 31, 1999, December 31, 1998 and June 30, 1998, respectively. The amount
by which income would have increased by for the periods ended December 31, 1998
and 1997 had interest been accrued is immaterial.
F-20
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
3. LOANS RECEIVABLE: -- (Continued)
Certain directors and officers of IGA have loans with IGA. Such loans were
made in the ordinary course of business and do not represent more than a normal
risk of collection. Loans to officers and directors amounted to $1,119,777,
$1,203,636 and $1,080,195 at March 31, 1999 (unaudited), December 31, 1998 and
June 30, 1998, respectively. During the period ended March 31, 1999, December
31, 1998 and June 30, 1998, loans of $-0-, $62,000 and $178,709, respectively,
were disbursed to executive officers and board of directors, while principal
repayments of $84,231, $86,529 and $104,703 were received in those years,
respectively.
4. LOAN SERVICING:
Mortgage loans serviced for others are not included in the accompanying
statement of financial condition. The unpaid principal balances of these loans
are summarized as follows:
Mortgage Loan Servicing Portfolios:
March 31, December 31, June 30,
1999 1998 1998 1997 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
(Dollars in Thousands)
Federal National Mortgage
Association ............. $13,850 $15,586 $14,025 $15,975 $15,131 $11,150
First Nationwide ......... 489 535 514 589 644 603
------- ------- ------- ------- ------- -------
Total ................... $14,339 $16,121 $14,539 $16,564 $15,775 $11,753
======= ======= ======= ======= ======= =======
Custodial escrow balances maintained in connection with the foregoing loan
servicing portfolio totaled $208,683 and $216,570 as of March 31, 1999 and
1998, respectively, $200,000 and $207,548 as of December 31, 1998 and 1997,
respectively, and $279,817 and $203,916 as of June 30, 1998 and 1997,
respectively.
5. ACCRUED INTEREST RECEIVABLE:
A summary of accrued interest receivable is as follows:
March 31, December 31, June 30,
1999 1998 1998
----------- -------------- ---------
Unaudited (Dollars in Thousands)
Loans .............................. $356 $325 $322
Mortgage-backed securities ......... 136 119 121
Investment securities .............. 472 202 252
---- ---- ----
$964 $646 $695
==== ==== ====
6. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET:
The major classes of property, equipment and leasehold improvements and
the total accumulated depreciation and amortization are as follows:
March 31, December 31, June 30,
1999 1998 1998
----------- -------------- ---------
Unaudited (Dollars in Thousands)
Land ........................................................... $ 150 $ 150 $ 150
Buildings and improvements ..................................... 1,920 1,726 1,726
Office furniture, equipment and leasehold improvements ......... 1,673 1,661 1,384
Transportation equipment ....................................... 99 99 99
------ ------ ------
3,842 3,636 3,359
Less accumulated depreciation and Amortization ................. 1,771 1,674 1,476
------ ------ ------
$2,071 $1,962 $1,883
====== ====== ======
F-21
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
7. DEPOSITS:
Deposits at March 31, 1999, December 31, 1998 and June 30, 1998 are
summarized as follows:
Weighted March 31, December 31, June 30,
Average 1999 1998 1998
Interest ------------------------ ------------------------- ------------------------
Rate Amount % Amount % Amount %
---------- ---------- ----------- ----------- ----------- ---------- -----------
Types of Deposits:
Savings accounts:
1999 .................... 2.70% $ 74,129 45.92%
1998 .................... 2.82 $ 70,281 45.38%
1998 .................... 2.82 $ 68,268 47.36%
Checking accounts:
1999 .................... 0.0 10,746 6.66
1998 .................... 0.0 10,526 6.80
1998 .................... 0.0 9,305 6.59
Money market accounts:
1999 .................... 3.11 10,240 6.34
1998 .................... 3.85 9,265 5.98
1998 .................... 3.85 8,311 5.77
-------- ------ -------- ------ -------- ------
95,115 58.92 90,072 58.15 85,884 59.72
-------- ------ -------- ------ -------- ------
Certificate of deposit:
3.00-3.99%
1999 .................... 3.79 2,736 1.70
1998 .................... 3.83 1,622 1.05
1998 .................... 0.0
4.00-4.99%
1999 .................... 4.73 23,001 14.25
1998 .................... 4.71 11,171 7.21
1998 .................... 4.27 2,025 1.41
5.00-5.99%
1999 .................... 5.58 31,113 19.27
1998 .................... 5.59 41,900 27.05
1998 .................... 5.59 44,850 31.12
6.00-6.99%
1999 .................... 6.22 7,931 4.91
1998 .................... 6.21 8,608 5.56
1998 .................... 6.29 9,700 6.73
7.00-7.99%
1999 .................... 7.17 1,533 .95
1998 .................... 7.17 1,515 .98
1998 .................... 7.17 1,475 1.02
-------- ------ -------- ------ -------- ------
Total of certificate of
deposit .............. 66,314 41.08 64,816 41.85 58,050 40.28
-------- ------ -------- ------ -------- ------
TOTAL DEPOSITS ......... $161,429 100.00% $154,888 100.00% $143,934 100.00%
======== ====== ======== ====== ======== ======
Certificates of deposit have scheduled maturities as follows:
March 31, December 31, June 30,
1999 1998 1998 1997 1998 1997
---------- ---------- ---------- --------- ---------- ----------
(Unaudited) (Unaudited)
(Dollars in Thousands)
Within one year .................... $47,255 $43,307 $46,456 41,401 $43,710 $38,694
One year through two years ......... 15,402 11,430 13,218 7,055 8,431 9,697
Three years ........................ 2,207 1,249 2,953 4,779 4,743 2,431
Over three years ................... 1,450 1,166 2,189 1,689 1,166 2,052
------- ------- ------- ------ ------- -------
$66,314 $57,152 $64,816 $54,924 $58,050 $52,874
======= ======= ======= ======= ======= =======
F-22
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
7. DEPOSITS: -- (Continued)
Interest expense on deposits is comprised of the following:
Three Months Ended Six Months Ended Year Ended
March 31, December 31, June 30,
1999 1998 1998 1997 1998 1997
--------- --------- -------- -------- --------- ---------
(Unaudited) (Unaudited)
(Dollars in Thousands)
Savings accounts ................ $ 378 $ 432 $ 834 $ 841 $1,976 $2,579
Money market accounts ........... 77 80 160 157 316 300
Certificates of deposit ......... 870 798 1,768 1,807 3,183 2,776
------ ------ ------ ------ ------ ------
$1,325 $1,310 $2,762 $2,805 $5,475 $5,655
====== ====== ====== ====== ====== ======
The aggregate amount of certificates of deposit accounts exceeding
$100,000 was approximately $7,980,000, $7,964,000 and $4,440,160 at March 31,
1999 (unaudited), December 31, 1998 and June 30, 1998, respectively, and are
not federally insured.
8. 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 in an amount not less than 1% of its outstanding home loans
or 1/20 of its outstanding notes payable, if any, to the Federal Home Loan Bank
of Pittsburgh, whichever is greater, as calculated December 31 of each year.
9. INCOME TAX MATTERS:
The Bank and it's wholly-owned subsidiary file a consolidated federal
income tax return and separate state return for the six month period ending
December 31, 1998. Prior to this period the Bank was a Credit Union and exempt
from taxes by statute.
The provision for income taxes for the three month period ended March 31,
1999 (unaudited) and six month period ended December 31, 1998 consisted of the
following:
Currently Payable:
(Dollars in Thousands)
March 31, December 31,
1999 1998
----------- -------------
Federal .......... $ 60 $ 170
State ............ 20
Deferred ......... 2 (44)
---- -----
TOTAL ........... $ 58 $ 146
==== =====
The reconciliation between the actual provision for federal and state
income taxes and the amount of income taxes which would have been provided at
statutory rates is as follows:
Percentage Percentage
March 31, of December 31, of
1999 Pretax Income 1998 Pretax Income
------------ --------------- -------------- --------------
(unaudited)
Expected income tax expense at federal tax rate ........ $ 64 34.0% $ 141 34.0%
Travel and entertainment ............................... 6 3.2% 3 0.7%
Exempt interest ........................................ (16) (8.5%) (14) (3.4%)
State tax .............................................. 0% 13 3.2%
Other differences, net ................................. 4 2.1% 3 0.7%
----- ---- ----- ----
$ 58 30.8% $ 146 35.2%
===== ==== ===== ====
F-23
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
9. INCOME TAX MATTERS: -- (Continued)
Deferred taxes are included in the accompanying statement of financial
condition as of March 31, 1999 (unaudited) and December 31, 1998 for the
estimated future tax effect of differences between the financial statement and
federal income tax basis of assets and liabilities given the provisions of
currently enacted tax laws.
The net deferred tax asset (liability) consists of the following
components:
March 31, December 31,
1999 1998
----------- -------------
Unaudited
Deferred Tax Asset:
(Dollars in Thousands)
Deferred compensation ............. $ 3 $ 2
Allowance for loan loss ......... 43 42
--- ---
DEFERRED TAX ASSET ............. $46 $44
=== ===
The realizability of deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes it
is more likely than not that the Bank will realize the benefits of these
deferred tax assets. The tax effect from the unrealized loss on securities
available-for-sale has been offset by a valuation allowance.
10. DIFFERENCE BETWEEN FEDERAL DEPOSITORY INSURANCE CORPORATION CALL REPORT AND
CONSOLIDATED FINANCIAL STATEMENTS:
An adjustment has been made to the accounts which is reflected in the
consolidated financial statements but is not reflected in the Bank's Federal
Depository Insurance Corporation Call Report. The adjustment and its effect on
equity are as follows:
March 31, December 31,
1999 1998
----------- -------------
(Dollars in Thousands)
Equity per the Bank's
Federal Depository Insurance .................................................. $14,977 $15,377
Corporation Call Report
Decrease in federal income tax provision set up as deferred asset .............. 44
Overaccrual of Federal and State Income Tax net of deferral tax asset .......... 119
Adjustment made to financial statement for professional fees relating to
offering as of June 30, 1998 that never materialized, subsequently recorded
by Bank ....................................................................... 145
------- -------
$15,096 $15,276
======= =======
11. REGULATORY MATTERS:
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off- balance sheet items as calculated
under accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-24
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
11. REGULATORY MATTERS: -- (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain certain minimum amounts and ratios (set forth in
the table below). Management believes that the Bank meets, as of March 31,
1999, all capital adequacy requirements to which it is subject.
As of March 2, 1998, the most recent notification from the OTS categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios are presented in the
following table.
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Capital Purposes Account Provisions
---------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- -------- --------- ------------ --------
(Dollars in Thousands)
As of March 31, 1999 (Unaudited):
Tangible capital
(to tangible assets) ................ $15,496 8.7% $2,668 1.5% N/A N/A
Core Capital
(to adjusted tangible assets) ......... 15,496 8.7 5,336 3.0 8,893 5.0
Tier I Capital
(to risk-weighted assets) ............. 15,496 15.5 4,006 4.0 6,010 6.0
Risk-based capital
(to risk-weighted assets) ............. 16,612 16.6 8,013 8.0 10,117 10.0
As of December 31, 1998:
Tangible capital
(to tangible assets) ................ 15,365 8.9 2,567 1.5 N/A N/A
Core Capital
(to adjusted tangible assets) ......... 15,365 8.9 5,135 3.0 8,559 5.0
Tier I Capital
(to risk-weighted assets) ............. 15,365 15.7 3,911 4.0 5,867 6.0
Risk-based capital
(to risk-weighted assets) ............. 16,439 16.8 7,822 8.0 9,778 10.0
The following summary reconciles the Bank's equity capital as reflected in
the accompanying financial statements as of March 31, 1999 with related amounts
reported to the OTS:
Tangible Core Risk Based
---------- ---------- -----------
(Dollars in Thousands)
Equity capital per financial statements .............. $15,096 $15,096 $15,096
Unrealized gains on available-for-sale securities, net
of tax .............................................. 594 594 594
Goodwill and other tangible assets ................... (194) (194) (194)
Allowance for loan losses ............................ 1,116
Other ................................................
------- ------- -------
Regulatory Equity Capital ............................ $15,496 $15,496 $16,612
======= ======= =======
F-25
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
12. RETAINED EARNINGS: (June 30, 1998)
Regular Reserve Fund:
As provided under Section 116 of the Federal Credit Union Act (Act as of
June 26, 1934, as amended March 1993) IGA maintained a regular reserve fund.
Transfers to this fund, in accordance with regulations must be not less than
10% of the current year's gross income (as defined in the Act) until the
reserve, including allowance for loan losses, aggregates 4% of total
outstanding loans and risk assets; thereafter, transfers shall be not less than
5% of gross income until the reserve, including allowance for loan losses,
aggregates 6% of total outstanding loans and risk assets, at which time
transfers may be discontinued as long as the established minimum reserve
requirements are met.
Reserve transfers are not charged against the annual earnings of IGA and
are not related to amounts of losses actually anticipated. Amounts transferred
to this fund are not available for the payment of dividends or loans to
customers.
On July 1, 1998, when IGA converted from a credit union to a federal
mutual savings bank the restricted regular reserve fund required under Section
116 of the Federal Credit Union Act was transferred to unrestricted undivided
earnings.
13. LEASE COMMITMENTS:
IGA rents various equipment and office space under various lease
agreements. Lease expense for these leases for the three months ended March 31,
1999 and 1998 (unaudited), $12,041 and $11,621, respectively, six months
December 31, 1998 and 1997 are $20,916 and $23,135, respectively and June 30,
1998 and 1997 $63,912 and $65,480, respectively.
Minimum annual rentals are as follows:
1999 ........... $26,866
2000 ........... 27,939
2001 ........... 29,056
2002 ........... 30,224
2003 ........... 23,342
14. RETIREMENT PLANS:
IGA sponsors the following retirement plans:
Pension Plans:
IGA has a profit-sharing plan and a 401(k) plan. Both plans cover all
employees who are 21 years of age and have completed at least 1,000 hours of
service during the plan year and are employed on the last day of the plan year.
IGA contributes a discretionary amount to the profit-sharing plan based on
year-to-date income at December 31. IGA matches up to 100% of the first 3% of
salary elected to be deferred by the employees under the 401(k) pension plan.
IGA contributions to the above plans amounted to:
F-26
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
14. RETIREMENT PLANS: -- (Continued)
Three Months Ended Six Months Ended Year Ended
March 31, December 31, June 30,
1999 1998 1998 1997 1998 1997
---------- ---------- ---------- ------------ ---------- ----------
(Unaudited) (Unaudited)
401(k) plan ................. $12,996 $11,858 $29,472 $31,488 $56,779 $19,313
Profit sharing plan ......... -- -- -- 21,028 34,707 59,729
------- ------- ------- ------- ------- -------
Total contribution ......... $12,996 $11,858 $29,472 $52,516 $91,486 $79,042
======= ======= ======= ======= ======= =======
Supplemental Deferred Compensation Plans:
IGA adopted a nonqualified deferred compensation plan for the benefit of
one of its officers. This plan requires IGA to pay $12,000 into this plan
annually beginning in 1995. The deferred compensation accounts are shown as
both assets and liabilities on IGA's financial statements. The balance of the
deferred compensation arrangement was $67,239 as of March 31, 1999 (unaudited),
$64,239 as of December 31, 1998 and $58,239 as of June 30, 1998. Deferred
compensation was $3,000 for period ended March 31, 1999 and 1998 (unaudited),
$6,000 for December 31, 1998 and $6,000 for December 31, 1997 (unaudited).
Total contribution for the years ended June 30, 1998 and 1997 was $12,000. The
plan is fully funded.
IGA also has a life insurance policy on one of its officers that provides
for annuity payments to the insured party upon retirement. Upon death of the
insured party, IGA will receive refund of all premiums paid and the insured
party's designated beneficiary will receive the remainder of the policy's face
value. If the policy is canceled, IGA will receive the policy's cash surrender
value only. IGA shows the cash surrender value of this policy as an asset in
its financial statements. At March 31, 1999, the cash surrender value was
$188,715 and is included in other assets on the balance sheet.
15. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK:
IGA grants mortgage and consumer loans primarily to customers in
Southeastern Pennsylvania. Although, IGA has a diversified loan portfolio, a
substantial portion of its customers' ability to honor their contracts is
dependent upon the local economy. IGA's net investment in loans is subject to a
significant concentration of credit risk given that the investment is primarily
within a specific geographic area.
As of March 31, 1999 (unaudited), December 31, 1998 and June 30, 1998, IGA
had a net investment of $105,320,000, $102,900,000 and $98,096,000 requirements
in loans receivable. These loans possess an inherent credit risk given the
uncertainty regarding the borrower's compliance with the terms of the loan
agreement. To reduce credit risk, the loans are secured by varying forms of
collateral, including first mortgages on real estate, liens on personal
property, share accounts, etc. It is generally IGA policy to file liens on
titled property taken as collateral on loans. In the event of default, IGA's
policy is to foreclose or repossess collateral on which it has filed liens.
In the event that any borrower completely failed to comply with the terms
of the loan agreement and the related collateral proved worthless, IGA would
incur a loss equal to the loan balance.
16. COMMITMENTS AND CONTINGENCIES:
Loan Commitments and Contingencies:
In the normal course of business, IGA makes various commitments and incurs
certain contingent liabilities which are not reflected in the accompanying
consolidated financial statements. These commitments and contingent liabilities
include commitments to extend credit and open-end credit available. At March
31, 1999 (unaudited), December 31, 1998 and June 30, 1998, open-end loan
commitments not utilized, and approved but unfunded loan commitments totaled
approximately $21,436,156, $19,876,892 and $21,431,476, respectively. As of
March 31, 1999, there were no other off-balance sheet commitments or
contingencies that would have a material impact on IGA. All loan commitments
and contingencies have variable rates that range from 8.75% to 13.15%.
F-27
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires the disclosure of the fair value
of financial instruments, both assets and liabilities recognized and not
recognized in the statement of financial position.
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that both imposes on one entity a
contractual obligation (1) to deliver cash or another financial instrument to a
second entity or (2) to exchange other financial instruments on potentially
unfavorable terms with the second entity and, conveys to that second entity a
contractual right to receive (1) cash or another financial instrument from the
first entity or (2) to exchange other financial instruments on potentially
favorable terms with the first entity.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Quoted market prices should be used
when available, if not available management's best estimate of fair value may
be based on quoted market price of financial instruments with similar
characteristics or on valuation techniques, such as using the present value of
estimated future cash flows using a discount rate commensurate with the
corresponding risk associated with those cash flows. These techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows and future economic conditions. In that regard,
the fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. In addition, these estimates are only indicative of individual
financial instruments' values and should not be considered an indication of the
fair value of IGA as a whole. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
The following table represents the carrying value and fair market value of
financial instruments as of March 31, 1999 (unaudited):
Carrying Fair
Amount Value
---------- -----------
(Dollars in Thousands)
Assets:
Cash and cash equivalents ............................. $ 18,114 $ 18,114
Investments securities available-for-sale ............. 28,240 28,240
Mortgage-backed securities available-for-sale ......... 15,529 15,529
Mortgage-backed securities held-to-maturity ........... 5,594 5,521
Loans receivable -- net ............................... 105,320 105,320
FHLB Stock ............................................ 834 834
Liabilities:
NOW, Savings and Money Market accounts ............... 95,113 95,113
Certificate of deposits .............................. 66,316 66,316
F-28
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
17. FAIR VALUE OF FINANCIAL INSTRUMENTS: -- (Continued)
The following table represents the carrying value and fair market value of
financial instruments as of December 31, 1998:
Carrying Fair
Amount Value
---------- -----------
(Dollars in Thousands)
Assets:
Cash and cash equivalents ............................. $ 18,351 $ 18,351
Investments securities available-for-sale ............. 28,726 28,726
Mortgage-backed securities available-for-sale ......... 10,176 10,176
Investment securities held-to-maturity ................
Mortgage-backed securities held-to-maturity ........... 6,635 6,541
Loans receivable -- net ............................... 102,900 102,900
FHLB stock ............................................ 834 834
Liabilities:
NOW, Savings and Money Market accounts ................ 90,072 90,072
Certificate of deposits ............................... 64,816 64,816
The following table represents the carrying value and fair market value of
financial instruments as of June 30, 1998:
Carrying Fair
Amount Value
---------- -----------
(Dollars in Thousands)
Assets:
Cash and cash equivalents ............................. $ 13,741 $ 13,741
Investments securities available-for-sale ............. 19,340 19,340
Mortgage-backed securities available-for-sale ......... 14,267 14,267
Investment securities held-to-maturity ................ 499 498
Mortgage-backed securities held-to-maturity ........... 9,071 8,950
Loans receivable -- net ............................... 98,096 98,096
Share Insurance Fund .................................. 1,320 1,320
Liabilities:
NOW, Savings and Money Market accounts ................ 85,884 85,884
Certificate of deposits ............................... 58,050 58,050
The following methods and assumptions, where practical to implement as
noted, were used by IGA in estimating its fair value for those assets.
Cash and Cash Equivalents:
The carrying amounts reported in the statement of financial condition for
cash and cash equivalents approximate the fair value for those assets.
Investment Securities:
The fair value for investments are based on quoted market prices.
Mortgage-backed Securities:
The fair value of mortgage-backed securities issued by quasi-governmental
agencies is based on quoted market prices.
F-29
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
17. FAIR VALUE OF FINANCIAL INSTRUMENTS: -- (Continued)
Loans Receivable:
The fair value of real estate, consumer and commercial loans approximates
the carrying amount. The carrying amount is adjusted for the estimated future
loan losses through a valuation allowance. IGA has not determined the fair
values of its loans due to it not being practical to make such estimates based
on varying interest rates and maturities involved and the excessive cost that
would be incurred. IGA's real estate loan portfolio was $42,871,013 at March
31, 1999 (unaudited), $41,522,000 at December 31, 1998 and $36,055,000 at June
30, 1998, respectively with rates ranging from 5.50% to 10.50% and maturities
through 30 years. IGA's consumer loan portfolio was $62,813,041 at March 31,
1999 (unaudited), $62,074,001 at December 31, 1998 and $62,735,006 at June 30,
1998, respectively, with rates ranging from 4.00% to 13.90% with maturities
through 10 years. IGA's commercial loan portfolio was $760,370, $400,000, and
$237,000 at March 31, 1999, December 31, 1998 and June 30, 1998, respectively
with rate of 7.0% to 13.5% and maturities through one year to 10 years and
monthly repayment terms.
Deposits:
The fair value of deposits with no stated maturity, such as NOW accounts,
savings accounts and money market accounts, is equal to the amount payable on
demand as of March 31, 1999, December 31, 1998 and June 30, 1998. Time deposits
were $66,314,000 at March 31, 1999, and $64,816,000 at December 31, 1998 and
$58,050,000 at June 30, 1998 with rates ranging from 3.00% to 8.00%.
18. SUBSEQUENT EVENT:
On May 26, 1999, IGA Federal Savings adopted a Plan of Conversion pursuant
to which the Bank will convert from a federal mutual savings bank to a federal
stock savings bank. Under the Plan, the Bank will issue all of its capital
stock to a newly-formed Pennsylvania corporation called JADE FINANCIAL CORP.
JADE FINANCIAL CORP. will purchase the stock of the Bank with a portion of the
proceeds it receives from an offering of its common stock to the Bank's
members, an employee stock ownership plan formed for the benefit of bank
employees, and the public. Consummation of the Plan of Conversion is subject to
the approval of the Office of Thrift Supervision and a majority of all votes
eligible to be cast by members of the Bank at a special meeting of members.
The Plan of Conversion provides that when the conversion is completed, a
"liquidation account" will be established in an amount equal to the total
equity of the Bank as of the latest practicable date prior to the Conversion.
The liquidation account is established to provide a limited priority claim to
the assets of the Bank to "eligible account holders" and "supplemental eligible
account holders," as defined in the Plan, who continue to maintain such
eligible accounts at the Bank after the Conversion. In the unlikely event of a
complete liquidation of the Bank, and only in such event, each eligible account
holder and supplemental eligible account holder would receive a liquidation
distribution, prior to any payment to the holder of the Bank's common stock.
This distribution would be based upon each eligible account holder's and
supplemental account holder's proportionate share of the then total remaining
qualifying deposits.
Direct costs of the Conversion will be deferred and will reduce the
proceeds of the offering. If the Conversion is not completed, all costs would
be charged to expense. There were no Conversion costs as of March 31, 1999.
The Bank may not declare or pay a cash dividend on, or repurchase any of,
its capital stock if the effect thereof would cause the regulatory capital of
the Bank to be reduced below the amount required for the liquidation account.
Any dividend declared or paid on, or repurchase of, the Bank's capital stock
shall be made, in compliance with Section 563.134 of the Regulations Applicable
to All Savings Banks, or any successor thereto.
F-30
IGA Federal Savings Bank And Subsidiary
Notes To Consolidated Financial Statements -- (Continued)
18. SUBSEQUENT EVENT: -- (Continued)
As part of the Conversion, JADE FINANCIAL CORP. and the Bank intend to
establish a charitable foundation that will qualify as an exempt organization
under Section 501(c)(3) of the Code (the "Foundation"). To fund the Foundation,
JADE FINANCIAL CORP. will contribute, immediately subsequent to the conversion,
an amount of cash and Common Stock of JADE FINANCIAL CORP. equal, in the
aggregate, to 5% of the dollar value of shares sold in the Conversion. The
amount of Common Stock to be contributed to the Foundation will not exceed
3.33% of the number of shares of JADE FINANCIAL CORP. Common Stock issued in
the conversion.
F-31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus in connection with
the offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by JADE
FINANCIAL CORP., IGA Federal Savings, or Charles Webb & Company. This
prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any of the securities offered hereby to any person in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so, or to any person
to whom it is unlawful to make such offer or solicitation in such jurisdiction.
Neither the delivery of this prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of JADE FINANCIAL CORP. or IGA Federal Savings since any of the dates
as of which information is furnished herein or since the date hereof.
----------------------------------------
TABLE OF CONTENTS
Page
---------
Questions and Answers about the Stock Offering ........ 1
Prospectus Summary .................................... 3
Risk Factors .......................................... 7
Selected Consolidated Financial Information ........... 9
Recent Developments ................................... 10
Management's Discussion and Analysis of Recent
Financial Information .............................. 12
JADE FINANCIAL CORP ................................... 13
IGA Federal Savings ................................... 13
How We Intend to Use the Proceeds ..................... 14
Our Policy Regarding Dividends ........................ 15
Market for the Common Stock ........................... 16
Capitalization ........................................ 16
IGA Exceeds All Regulatory Capital Requirements........ 17
Pro Forma Data ........................................ 18
Comparison of Valuation and Pro Forma
Information With No Foundation ..................... 23
Pro Forma Regulatory Capital Analysis .................
The Conversion ........................................ 24
Proposed Purchases by Management ...................... 46
Management's Discussion and Analysis of
Financial Condition and Results of Operations ...... 47
Business of JADE FINANCIAL ............................ 63
Business of IGA ....................................... 63
Management ............................................ 81
How We are Regulated .................................. 89
Taxation .............................................. 95
Restrictions on Acquisitions of
JADE FINANCIAL and IGA ............................. 96
Description of Capital Stock of JADE
FINANCIAL .......................................... 100
Transfer Agent and Registrar .......................... 101
Experts ............................................... 101
Legal and Tax Opinions ................................ 101
Additional Information ................................ 101
Index to Consolidated Financial Statements ............ F-1
Until September 6, 1999 (25 days after the date of this prospectus, 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
2,397,035 SHARES
(Anticipated Maximum)
JADE FINANCIAL CORP.
(Proposed Holding Company for
IGA Federal Savings)
Common Stock
-----------------------------------
PROSPECTUS
-----------------------------------
CHARLES WEBB & COMPANY,
A Division of
Keefe, Bruyette & Woods, Inc.
August 12, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expense of Issuance and Distribution.
The Company anticipates the following expenses:
SEC registration fee.......................... $ 5,509
OTS filing fees............................... $ 8,500
Printing, postage, and mailing*............... $ 75,000
Legal fees and expenses*...................... $180,000
Accounting fees and expenses*................. $ 75,000
Appraisal fees and expenses................... $ 35,000
Blue sky filing fees and expenses (including
counsel fees)*.............................. $ 5,000
Transfer and conversion agent fees and
expenses*................................... $ 10,000
Miscellaneous*................................ $ 21,491(1)
Total.................................... $415,500
- -------------------
*Estimated
(1) In addition to the foregoing expenses, Charles Webb & Company, a Division
of Keefe, Bruyette & Woods, Inc. will receive fees based on the number of
shares of common stock sold in the conversion, plus expenses. Based upon
the assumptions and the information set forth under "Pro Forma Data" and
"The Conversion -- Marketing Arrangements" in the prospectus, it is
estimated that such fees will amount to approximately $137,746, $165,760,
$193,774 and $225,990 in the event that 1,232,500 shares, 1,450,000 shares,
1,667,500 shares and 1,917,625 shares of common stock are sold in the
conversion, respectively.
Item 14. Indemnification of Directors and Officers.
Pennsylvania law provides that a Pennsylvania corporation may indemnify
directors, officers, employees, and agents of the corporation against
liabilities they may incur in such capacities for any action taken or any
failure to act, whether or not the corporation would have the power to indemnify
the person under any provision of law, unless such action or failure to act is
determined by a court to have constituted recklessness or willful misconduct.
Pennsylvania law also permits the adoption of a bylaw amendment, approved by
shareholders, providing for the elimination of a director's liability for
monetary damages for any action taken or any failure to taken any action unless
(1) the director has breached or failed to perform the duties of his/her office;
and (2) the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
The bylaws of JADE FINANCIAL provide for (1) indemnification of
directors, officers, employees, and agents of JADE FINANCIAL and its
subsidiaries; and (2) the elimination of a director's liability for monetary
damages, each to the fullest extent permitted by Pennsylvania law.
Directors and officers are also insured against certain liabilities for
their actions as such by an insurance policy obtained by JADE FINANCIAL.
Item 15. Recent Sales of Unregistered Securities.
Not applicable.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits: See Exhibit Index filed as part of this Registration
Statement.
(b) Financial Statement Schedules: All schedules have been omitted as
not applicable or not required under the rules of Regulation S-X.
Item 17. Undertakings.
(a) Rule 415 Offering: 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; (ii) to reflect in the prospectus any fact 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;
and (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 of 1933, 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 deemed to 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.
(b) Request for acceleration of effective date: Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the bylaws of the registrant, 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 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such 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 question whether such indemnification by it is against public
policy as expressed in the 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 the City of
Feasterville, Commonwealth of Pennsylvania, on August 10, 1999.
JADE FINANCIAL CORP.
By /s/ John J. O'Connell
-----------------------------------------
John J. O'Connell
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ John J. O'Connell Director and Chairman August 10, 1999
- ---------------------------- of the Board Chief
John J. O'Connell Executive Officer
(Principal Executive
Officer)
/s/ Mario L. Incollingo, Jr. Director, President August 10, 1999
- ---------------------------- and Chief Operating
Mario L. Incollingo, Jr. Officer
/s/ Edward D. McBride* Director August 10, 1999
- ----------------------------
Edward D. McBride
/s/ Francis J. Moran* Director August 10, 1999
- ----------------------------
Francis J. Moran
/s/ Dennis P. Wesley* Director August 10, 1999
- ----------------------------
Dennis P. Wesley
/s/ Dorothy M. Bourlier Senior Vice President August 10, 1999
- ---------------------------- and Chief Financial
Dorothy M. Bourlier Officer (Principal
Financial and
Accounting Officer)
*By /s/ Mario L. Incollingo, Jr.
----------------------------
Mario L. Incollingo, Jr.
Attorney-in-Fact
EXHIBIT INDEX
Number Title
- ------ -----
1.1 Form of Agency Agreement with Charles Webb & Company, a Division of
Keefe, Bruyette & Woods, Inc.*
2.1 Plan of Conversion*
3.1 Articles of Incorporation of JADE FINANCIAL CORP.*
3.2 Bylaws of JADE FINANCIAL CORP.*
4.1 Form of certificate evidencing shares of JADE FINANCIAL CORP.*
5.1 Opinion of Stevens & Lee Re: Legality*
8.1 Revised Opinion of Stevens & Lee Re: Federal Tax Matters*
8.2 Opinion of Stevens & Lee Re: Charitable Foundation*
8.3 Opinion of Stockton Bates & Company, P.C. Re: Pennsylvania Tax
Matters*
8.4 Letter of RP Financial, L.C. Re: Subscription Rights*
10.1 JADE FINANCIAL CORP. - Management Recognition Plan*
10.2 JADE FINANCIAL CORP. - Stock Compensation Plan*(C)
10.3 JADE FINANCIAL CORP. - Employee Stock Ownership Plan*(C)
23.1 Consent of Stockton Bates & Company, P.C.*
23.2 Consent of Stevens & Lee (contained in Exhibit 5.1)*
23.3 Consent of Stevens & Lee (contained in Exhibit 8.1)*
23.4 Consent of Stevens & Lee (contained in Exhibit 8.2)*
23.5 Consent of Stockton Bates & Company, P.C. (contained in Exhibit 8.3)*
23.6 Consent of RP Financial, L.C.*
24.1 Power of Attorney*
27.1 Financial Data Schedule*
27.2 Financial Data Schedule*
27.3 Financial Data Schedule*
27.4 Financial Data Schedule*
99.1 Appraisal of IGA Federal Savings by RP Financial, L.C. (P)*
99.1(i)Amended Appraisal of IGA Federal Savings by RP Financial, L.C. (P)*
99.2 Subscription Order Form and Instructions*
99.3 Form of Proxy and Proxy Statement of IGA Federal Savings*
99.4 Form of marketing letters*
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* Previously filed.
(C) Compensatory Plan.
(P) Filed in paper format pursuant to continuing hardship exemption.