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As filed with the Securities and Exchange Commission on September 11, 1998
Registration No. 333-__________
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CERTIFICATE OF INCORPORATION)
DELAWARE 6036 BEING APPLIED FOR
(State or Other Jurisdiction of Incorporation or (Primary Standard Industrial (IRS Employer Identification No.)
Organization) Classification Code Number)
SECURITY SAVINGS ASSOCIATION OF HAZLETON
31 W. BROAD STREET 31 W. BROAD STREET
HAZLETON, PENNSYLVANIA 18201 HAZLETON, PENNSYLVANIA 18201
(717) 454-0824 (717) 454-0824
(Address and Telephone Number of Principal Executive Offices) (Address of Principal Place of Business or Intended
Principal Place of Business)
RICHARD C. LAUBACH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SECURITY SAVINGS ASSOCIATION OF HAZLETON
31 W. BROAD STREET
HAZLETON, PENNSYLVANIA 18201
(717) 454-0824
(Name, Address and Telephone Number of Agent for Service)
Copies to:
DOUGLAS P. FAUCETTE, ESQUIRE
THOMAS J. HAGGERTY, ESQUIRE
SCOTT A. BROWN, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
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 this form is a post-effective amendment filed pursuant to Rule
462(d) 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. /___/
CALCULATION OF REGISTRATION FEE
=========================================================================================================================
Title of each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price Aggregate Offering Registration Fee
Per Unit Price (1)
- ------------------------------- ------------------- ---------------------- ------------------------- -----------------
Common Stock 1,944,075
$.01 par Value Shares(2) $10.00 $19,440,750 $5,736
=========================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes shares to be issued to Security Savings Charitable Foundation, a
privately-formed charitable foundation.
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 SECTION 8(a), MAY
DETERMINE.
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[To be used in connection with the Syndicated Community Offering only]
SYNDICATED PROSPECTUS SUPPLEMENT
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR
SECURITY SAVINGS ASSOCIATION OF HAZLETON)
__________ SHARES OF COMMON STOCK
Security of Pennsylvania Financial Corp. (the "Company"), a
Delaware corporation, is offering for sale in a syndicated community offering
(the "Syndicated Community Offering") __________ shares, at a per share price
of $10.00, of its common stock, par value $.01 per share (the "Common Stock"),
to be sold upon the conversion (the "Conversion") of Security Savings
Association of Hazleton, Hazleton, Pennsylvania (the "Association") from a
mutual to a stock association and the issuance of the Association's outstanding
capital stock to the Company pursuant to a plan of conversion, as amended (the
"Plan of Conversion"). The remaining __________ shares of the Common Stock to
be sold in the Conversion have been subscribed for in subscription and
community offerings (the "Subscription and Community Offerings") by holders of
deposit accounts with the Association with a balance of $50 or more as of March
31, 1997, by the Security Savings Association of Hazleton Employee Stock
Ownership Plan, a tax-qualified employee benefit plan, and related trust (the
"ESOP"), by holders of deposit accounts with the Association with a balance of
$50 or more as of ______________, 1998, by certain other account holders and
borrowers of the Association and, then, by certain members of the general
public. See "The Conversion - General." Contained herein is the Prospectus in
the form used in the Subscription and Community Offerings. The purchase price
for all shares sold in the Syndicated Community Offering will be the same as
the price paid by subscribers in the Subscription and Community Offerings (the
"Purchase Price"). The Purchase Price of $10.00 per share is the amount to be
paid for each share at the time a purchase order is submitted. See the cover
page of the Prospectus and the table below for information as to the method by
which the range within which the number of shares offered may vary and the
method of subscribing for shares of the Common Stock.
Funds submitted to the Association with purchase orders will
earn interest at the Association's passbook rate of interest from the date of
receipt until completion or termination of the Conversion. The Syndicated
Community Offering will expire no later than _______________, 199_, unless
extended by the Association and the Company with the approval of the Office of
Thrift Supervision. Such extensions may not go beyond _______________, 199_.
If an extension of time has been granted, all subscribers will be notified of
such extension, and of their rights to confirm their subscriptions, or to
modify or rescind their subscriptions and have their funds returned promptly
with interest, and of the time period within which the subscriber must notify
the Association of his intention to confirm, modify or rescind his
subscription. If an affirmative response to any resolicitation is not received
by the Association and the Company from subscribers,
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such orders will be rescinded and all funds will be returned promptly with
interest. The minimum number of shares which may be purchased is 25 shares.
Except for the ESOP, which may purchase up to 10% of the total number of shares
of Common Stock issued in the Conversion, no person, together with associates
of and persons acting in concert with such person, may purchase in the
Community Offering or Syndicated Community Offering more than the total number
of shares offered that could be purchased for $150,000 at the Purchase Price;
provided however, that shares of Common Stock purchased in the Community
Offering by any persons, together with associates of and persons acting in
concert with such persons, will be aggregated with purchases in the Syndicated
Community Offering and be subject to an overall maximum purchase limitation of
the greater of (i) $150,000 or (ii) 1.0% of the shares offered. See "The
Conversion - Subscription Offering and Subscription Rights," "- Syndicated
Community Offering" and "-Limitations on Common Stock Purchases." The Company
reserves the right, in its absolute discretion, to accept or reject, in whole
or in part, any or all subscriptions in the Syndicated Community Offering.
The Company and the Association have engaged Sandler O'Neill &
Partners, L.P. ("Sandler O'Neill") as financial advisors to assist them in the
sale of the Common Stock in the Syndicated Community Offering. It is
anticipated that Sandler O'Neill will use the services of other registered
broker-dealers ("Selected Dealers") and that fees to Sandler O'Neill and such
Selected Dealers will not exceed 2% of the aggregate Purchase Price of the
shares sold in the Syndicated Community Offering. Neither Sandler O'Neill nor
any Selected Dealer shall have any obligation to take or purchase any shares of
Common Stock in the Syndicated Community Offering.
The Company has applied to have its Common Stock listed on the
American Stock Exchange ("AMEX") under the symbol "__." Prior to this
offering, there has not been a public market for the Common Stock, and there
can be no assurance that an active and liquid trading market for the Common
Stock will develop. The absence or discontinuance of a market may have an
adverse impact on both the price and liquidity of the stock.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY EACH PARTICIPANT, SEE "RISK FACTORS" ON PAGES __ TO __ OF THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF THRIFT
SUPERVISION, THE PENNSYLVANIA DEPARTMENT OF BANKING OR ANY OTHER STATE OR
FEDERAL AGENCY, NOR HAS SUCH OFFICE OR OTHER AGENCY PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SHARES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY NOR
ARE THEY INSURED OR GUARANTEED BY THE ASSOCIATION OR THE COMPANY. THE COMMON
STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL
INVESTED.
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MAXIMUM
MINIMUM AS ADJUSTED
1,190,000 1,851,500
PER SHARE SHARES SHARES
----------- ------------- -------------
Public offering price . . . . . . . . . . . . $10.00 $11,900,000 $18,515,000
Estimated underwriting commissions
and other expenses . . . . . . . . . . . 774,118 894,972
Estimated proceeds to Company . . . . . . . . $11,125,882 $17,620,028
SANDLER O'NEILL & PARTNERS, L.P.
---------------------------------
The date of this Prospectus Supplement is _______________, 1998.
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Prospectus Subject to Completion
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
(Proposed Holding Company for
Security Savings Association of Hazleton)
UP TO 1,851,500 SHARES OF COMMON STOCK
This offering is made as part of the plan of conversion of Security
Savings Association of Hazleton, Hazleton, Pennsylvania, from a mutual to a
stock association. In this conversion, the Association will become a
wholly-owned subsidiary of Security of Pennsylvania Financial Corp., a Delaware
corporation. No shares will be sold if the minimum number of shares are not
subscribed for or if the necessary approvals from the banking regulatory
authorities and the members of the Association are not received.
There is currently no public market for the common stock. The Company
has applied for the common stock to be listed on the American Stock Exchange,
under the symbol "_____", upon completion of the conversion.
Investing in the common stock involves certain risks. See "Risk
Factors" beginning on page __.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED
UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF
THRIFT SUPERVISION, THE PENNSYLVANIA DEPARTMENT OF BANKING OR ANY OTHER FEDERAL
AGENCY, NOR HAS SUCH OFFICE OR OTHER AGENCY PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE SHARES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY NOR
ARE THEY INSURED OR GUARANTEED BY THE ASSOCIATION OR THE COMPANY. THE COMMON
STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL
INVESTED.
MAXIMUM
MINIMUM AS ADJUSTED
1,190,000 1,851,500
PER SHARE SHARES SHARES
---------------- ------------------ -------------------
Public offering price . . . . . . . . . . . . . . . . . $10.00 $11,900,000 $18,515,000
Estimated underwriting commissions
and other expenses . . . . . . . . . . . . . . . . 774,118 894,972
Estimated proceeds to Company . . . . . . . . . . . . . 11,125,882 17,620,028
The shares are being offered in a Subscription Offering to persons who have
specified priorities of subscription rights based on their relationship with
the Association. IN ORDER TO PURCHASE SHARES PURSUANT TO A SUBSCRIPTION RIGHT,
YOU MUST SUBMIT A PROPERLY COMPLETED SUBSCRIPTION ORDER FORM AND CERTIFICATION,
TOGETHER WITH PAYMENT FOR THE SHARES, TO THE ASSOCIATION PRIOR TO THE
EXPIRATION DATE, ____________, EASTERN TIME, ON _______________, 1998, UNLESS
EXTENDED.
To the extent sufficient shares to complete the conversion are not sold in
the Subscription Offering, the remaining shares will be offered for sale in a
Community Offering and, if necessary, a Syndicated Community Offering or other
offering. The Community Offering may be commenced prior to completion of the
Subscription Offering.
Sandler O'Neill & Partners, L.P. has agreed to assist the Company in
selling the shares, but does not guarantee that at least the minimum number of
shares will be sold.
----------------------------------
SANDLER O'NEILL & PARTNERS, L.P.
----------------------------------
The date of this Prospectus is _____________, 1998.
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SUMMARY
This summary highlights selected information from this document and
does not contain all the information that you need to know before making an
informed investment decision. To understand the stock offering fully, you
should read carefully this entire Prospectus, including the financial
statements and the notes to the financial statements of Security Savings
Association of Hazleton included elsewhere herein. References in this document
to the "Association" refer to Security Savings Association of Hazleton.
References in this document to the "Company" refer to Security of Pennsylvania
Financial Corp.
SECURITY OF PENNSYLVANIA
FINANCIAL CORP. . . . . . . . The Company was recently organized to become a savings and loan holding company and own
all of the capital stock of the Association to be issued upon its conversion from mutual
to stock form. To date, the Company has not engaged in any business.
The Company's office is located at 31 W. Broad Street, Hazleton, Pennsylvania and its
telephone number is (717) 454-0824. The Association's executive office has the same
address and phone number.
SECURITY SAVINGS ASSOCIATION
OF HAZLETON . . . . . . . . . The Association is a Pennsylvania mutual savings and loan association. At June 30,
1998, the Association had total assets of $112.0 million, total deposits of $102.6
million and total equity of $9.2 million.
The Association operates four banking offices in Luzerne and Carbon counties in Northeast
Pennsylvania. The Association historically has operated as a community-oriented banking
institution offering primarily one- to four- family residential mortgage loans and
consumer loans and a variety of retail deposit products.
THE CONVERSION . . . . . . . . The Association has adopted a Plan of Conversion (the "Plan") which is subject to
requirements of the Office of Thrift Supervision (the "OTS") and the Pennsylvania
Department of Banking (the "Pennsylvania Department"). The conversion, which hereafter is
referred to as the "Conversion," is governed by the Plan and has three major components,
as follows:
(i) The conversion of the Association to stock form;
(ii) The acquisition by the Company of all of the outstanding capital stock of the
Association;
(iii) The sale by the Company of its common stock, par value $0.01 per share (the "Common
Stock").
SECURITY SAVINGS CHARITABLE
FOUNDATION . . . . . . . . . The Association intends to establish a charitable foundation, Security Savings Charitable
Foundation, or the "Foundation." The Company intends to contribute to the Foundation
common stock equal to 5% of the common stock sold in the conversion. The authority for
the affairs of the Foundation is vested in its Board of Directors, all of whom are
existing Directors or officers of the Company and the Association.
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TERMS OF THE OFFERING . . . . . The shares of Common Stock are offered at a fixed price of $10.00 per share (the
"Purchase Price") in the Subscription Offering pursuant to subscription rights in the
following order of priority to:
(i) Eligible Account Holders in the Association as of March 31, 1997;
(ii) the Security Savings Association of Hazleton Employee Stock Ownership Plan (the
"ESOP");
(iii) Supplemental Eligible Account Holders in the Association as of ____ who are not
entitled to a first priority subscription right; and
(iv) Other Members in the Association as of ______ who are not entitled to a higher
priority subscription right. See "The Conversion--Subscription Offering and Subscription
Rights" for the complete qualifications of each of the subscription right priorities.
Shares of Common Stock not subscribed for by persons having priority subscription rights
will be offered to certain members of the general public in a Community Offering.
EXPIRATION DATE OF
SUBSCRIPTION OFFERING . . . . Subscription rights will expire if not exercised and all orders to purchase Common Stock
in the Subscription Offering must be received by __:__ ____, Eastern time, on ________,
1998, unless extended, __________ which is the "Expiration Date."
NONTRANSFERABILITY OF
SUBSCRIPTION RIGHTS . . . . . The subscription rights are not transferable.
NUMBER OF SHARES OFFERED . . . The Company is offering between a minimum of 1,190,000 shares and a maximum of 1,610,000
shares of Common Stock, or up to an adjusted maximum of 1,851,500 shares if the maximum
number of shares is increased.
The number of shares offered is based upon an independent appraisal prepared by Keller &
Company, Inc. ("Keller") dated as of August 14, 1998, which estimates that the aggregate
pro forma market value of the Common Stock to be sold ranged from $11.9 million to $16.1
million. (This range is referred to as the "Estimated Price Range"). Keller is an
independent appraisal firm experienced in appraisals of savings institutions.
Establishing the Foundation in connection with the Conversion will result in a lower
aggregate market valuation than if the Conversion were completed without the Foundation.
The final aggregate estimated pro forma market value of the Common Stock to be sold will
be determined at the time of closing of the Subscription Offering, or if all shares are
not sold in the Subscription Offering, the closing of the Community Offering or other
subsequent offering. The Subscription Offering, Community Offering and any other
subsequent offerings are referred to collectively as the "Offerings." Such estimated
aggregate pro forma market value is subject to change due to changes in market and
general financial and economic conditions.
The maximum number of shares to be sold may be increased up to the adjusted maximum, a
15% increase above the maximum, if the aggregate estimated pro forma market value of the
Common Stock to be sold is increased.
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HOW DO I ORDER STOCK? . . . . . If you are entitled to a subscription right, you may order shares in the Subscription
Offering by delivering to the Association a properly executed stock order form and
certification ("order form") together with full payment for the shares ordered on or
prior to the Expiration Date. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED OR
MODIFIED WITHOUT THE CONSENT OF THE ASSOCIATION. All order forms must be accompanied or
preceded by a Prospectus. Please make sure you review the Prospectus carefully prior to
submitting an order form. To ensure that each purchaser receives a Prospectus at least
48 hours prior to the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, no Prospectus will be mailed any later than five days prior to the
Expiration Date or hand delivered any later than two days prior to such date. The
Association is not obligated to accept subscriptions not submitted on an original stock
order form.
Persons wishing to order shares offered in the Community Offering also must submit a
properly executed order form and certification prior to the expiration date to be set for
the Community Offering.
FORM OF PAYMENT FOR SHARES . . Payment for subscriptions may be made:
(i) in cash (if delivered in person at any banking office of the Association);
(ii) by check, bank draft or money order; or
(iii) by authorization of withdrawal from deposit accounts maintained at the Association.
Orders for Common Stock in the Subscription Offering which aggregate $50,000 or more must
be paid by official bank or certified check or by withdrawal authorization from a deposit
account at the Association.
NUMBER OF SHARES THAT MAY
BE ORDERED . . . . . . . . Minimum: 25 shares ($250).
Maximum:
- No Eligible Account Holder, Supplemental Eligible Account Holder or Other Member may
purchase in the Subscription Offering more than $150,000 of Common Stock.
- No person, together with associates or persons acting in concert with such person,
may purchase in the Community Offering more than $150,000 of Common Stock.
- No person, together with associates or persons acting in concert with such person,
may purchase in the aggregate more than the greater of: (i) $150,000 of Common Stock
or (ii) 1% of the Common Stock to be sold. However, the ESOP may purchase up to 10%
of the Common Stock to be issued in connection with the Conversion, including shares
issued to the Foundation. It is intended that the ESOP will purchase 8% of the
Common Stock issued, including shares issued to the Foundation.
USE OF PROCEEDS . . . . . . . . The Company will use 50% of the net proceeds from the sale of Common Stock to purchase
all of the Common Stock of the Association to be issued in the Conversion. The portion
of net proceeds retained by the Company will be used for general business activities,
including the lending of funds to the ESOP (to the extent such loan is not funded by a
third party) to enable the ESOP to
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purchase up to 8% of the stock issued in connection with the Conversion, including shares
issued to the Foundation. The Company intends initially to invest the remaining net
proceeds in federal funds and securities, primarily mortgage-related securities and
federal agency obligations. The Association intends to utilize the net proceeds from the
sale of its stock to the Company for general business purposes, including investment in
loans and mortgage-related securities.
DIVIDEND POLICY . . . . . . . . No decision has been made by the Company with respect to the payment of dividends if any.
Additionally, in connection with the Conversion, the Company and the Association have
committed to the OTS that during the one-year period following the Conversion, the
Company will not make any distribution to stockholders that, for federal tax purposes,
would be treated as a return of capital without the prior approval of the OTS.
BENEFITS OF THE CONVERSION TO
MANAGEMENT . . . . . . . . . Among the benefits to the Association and the Company anticipated from the Conversion is
the ability to attract and retain personnel through the use of stock options and other
stock-related benefit programs. Subsequent to the Conversion, the Company intends to
adopt a Stock-Based Incentive Plan for the benefit of directors, officers and employees
of the Company and Association. If the Stock-Based Incentive Plan is adopted within one
year after the Conversion, the plan will be subject to stockholders' approval at a
meeting of stockholders which may not be held earlier than six months after the
Conversion. The Stock-Based Incentive Plan would provide for the award at no cost to the
recipients of shares of Common Stock in an amount equal to 4% of the Common Stock issued
in connection with the Conversion, including shares issued to the Foundation, and the
grant of options to purchase Common Stock in an amount equal to 10% of the Common Stock
issued in the Conversion, including shares issued to the Foundation.
Additionally, certain officers of the Company and the Association will be provided with
employment agreements or change in control agreements which provide such officers with
employment rights and/or payments upon their termination of service following a change in
control. The Stock-Based Incentive Plan may also provide participants with benefits upon
a change in control of the Company or the Association.
VOTING CONTROL OF OFFICERS
AND DIRECTORS . . . . . . . . Directors and executive officers of the Association and the Company expect to purchase
approximately 6.06% or 4.48% of shares of Common Stock to be issued in the Conversion,
including shares issued to the Foundation, based on the estimated minimum and maximum
number of shares issued, respectively. Additionally, assuming the implementation of the
ESOP and the Stock-Based Incentive Plan (and the exercise of all options which may be
granted under that plan), directors, executive officers and employees have the potential
to control the voting of approximately 28.06% or 26.48% of the Common Stock to be issued
in the Conversion, including shares issued to the Foundation, based on the minimum and
maximum of such shares, respectively.
NO BOARD RECOMMENDATIONS . . . The Association's and the Company's Board of Directors make no recommendation to
depositors or other potential investors regarding whether such persons should purchase
the Common Stock. An investment in the Common Stock must be made pursuant to each
investor's evaluation of his or her best interests and financial capability.
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CONVERSION CENTER . . . . . . . If you have any questions regarding the Conversion, please call the Conversion Center at
(717) ___-____.
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SELECTED FINANCIAL AND OTHER DATA OF THE ASSOCIATION
The selected financial and other data of the Association set forth
below is derived in part from, and should be read in conjunction with, the
Financial Statements of the Association and Notes thereto presented elsewhere
in this Prospectus.
AT JUNE 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ---------- --------- -------- ---------
(IN THOUSANDS)
SELECTED FINANCIAL DATA:
Total assets . . . . . . . . . . . . . . . $111,990 $107,447 $107,943 $104,326 $102,108
Cash and due from banks . . . . . . . . . 3,272 2,867 1,910 1,543 4,599
Interest-bearing deposits with banks . . . 8,586 6,167 8,196 7,429 13,163
Loans, net (1) . . . . . . . . . . . . . . 69,211 66,738 65,071 63,943 57,347
Securities held-to-maturity (2):
Mortgage-related securities, net . . . 2,281 4,706 5,565 6,414 7,577
Investment securities, net . . . . . . 18,502 20,136 18,509 18,411 12,787
Securities available-for-sale (2):
Mortgage-related securities, net . . . 1,353 1,672 2,246 995 1,253
Investment securities, net . . . . . . 6,548 2,576 4,056 3,438 3,352
Deposits . . . . . . . . . . . . . . . . . 102,604 98,465 99,348 96,398 94,817
Total equity . . . . . . . . . . . . . . . 9,231 8,583 8,325 7,741 7,004
Foreclosed real estate, net . . . . . . . 221 531 171 -- 107
Nonperforming assets and
troubled debt restructurings . . . . . . 2,085 2,117 2,041 1,591 1,624
FOR THE FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- ------- ------- --------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Total interest income..................... $7,740 $7,440 $7,459 $7,121 $6,575
Interest expense.......................... 4,260 4,029 4,230 3,717 3,373
------ ------ ------ ------ ------
Net interest income ................... 3,480 3,411 3,229 3,404 3,202
Provision for loan losses................. 176 34 102 249 46
------ ------ ------ ------ ------
Net interest income after provision
for loan losses..................... 3,304 3,377 3,127 3,155 3,156
Noninterest income:
Net gain on sale of securities......... 1 17 -- -- --
Other.................................. 303 267 258 239 265
Noninterest expenses...................... 2,485 3,107(3) 2,426 2,378 2,101
------ ------ ------ ------ ------
Income before provision for income taxes.. 1,123 554 959 1,016 1,320
Provision for income taxes................ 506 344 362 366 506
------ ------ ------ ------ ------
Net income............................. $ 617 $ 210 $ 597 $ 650 $ 814
====== ====== ====== ====== ======
(See footnotes on next page)
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AT OR FOR THE FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- -------- -------- -------
SELECTED OPERATING RATIOS AND OTHER DATA (4):
PERFORMANCE RATIOS:
Average yield on interest-earning assets (5) .......... 7.40% 7.28% 7.28% 7.32% 7.42%
Average rate paid on interest-bearing liabilities ..... 4.24 4.11 4.31 3.91 3.65
Average interest rate spread (6) ...................... 3.16 3.17 2.97 3.41 3.77
Net interest margin (7) ............................... 3.33 3.34 3.15 3.50 3.61
Ratio of interest-earning assets to
interest-bearing liabilities ........................ 104.27 104.22 104.31 102.36 95.90
Net interest income after provision for loan
losses to noninterest expense ....................... 132.96 108.69 128.90 132.67 150.21
Noninterest expense as a percent of
average assets ...................................... 2.26 2.91 2.27 2.31 2.11
Return on average assets .............................. 0.56 0.20 0.56 0.63 0.82
Return on average equity .............................. 6.89 2.52 7.40 8.81 11.97
Ratio of average equity to average assets ............. 8.16 7.79 7.56 7.17 6.83
REGULATORY CAPITAL RATIOS: (8)
Tangible capital ratio ................................ 8.35 8.13 7.89 7.59 7.11
Core capital ratio .................................... 8.35 8.13 7.89 7.59 7.11
Risk-based capital ratio .............................. 16.92 21.70 21.15 18.31 16.85
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total loans (9) ...... 2.69 2.38 2.87 2.49 2.65
Nonperforming assets and troubled debt
restructurings as a percent of total assets (10) .... 1.86 1.97 1.89 1.53 1.59
Allowance for loan losses as a percent
of total loans ...................................... 0.65 0.64 0.69 0.63 0.37
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings (1)(9) ............................... 24.25 27.05 23.90 25.20 14.17
Net loans charged-off to average interest-
earning loans ....................................... 0.22 0.05 0.02 0.09 0.05
FULL SERVICE OFFICES AT END OF PERIOD .................... 4 4 4 4 4
- -------------------------
(1) Loans, net, represents gross loans receivable net of the allowance for
loan losses, loans in process and deferred loan origination fees. The
allowance for loan losses at June 30, 1998, 1997, 1996, 1995 and 1994 was
$452,000, $429,000, $447,000, $401,000 and $215,000, respectively.
(2) The Association adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," during fiscal 1994.
(3) Includes a one-time special assessment of $620,000 in order to
recapitalize the Savings Association Insurance Fund ("SAIF") fund in
fiscal 1997.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods.
(5) Calculations of yield for tax-exempt investments are not presented on a
tax equivalent basis due to the average balance of tax-exempt investments
in 1998 not being material. There were no securities exempt from federal
or state taxes in previous years.
(6) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) For definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation -- Capital Requirements."
See "Regulatory Capital Compliance" for the Association's pro forma capital
levels as a result of the Offerings.
(9) Non-performing loans consist of all non-accrual loans and all other loans
90 days or more past due. It is the policy of the Association to cease
accruing interest on loans 90 days or more past due (unless the loan
principal and interest are determined by management to be fully secured
and in the process of collection) and to charge off all accrued interest.
See "Business of the Association--Delinquent Loans, Classified Assets, and
Foreclosed Real Estate."
(10) Non-performing assets consist of non-performing loans and foreclosed real
estate.
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RISK FACTORS
The following risk factors should be considered by investors in
deciding whether to purchase the Common Stock.
SENSITIVITY TO CHANGES IN INTEREST RATES
The Association's profitability is dependent to a large extent upon
its net interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and borrowings.
Accordingly, the Association's profitability will be significantly affected by
changes in market interest rates and its ability to manage its assets and
liabilities in response to such changes.
The Association anticipates that an increase in interest rates could
have an adverse effect on the Association. The Association primarily monitors
its interest rate sensitivity through the use of a model which estimates the
change in the Association's net portfolio value ("NPV") over a range of
interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. As of June 30, 1998,
based on assumptions utilized by the Association, it is estimated that a 200
basis point increase in market interest rates would result in a 12% decrease in
NPV, compared to a 8% estimated increase in NPV as a result of a 200 basis
point decrease in market interest rates. NPV estimated changes do not provide
a precise forecast of the effect of changes in market interest rates on the
Association's net interest income. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Management of Interest Rate
Risk and Market Risk Analysis."
Increases in interest rates also could adversely affect the type
(fixed-rate or adjustable-rate) and amount of loans originated by the
Association and the average life of loans and securities which, in turn, could
adversely impact the yields earned on the Association's loan and securities
portfolios.
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION
At June 30, 1998, the Association's ratio of equity to total assets
was 8.2%. The Company's equity position will be significantly increased as a
result of the Conversion. On a pro forma basis as of June 30, 1998, assuming
the sale of Common Stock at the midpoint of the Estimated Price Range, the
Company's ratio of equity to assets would approximate 16.92%. The Company's
ability to invest this new capital in interest- earning assets, such as loans
and securities, which bear rates of return comparable to its current loans and
securities investments will be significantly affected by industry competition.
The Company currently anticipates that it will take time to prudently deploy
such capital. As a result, the Company's return on equity initially is
expected to be below its historical return on equity and may be below peer
group institutions after the Conversion. No assurances can be made as to when
or if the Company will achieve returns on its equity that are comparable to
industry peers or industry averages. Additionally, due to the implementation
of stock-based benefit plans such as the ESOP and Stock-Based Incentive Plan,
the Company's future compensation expense will be increased, thereby, adversely
affecting its net income and return on equity.
WEAKNESS OF REGIONAL AND LOCAL ECONOMY
Economic conditions at the local and national levels, as well as
government policies and regulations concerning, among other things, monetary
and fiscal affairs, significantly affect the operations of financial
institutions such as the Association. The population of the market in which
the Association operates is relatively small and in recent years has remained
relatively static. In addition, the population of Luzerne County has one of
the oldest average ages of all counties in the United States and the
unemployment rate in the Association's market area is greater than the national
average. Further, because of the significant number of financial institutions
competing for funds in the market, the Association has experienced increased
competition for loan and deposit customers. Accordingly, the Association could
be exposed to a higher cost of funds and/or a decreased net interest margin in
the future.
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LENDING RISKS
REAL ESTATE LOANS
ONE- TO FOUR-FAMILY LOANS. Due to the current relatively low interest
rate environment, a significant portion of the Association's originations of
one- to four-family real estate mortgage loans (65% during the first six months
of calendar 1998) relate to refinancings of existing mortgage loans either with
the Association or other lenders. Refinancing of existing loans at lower rates
tends to compress the Association's net interest margin and may result in
reduced profitability.
Commencing in 1996, the Association experienced an increase in the
aggregate amount of its nonperforming assets and troubled debt restructurings
which it attributes in significant part to a general decline in real estate
values in its market area during that period. Initially, the Association was
slow to handle the increased number of loans which warranted foreclosure. The
Association has improved its procedures for addressing delinquent loans. As a
result, while its level of nonperforming assets at June 30, 1998 of 1.86% of
total assets is relatively high compared to its peers, the Association
anticipates that such level will decrease in future periods. At June 30, 1998,
loans 60-89 days delinquent had been reduced to 0.18% of total loans compared
to 1.14% at June 30, 1997.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. The Association's
multi-family and commercial real estate loans aggregated $4.8 million or 6.8%
of total loans at June 30, 1998. Multi-family and commercial real estate loans
generally are considered to have a higher degree of risk and involve larger
principal amounts than one- to four-family mortgage loans. In addition,
because multi-family and commercial real estate loans often are dependent on
successful operation and management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy
to a greater extent than one-to four-family loans.
CONSTRUCTION LOANS. At June 30, 1998, construction loans totalled
$523,000, or 0.8% of total loans. During fiscal 1998 the Association
originated $2.1 million of construction loans for one- to four-family
properties, or 13.5% of total loan originations for that year. Construction
loans are generally considered to involve a higher degree of credit risk than
long-term financing on improved, owner-occupied real estate because the risk of
loss on such loans is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction or development
compared to the estimated cost (including interest) of construction. If the
estimate of value proves to be inaccurate, the property securing the loan, when
completed, may have a value which is insufficient to assure full repayment of
the loan.
CONSUMER LOANS
At June 30, 1998, the Association's consumer loan portfolio totalled
$9.9 million, or 14.2% of total loans. These consumer loans include home equity
loans and lines of credit, which although secured by one- to four-family real
property, generally are secured by a second lien rather than a first mortgage
on such property. In addition, consumer loans generally are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by unemployment, divorce, illness or personal bankruptcy.
COMMERCIAL LOANS
The Association does not currently originate any commercial loans.
However, the Association is actively considering the commencement of commercial
lending on a limited basis as part of the long-term deployment of proceeds from
the Conversion. The Association would only commence such commercial lending
after it hired an experienced commercial lending officer. Commercial loans are
generally considered to involve a higher degree of risk compared to first
mortgage loans on one- to four-family real property. Risk of loss on
commercial business lending is dependent in significant part on the business
success of the borrower and on general economic conditions in the region or
industry in which the borrower operates. Commercial business loans also
require continued review and evaluation regarding the performance of the
borrower.
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ESTABLISHMENT OF THE CHARITABLE FOUNDATION
The Company intends to establish the Foundation and to contribute to
it shares of Common Stock equal to 5% of the shares to be sold in the
Conversion. Establishment of the Foundation is subject to the approval of the
Association's members at a special meeting of members (the "Special Meeting").
If approved by members, the establishment of the Foundation will be dilutive to
the voting and ownership interests of stockholders and will have an adverse
impact on the operating results of the Company for its fiscal year ending June
30, 1999, possibly resulting in an operating loss for that year.
DILUTION OF STOCKHOLDERS' INTERESTS. At the minimum, midpoint and
maximum of the Estimated Price Range, the contribution to the Foundation would
be 59,500, 70,000 and 80,500 shares, with a value of $595,000, $700,000 and
$805,000, respectively, based on the Purchase Price of $10.00 per share for the
shares of Common Stock to be sold in the Conversion. Upon completion of the
Conversion and establishment of the Foundation, the Company will have 1,690,500
shares issued and outstanding at the maximum of the Estimated Price Range, of
which the Foundation will own 80,500 shares, or 4.8% AS A RESULT, PERSONS
PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING
INTERESTS IN THE COMPANY DILUTED BY 4.8%. SEE "PRO FORMA DATA."
ADVERSE IMPACT ON EARNINGS. The Company will recognize an expense in
the amount of the contribution to the Foundation in the quarter in which it
occurs, which is expected to be the second quarter of fiscal 1999. Such
expense will reduce earnings and have a material adverse impact on the
Company's earnings for the fiscal year. The amount of the contribution will
range from $595,000 to $805,000, depending on the amount of Common Stock sold
in the Conversion. The contribution expense will be partially offset by the
tax deductibility of the expense. The Company has been advised by its
independent accountants that the contribution to the Foundation will be
deductible for federal income tax purposes, subject to a limitation based on
10% of the Company's annual taxable income. Assuming a contribution of $805,000
in Common Stock, based on the maximum of the Estimated Price Range, the Company
estimates a net tax effected expense of $470,000. If the Foundation had been
established at June 30, 1998, the Association would have reported net income of
$147,000 for fiscal 1998 rather than reporting net income of $617,000. In
addition to the contribution to the Foundation, the Association may in the
future continue to make ordinary charitable contributions within its community.
POSSIBLE NONDEDUCTIBILITY OF THE CONTRIBUTION. Based on the maximum
of the Estimated Price Range, the Company estimates that substantially all of
the contribution to the Foundation should be deductible for federal tax
purposes over the permissible six-year period. However, no assurance can be
made that the Company will have sufficient pre-tax income over the five-year
period following the year in which the contribution is initially made to fully
utilize the carryover related to the excess contribution. Furthermore,
although the Company and the Association have received an opinion of their
independent accountants that the Company will be entitled to the deduction for
the contribution to the Foundation, there can be no assurance that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that the
deduction will be permitted. In such event, there would be no tax benefit
related to the Foundation.
POTENTIAL ANTI-TAKEOVER EFFECT. If approved by the Association's
members, upon completion of the Conversion, the Foundation will own 4.8% of the
total shares of the Company's Common Stock outstanding. However, pursuant to
the terms of the contribution as mandated by the OTS, the shares of Common
Stock held by the Foundation must be voted in the same ratio as all other
shares of the Company's Common Stock on all proposals considered by the
stockholders of the Company. As a result, the Company does not believe the
Foundation will have an anti-takeover effect on the Company. In the event,
however, that the OTS were to waive this voting restriction and not impose
other restrictions and requirements with respect to the Foundation, the
Foundation's board of directors would exercise sole voting power over such
shares. See "The Conversion--Establishment of the Charitable
Foundation--Regulatory Conditions Imposed on the Foundation." If the
Foundation's shares are combined with shares purchased directly by officers and
directors of the Company, shares held by the proposed stock benefit plan, if
approved by stockholders, and shares held in the ESOP, the aggregate of such
shares could exceed 20% of the Company's outstanding Common Stock, which could
enable management to defeat stockholder proposals requiring 80% approval.
Consequently, in the event the voting restriction was waived, this potential
voting control might preclude takeover attempts that certain stockholders
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deem to be in their best interest, and might tend to perpetuate management.
Since the ESOP shares are allocated to all eligible employees of the
Association, and any unallocated shares will be voted by an independent
trustee, and because awards under the proposed stock benefit plan may be
granted to employees other than executive officers and directors, management of
the Company does not expect to have voting control of all shares held or
allocated by the ESOP or other stock benefit plans. See "--Certain
Anti-Takeover Provisions Which May Discourage Takeover Attempts--Voting Control
of Officers and Directors."
There will be no agreements or understandings, written or tacit, with
respect to the exercise of either direct or indirect control over the
management or policies of the Company by the Foundation which may discourage
takeover attempts, including agreements related to voting, acquisition or
disposition of the Company's Common Stock. Finally, as the Foundation sells
its shares of Common Stock over time, its ownership interest and voting power
in the Company are expected to decrease.
POTENTIAL CHALLENGES. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in only a
limited number of instances. As such, the Foundation may be subject to
potential challenges notwithstanding that the Boards of Directors of the
Company and the Association have carefully considered the various factors
involved in the establishment of the Foundation. See "The
Conversion--Establishment of the Charitable Foundation--Purpose of the
Foundation." If anyone were to institute an action seeking to require that the
Association eliminate establishment of the Foundation, no assurances can be
made that the resolution of such action would not result in a delay in the
consummation of the Conversion or that any objecting persons would not be
ultimately successful in obtaining the elimination of the Foundation or other
equitable relief or monetary damages against the Company or the Association.
Additionally, if the Company and the Association are forced to eliminate the
Foundation, the Company may be required to resolicit subscribers in the
Offerings.
APPROVAL OF MEMBERS. Establishment of the Foundation is subject to
the approval of a majority of the total outstanding votes of the Association's
members eligible to be cast at a Special Meeting. The Foundation will be
considered as a separate matter from approval of the Plan of Conversion. If
the Association's members approve the Plan of Conversion, but not the
establishment of the Foundation, the Association intends to complete the
Conversion without the establishment of the Foundation. Failure to approve the
Foundation may materially increase the aggregate pro forma market value of the
Common Stock to be sold in the Conversion since the estimate of such amount
takes into account the dilutive impact of the issuance of shares to the
Foundation. If the aggregate pro forma market value of the Common Stock
without the Foundation is either greater than $18.5 million or less than $11.9
million, the Association will establish a new Estimated Price Range and
commence a resolicitation of subscribers (i.e., subscribers will be permitted
to continue their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their subscriptions funds will be promptly refunded with interest
at the Association's passbook rate of interest, or be permitted to increase,
decrease, or cancel their subscriptions). Any change in the Estimated Price
Range must be approved by the OTS. See "The Conversion--Stock Pricing." A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the OTS
for periods of up to 90 days not to extend beyond ________, 2000.
HIGHLY COMPETITIVE INDUSTRY
The Association faces significant competition in its market area both
in attracting deposits and in originating loans. The population of the market
is relatively small and population growth is relatively static in the county in
which the Association is headquartered. This competition arises from
commercial banks, savings banks, mortgage brokers, mortgage banking companies,
credit unions, and other providers of financial services, many of which are
significantly larger than the Association and, therefore, have greater
financial and marketing resources than those of the Association. Also, many of
such competitors have a statewide or even a national presence. The
Association's competitive environment raises the possibility of the
Association's need to increase the rates paid and lower the yields on its
deposits and loans, respectively, in order to remain competitive, thus
potentially reducing its profitability. See "Business of the Association--
Market Area and Competition."
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FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Association is subject to extensive federal and state regulation
and supervision as a state savings and loan association. In addition, the
Company, as a savings and loan holding company, is subject to regulation and
supervision. Such regulations, which affect the Association and the Company on
a daily basis, may be changed at any time, and the interpretation of the
relevant law and regulations is also subject to change by the authorities who
examine the Association and interpret those laws and regulations. Any change
in the regulatory structure or the applicable statutes or regulations, whether
by the OTS, the Pennsylvania Department, the Federal Deposit Insurance
Corporation ("FDIC") or the Congress, could have a material impact on the
Company, the Association, its operations or the Association's Conversion. See
"Regulation."
THRIFT RECHARTERING
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), which was
enacted in September 1996, provides that the BIF (the deposit insurance fund
that covers most commercial bank deposits) and the SAIF will merge on January
1, 1999, if there are no more savings associations as of that date. Several
bills have been introduced in the current Congress that would eliminate the
federal thrift charter and the OTS. A bill originally reported by the House
Banking Committee would have required federal thrifts to become national banks
or state banks within two years of enactment or they would have become national
banks by operation of law. The OTS would have been abolished and its functions
transferred to the bank regulatory agencies. State savings associations would
have become subject to the same federal regulation as state banks. The bill as
passed by the House of Representatives, however, did not provide for the
elimination of the federal thrift charter or OTS or revise the federal
regulation of state associations, but did provide that unitary savings and loan
holding companies existing or applied for after March 31, 1998 would not have
the ability to engage in unlimited activities but would be subject to the
activities restrictions applicable to multiple savings and loan holding
companies. Unitary holding companies existing or applied for before such date
would be grandfathered and could continue to engage in unlimited activities and
could transfer the grandfather rights to acquirors of the holding company. The
Senate has not acted on the legislation but if such legislation is enacted, the
Company would not qualify for unlimited activities but would be subject to the
activities restrictions applicable to multiple savings and loan holding
companies. The Association is unable to predict whether the legislation will
be enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Association is also
unable to predict whether the SAIF and BIF will eventually be merged, the
federal thrift charter eliminated or the regulation of state associations
revised, and what effect, if any, such legislation would have on the
Association.
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS, EMPLOYMENT CONTRACTS AND
CHANGE IN CONTROL PAYMENTS
STOCK-BASED INCENTIVE PLAN. The Company intends to adopt a
Stock-Based Incentive Plan which would provide for the granting of options to
purchase Common Stock ("Stock Options"), awards of Common Stock ("Stock
Awards"), and certain related rights to eligible officers, employees and
directors of the Company and Association. While the Company currently
anticipates granting Stock Options and Stock Awards under a single plan, it may
establish separate plans to provide for such awards. In the event such plan is
adopted within one year after conversion, OTS regulations require the plan to
be approved by stockholders at a meeting of stockholders which may be held no
earlier than six months after completion of the Conversion. It is anticipated
the Stock-Based Incentive Plan will provide for the granting of options to
purchase shares of Common Stock equal to 10% of the shares of Common Stock
issued in the Conversion, including shares issued to the Foundation (124,950
shares and 169,050 shares at the minimum and maximum of the Estimated Price
Range, respectively) and the granting of Stock Awards in an amount equal to 4%
of the shares of Common Stock issued in the Conversion, including shares issued
to the Foundation (49,980 shares and 67,620 shares at the minimum and maximum
of the Estimated Price Range, respectively).
Under the Stock-Based Incentive Plan, Stock Awards would be granted in
the form of non-transferable, non-assignable shares of Common Stock. The
shares of Common Stock used as Stock Awards would be acquired by the
Stock-Based Incentive Plan or a trust established for the Stock-Based Incentive
Plan, either through open market purchases or from authorized but unissued
Common Stock. The Board of Directors intends to appoint an independent
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trustee who will vote unallocated Stock Awards in the same proportion as it
receives instructions from recipients with respect to allocated shares which
have not been earned and distributed. The trustee will not vote allocated
shares which have not been distributed if it does not receive instructions from
the recipient.
It is anticipated that the exercise price of Stock Options granted
under the Stock-Based Incentive Plan will be equal to the fair market value of
the underlying Common Stock on the date of grant. Such options will permit
such officers and directors to benefit from any increase in the market value of
the shares in excess of the exercise price at the time of exercise. Officers
and directors receiving Stock Options will not be required to pay for the
shares until the date of exercise. The granting of Stock Awards and the
exercise of non-statutory Stock Options (and disqualifying dispositions of
stock acquired through the exercise of incentive Stock Options) will result in
additional compensation expense to the Company and, accordingly, may result in
an increase in overall compensation expense in future periods. See "Management
of the Association--Other Benefit Plans."
Although no specific determinations have been made, the Company
anticipates that it will provide Stock Awards and/or Stock Options to
directors, officers and employees to the extent permitted by applicable
regulations. Current OTS regulations provide that, with respect to any non-tax
qualified stock benefit plan, such as the Stock-Based Incentive Plan, which is
implemented within one year after consummation of the Conversion, no individual
may receive more than 25% of the shares or options under any such plan and
non-employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the shares or options awarded under any such plan. Such
regulations also provide that any awards granted under such a plan may not vest
at a rate greater than 20% per year except in limited circumstances. It is
also anticipated that the Stock-Based Incentive Plan may under certain
circumstances provide for cash payments to participants in lieu of the benefit
provided by the Stock Award or Stock Option in the event of a change in control
of the Company or Association.
The Board of Directors, in determining specific allocations and grants
of Stock Awards and Stock Options, will consider various factors, including but
not limited to, the financial condition of the Company, current and past
performance of plan participants and tax and securities law and regulation
requirements.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL PROVISIONS. Employment and
change in control agreements proposed to be entered into with certain officers
and the employee severance compensation plan expected to be adopted provide for
benefits and cash payments in the event of a change in control of the Company
or the Association. The provisions in such agreements and plan would provide
the recipient with a change in control payment in the event of the recipient's
involuntary or, in certain circumstances, voluntary termination of employment
subsequent to a change in control of the Company or the Association. In
addition to any payments which may be made under the Stock-Based Incentive Plan
upon a change in control, these provisions may have the effect of increasing
the cost of acquiring the Company, thereby discouraging future attempts to take
over the Company or the Association. Based on current salaries, cash payments
to be paid in the event of a change in control pursuant to the terms of the
employment agreements, change in control agreements and an employee severance
compensation plan would be approximately $1.1 million. However, the actual
amount to be paid in the event of a change in control of the Company or
Association cannot be estimated at this time because the actual amount is based
on the average compensation of the employee and other factors existing at the
time of the change in control. See "Restrictions on Acquisition of the Company
and the Association--Restrictions in the Company's Certificate of Incorporation
and Bylaws," "Management of the Association--Employment Agreements," "-- Change
in Control Agreements," "-- Employee Severance Compensation Plan" and "-- Other
Benefit Plans."
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN
Following the Conversion, the Stock-Based Incentive Plan will acquire
an amount of shares equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, either through open
market purchases or the issuance of authorized but unissued shares of Common
Stock from the Company. If the Stock- Based Incentive Plan is funded by the
issuance of authorized but unissued shares, the voting interests of existing
stockholders at that time will be diluted by 3.8%. Also following the
Conversion, directors, officers and employees will
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be granted stock options under the Stock-Based Incentive Plan in an amount
equal to 10% of the Common Stock issued in the Conversion, including shares
issued to the Foundation. The exercise of such Stock Options may be satisfied
by the issuance of authorized but unissued shares. If all of the Stock Options
were to be exercised using authorized but unissued Common Stock and the Stock
Awards granted under the Stock-Based Incentive Plan were funded with authorized
but unissued shares, the voting interests of existing stockholders at that time
would be diluted at that time by 12.3%.
CERTAIN ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
PROVISIONS IN THE COMPANY'S AND THE ASSOCIATION'S GOVERNING
INSTRUMENTS. Certain provisions of the Company's Certificate of Incorporation
and Bylaws, particularly a provision limiting voting rights, and the
Association's Stock Articles of Incorporation and Bylaws, as well as certain
federal regulations, may assist the Company in maintaining its status as an
independent publicly owned corporation. These provisions provide for, among
other things, supermajority voting on certain matters, staggered boards of
directors, non-cumulative voting for directors, limits on the calling of
special meetings, limits on voting shares in excess of 10% of outstanding
shares, and certain uniform price provisions for certain business combinations.
These provisions in the Company's governing instruments may discourage
potential proxy contests and other potential takeover attempts, particularly
those which have not been negotiated with the Board of Directors, and thus,
generally may serve to perpetuate existing management. For a more detailed
discussion of these provisions, see "Restrictions on Acquisitions of the
Company and the Association."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and officers of
the Association and the Company expect to purchase approximately 6.06% or 4.48%
of the shares of Common Stock to be issued in the Conversion, including shares
issued to the Foundation, based upon the minimum and the maximum of the
Estimated Price Range, respectively. The ESOP may be viewed as giving
directors, officers and employees the potential to control the voting of an
additional 8% of the Company's Common Stock. In addition, the Foundation will
be funded with a contribution by the Company equal to 5% of the Common Stock
sold in the Conversion. If a waiver of the voting restriction imposed on such
Common Stock is obtained from the OTS and the OTS does not impose other
restrictions, the Foundation shares may be voted as determined by the directors
of the Foundation who also will be directors or officers of the Company and
Association. Management's potential voting control could, together with
additional stockholder support, defeat stockholder proposals requiring 80%
approval of stockholders. As a result, this potential voting control may
preclude takeover attempts that certain stockholders deem to be in their best
interest and may tend to perpetuate existing management. See "Restrictions on
Acquisition of the Company and the Association--Restrictions in the Company's
Certificate of Incorporation and Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Association have never issued capital stock. The
Company has applied to have its Common Stock listed on the American Stock
Exchange ("AMEX") under the symbol "___" upon completion of the Conversion.
However, there can be no assurance that an active and liquid trading market for
the Common Stock will develop or, once developed, will continue, nor can there
be any assurances that purchasers of the Common Stock will be able to sell
their shares at or above the purchase price. The absence or discontinuance of
a market for the Common Stock would have an adverse impact on both the price
and liquidity of the Common Stock. See "Market for the Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be issued in the Conversion, including shares
issued to the Foundation may be increased as a result of an increase in the
Estimated Price Range of up to 15% to reflect changes in market and financial
conditions following the commencement of the Subscription and Community
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 1,851,500 shares of Common Stock for
an aggregate purchase price of up to $18.5 million. An increase in the number
of shares issued will decrease a subscriber's pro forma net earnings per share
and stockholders' equity per share and will increase the Company's pro forma
16
21
consolidated stockholders' equity and net earnings. Such an increase will also
increase the purchase price as a percentage of pro forma stockholders' equity
per share and net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Association has received an opinion of Keller that, pursuant to
Keller's Valuation, subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members have no value. However,
such valuation is not binding on the IRS. If the subscription rights granted
to Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are deemed to have an ascertainable value, receipt of such rights could
result in taxable gain to those Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members who receive and/or exercise the subscription
rights in an amount equal to such value. Additionally, the Association could
recognize a gain for tax purposes on such distribution. Whether subscription
rights are considered to have ascertainable value is an inherently factual
determination. See "The Conversion--Effects of Conversion" and "-- Tax
Aspects."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "96" is stored on the
system and represents 1996. The Association relies significantly on an outside
service bureau. That service bureau has completed its inventory and assessment
of its "Year 2000" compliance and is scheduled to have resolved all identified
problems by the end of 1998. This will provide for a full year of testing for
compliance. The Association has also completed its inventory and assessment
and has completed upgrading its internal system to handle the "Year 2000"
problem. The Association currently is testing its upgraded system and will
perform extensive tests with the service bureau system. The cost to the
Association for the internal system upgrade, not including staff time, has been
less than $50,000. There can be no assurances, however, that the performance
by the Association and its service bureau will be effective to remedy all
potential problems. To the extent the Company's systems are not fully Year
2000 compliant, there can be no assurance that potential systems interruptions
or the cost necessary to update software would not have a materially adverse
effect on the Company's business, financial condition, results of operations
and business prospects.
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
The Company was organized in Delaware at the direction of the Board of
Directors of the Association for the purpose of acquiring all of the capital
stock to be issued by the Association in the Conversion. The Company has
applied to the OTS for approval to become a savings and loan holding company.
The Company will acquire the Common Stock of the Association and sell its
Common Stock only if such approval is received. As a savings and loan holding
company, the Company will be subject to regulation by the OTS. See "The
Conversion--General." Upon consummation of the Conversion, the Company will
conduct business initially as a unitary savings and loan holding company. See
"Regulation--Holding Company Regulation." After completion of the Conversion,
the Company's assets will consist of all of the outstanding shares of the
Association's capital stock issued to the Company in the Conversion and 50% of
the net proceeds of the Offerings to be retained by the Company. The Company
intends to use part of such net proceeds to loan funds to the ESOP to enable
the ESOP to purchase 8% of the Common Stock issued in the Conversion, including
shares issued to the Foundation. The Company and Association may, however,
alternatively choose to fund the ESOP through a loan to the ESOP trust by a
third-party financial institution. The Company intends initially to utilize
the remaining proceeds for investments in mortgage-related securities and
federal agency obligations. See "Use of Proceeds." Immediately after the
Conversion, the Company will have no significant liabilities. The management
of the Company is set forth under "Management of the Company." Initially, the
Company will neither own nor lease any property, but will instead use the
premises, equipment and furniture of the Association. At the present time, the
Company does not intend to employ any persons other than officers of the
Company who are also officers of the Association, but will utilize the support
staff of the Association from time to time. Additional employees will be hired
as appropriate to the extent the Company expands its business in the future.
17
22
Management believes that the holding company structure will provide
the Company with additional flexibility to diversify, should it decide to do
so, its business activities through existing or newly-formed subsidiaries, or
through acquisitions of other financial institutions and financial services
related companies. In addition, management believes that the Company will be
in a position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and
expansion opportunities that may arise. There are no current arrangements,
understandings or agreements, written or oral, regarding any such opportunities
or transactions. The initial activities of the Company are anticipated to be
funded by the net proceeds retained by the Company and earnings thereon or,
alternatively, through dividends from the Association.
The Company's executive offices are located at 31 W. Broad Street,
Hazleton, Pennsylvania 18201 and its telephone number is (717) 454-0824.
SECURITY SAVINGS ASSOCIATION OF HAZLETON
The Association was originally incorporated in 1889 as a
state-chartered building and loan association under the name The Middle Coal
Field Building and Loan Association of Hazleton, Pennsylvania. In January
1987, the Association acquired through merger Anthracite Building and Loan
Association of Weatherly, Pennsylvania. The Association currently maintains
four banking offices in Luzerne and Carbon counties in Northeast Pennsylvania.
The Association operates as a community savings association and its
corporate philosophy has traditionally been focused on providing a competitive
array of financial products and services to consumers within its market area.
The Association's business primarily consists of accepting deposits from
customers and investing those funds primarily in mortgage loans secured by one-
to four-family residences, consumer loans and, to a lesser extent, other types
of loans and securities. At June 30, 1998, the Association had $69.9 million,
or 62.4% of total assets, invested in loans, consisting of: $54.7 million, or
48.9% of total assets, of one- to four-family mortgage loans; $9.9 million, or
8.9% of total assets, of consumer loans (consisting primarily of home equity
loans and lines of credit, automobile and education loans); $4.8 million, or
4.2% of total assets, of multi-family and commercial real estate loans; and
$523,000, or 0.47% of total assets, of construction loans. See "Business of
the Association -- Lending Activities."
The Association's investment activities primarily consist of
mortgage-related and investment securities. At June 30, 1998, the
Association's securities portfolio totalled $28.7 million, or 25.6% of total
assets, of which $20.8 million was categorized as held-to-maturity. At June
30, 1998, the Association's debt investments totalled $24.4 million, or 21.8%
of total assets, $18.5 million of which was classified as held-to-maturity and
consisted primarily of investments in various certificates of deposit. At June
30, 1998, the Association's equity investments totalled $594,000, or 0.5% of
total assets, all of which was classified as available-for-sale and consisted
of an investment in FHLB stock. At June 30, 1998, the Association's
mortgage-backed securities, consisting primarily of U.S. Government and agency
obligations, totalled $6.3 million, or 5.6% of total assets, of which $2.8
million was categorized as held-to-maturity. At June 30, 1998, the
Association's mortgage-related securities portfolio totalled $3.6 million, or
3.2% of total assets, of which $2.3 million was classified as held-to-maturity
and consisted primarily of securities guaranteed or issued by
Government-sponsored and federal agencies such as Fannie Mae ("FNMA"), Freddie
Mac ("FHLMC"), and Ginnie Mae ("GNMA"). See "Business of the Association --
Investment Activities."
At June 30, 1998, the Association's deposit accounts totalled $102.6
million, or 99.8% of total liabilities, of which $42.1 million, or 41.1%, were
comprised of core deposits (savings, NOW and money market accounts). In
addition to core deposits, the Association had $60.5 million of certificate
accounts, or 58.9% of total liabilities, of which $38.8 million were
certificates of deposit with maturities of one year or less and $13.5 million
were jumbo certificates of deposit.
The Association is subject to extensive regulation, supervision and
examination by the Pennsylvania Department, the OTS, and the FDIC. As of June
30, 1998, the Association exceeded all regulatory capital requirements with
tangible, core and risk-based capital of $9.4 million, $9.4 million and $9.8
million, respectively. Additionally, the Association's regulatory capital was
in excess of the amount necessary for the Association to be deemed "well
18
23
capitalized" under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"). See "Regulatory Capital Compliance" and "Regulation." The
Association is a member of the FHLB of Pittsburgh which is one of the twelve
regional banks which comprise the FHLB system. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business of
the Association."
The Association's executive offices are located at 31 W. Broad Street,
Hazleton, Pennsylvania 18201 and its telephone number is (717) 454-0824.
19
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REGULATORY CAPITAL COMPLIANCE
At June 30, 1998, the Association exceeded all regulatory capital
requirements. See "Regulation--Federal Regulation of Savings
Institutions--Capital Requirements." Set forth below is a summary of the
Association's compliance with the regulatory capital standards as of June 30,
1998, on a historical and pro forma basis assuming that the indicated number of
shares were sold as of such date and receipt by the Association of 50% of the
net proceeds.
HISTORICAL AT
JUNE 30, 1998
-----------------------
PERCENT
OF
AMOUNT ASSETS (2)
-----------------------
GAAP Capital (3) ............. $9,231 8.2%
======
TANGIBLE CAPITAL:
Capital Level .............. $9,362 8.4%
Requirement ................ 1,682 1.5
----- ---
Excess ..................... $7,680 6.9%
======
CORE CAPITAL:
Capital Level .............. $9,362 8.4%
Requirement (4) ............ 4,485 4.0
----- ---
Excess ..................... $4,877 4.4%
======
RISK-BASED CAPITAL:
Capital Level (5)(6) ....... $9,814 16.9%
Requirement ................ 4,641 8.0
----- ---
Excess ..................... $5,173 8.9%
======
SECURITY SAVINGS ASSOCIATION OF HAZLETON
PRO FORMA AT JUNE 30, 1998 BASED UPON THE SALE AT $10.00 PER SHARE
--------------------------------------------------------------------------------------------------
1,190,000 SHARES 1,400,000 SHARES 1,610,000 SHARES 1,851,500 SHARES
(MINIMUM (MIDPOINT (MAXIMUM 15% ABOVE
OF OF OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
------------------------ -------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2)
----------- ------------ ----------- ------------------------------------------------ ------------
(DOLLARS IN THOUSANDS)
GAAP Capital (3) ........ $14,794 12.6% $15,825 13.3% $16,856 14.1% $18,041 14.9%
======= ======= ======= =======
TANGIBLE CAPITAL:
Capital Level ......... $14,925 12.7% $15,956 13.4% $16,987 14.2% $18,172 15.0%
Requirement ........... 1,765 1.5 1,781 1.5 1,796 1.5 1,814 1.5
----- --- ----- --- ----- --- ----- ---
Excess ................ $13,160 11.2% $14,175 11.9% $15,191 12.7% $16,358 13.5%
======= ======= ======= =======
CORE CAPITAL:
Capital Level ......... $14,925 12.7% $15,956 13.4% $16,987 14.2% $18,172 15.0%
Requirement (4) ....... 4,707 4.0 4,749 4.0 4,790 4.0 4,837 4.0
----- --- ----- --- ----- --- ----- ---
Excess ................ $10,218 8.7% $11,207 9.4% $12,197 10.2% $13,335 11.0%
======= ======= ======= =======
RISK-BASED CAPITAL:
Capital Level (5)(6)... $15,377 25.3% $16,408 26.8% $17,439 28.2% $18,624 29.8%
Requirement ........... 4,864 8.0 4,905 8.0 4,946 8.0 4,994 8.0
----- --- ----- --- ----- --- ----- ---
Excess ................ $10,513 17.3% $11,503 18.8% $12,493 20.2% $13,630 21.8%
======= ======= ======= =======
- ------------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighed assets.
(3) GAAP Capital includes unrealized loss on available-for-sale securities,
net, which is not included as regulatory capital.
(4) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and soundness
and a 4% to 5% core capital ratio requirement for all other thrifts. See
"Regulation--Federal Regulation of Savings Institutions--Capital
Requirements."
(5) Assumes net proceeds are invested in assets that carry a 50%
risk-weighting.
(6) The difference between equity under generally accepted accounting
principles ("GAAP") and regulatory risk-based capital is attributable to
the addition of the general valuation allowance of $452,000 at June 30,
1998 (in addition to the exclusion of unrealized gain on available-for-sale
securities, net).
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USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $11.1 million and $15.2 million (or $17.6 million if the Estimated
Price Range is increased by 15%). See "Pro Forma Data" and "The
Conversion--Stock Pricing" as to the assumptions used to arrive at such
amounts. The Company will be unable to utilize any of the net proceeds of the
Offerings until the consummation of the Conversion.
The Company will purchase all of the outstanding capital stock of the
Association to be issued upon Conversion in exchange for 50% of the net
proceeds, with the remaining net proceeds to be retained by the Company. Based
on the midpoint of the Estimated Price Range, the Company expects to utilize
the $6.6 million of net proceeds to purchase the Common Stock of the
Association. Such portion of net proceeds will be added to the Association's
general funds which the Association currently intends to utilize for general
corporate purposes, including investments in loans, mortgage-related and
investment securities, and the funding of the Stock-Based Incentive Plan. The
Association may also use such funds for the expansion of its facilities, and to
expand operations through acquisitions of other financial institutions, branch
offices or other financial services companies. Additionally, the Association
may explore expanding the types of lending products it offers. This may be
accomplished, in part, by the hiring of a commercial lending officer. The
Association has not yet determined the approximate amount of net proceeds to be
used for any of the purposes mentioned above.
The Company intends to use a portion of the net proceeds to make a
loan directly to the ESOP to enable the ESOP to purchase 8% of the Common Stock
issued in the Conversion, including shares issued to the Foundation. The
Company and Association may alternatively choose to fund the ESOP's stock
purchases through a loan by a third-party financial institution. The remaining
net proceeds retained by the Company will initially be invested in
mortgage-related securities and federal agency obligations. Based upon the
sale of 1,190,000 shares or 1,610,000 shares at the minimum and maximum of the
Estimated Price Range, and the issuance of shares to the Foundation, the amount
of the loan to the ESOP would be $999,600 or $1.4 million, respectively (or
$1.6 million if the Estimated Price Range is increased by 15%) to be repaid
over a 12-year period at the prevailing prime rate of interest, which currently
is 8.5%. See "Management of the Association -- Other Benefit Plans--Employee
Stock Ownership Plan."
The net proceeds retained by the Company may also be used to support
the future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of other financial
institutions or their assets, including those located within the Association's
market area or diversification into other banking related businesses. The
Company has no current arrangements, understandings or agreements regarding any
such opportunities or transactions. The Company, upon the Conversion, will be
a unitary savings and loan holding company, which under existing laws would
generally not be restricted as to the types of business activities in which it
may engage, provided that the Association continues to be a qualified thrift
lender ("QTL"). See "Regulation--Holding Company Regulation" for a description
of certain regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements. Unless approved by the OTS, the
Company, pursuant to OTS regulations, will be prohibited from repurchasing any
shares of Common Stock for three years except (i) for an offer to all
stockholders on a pro rata basis, or (ii) for the repurchase of qualifying
shares of a director. Notwithstanding the foregoing and except as provided
below, beginning one year following completion of the Conversion, the OTS
regulations permit the Company to repurchase its Common Stock so long as: (i)
the repurchases within the following two years are part of an open-market
program not involving greater than 5% of its outstanding capital stock during a
12-month period; (ii) the repurchases do not cause the Association to become
"undercapitalized" within the meaning of the OTS prompt corrective action
regulation; and (iii) the Company provides to the Regional Director of the OTS
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. See "Regulation--Prompt
Corrective Regulatory Action." In addition, under current OTS policies,
repurchases may be allowed in the first year following Conversion and in
amounts greater than 5% in the second and third years following
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26
Conversion provided there are valid and compelling business reasons for such
repurchases and the OTS approves such repurchases.
Based upon facts and circumstances following Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
are not limited to: (i) market and economic factors such as the price at which
the Common Stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the
opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii)
any other circumstances in which repurchases would be in the best interests of
the Company and its stockholders. Although the Company has no current plans to
repurchase its stock, in the event the Company does determine to repurchase
stock, such repurchases may be made at market prices which may be in excess of
the Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the
Board of Directors that both the Company and the Association will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases and that such capital will be adequate, taking into account, among
other things, the level of non-performing and other risk assets, the Company's
and the Association's current and projected results of operations and
asset/liability structure, the economic environment, tax and other
considerations. See "The Conversion-- Certain Restrictions on Purchase or
Transfer of Shares After Conversion."
Additionally, in connection with the Conversion, the Company and
Association have committed to the OTS that during the one-year period following
the consummation of the Conversion, the Company will not make any distribution
to stockholders that, for federal tax purposes, would be treated as a return of
capital without prior approval of the OTS.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors intends to
consider a policy of paying cash or stock dividends on the Common Stock.
However, no decision has been made with respect to the payment of dividends.
Declarations of dividends by the Board of Directors, if any, will depend upon a
number of factors, including the amount of net proceeds retained by the Company
in the Conversion, investment opportunities available to the Company or the
Association, capital requirements, regulatory limitations, the Company's and
the Association's financial condition and results of operations, tax
considerations and general economic conditions. No assurances can be given,
however, that any dividends will be paid or, if commenced, will continue to be
paid.
The Association will not be permitted to pay dividends to the Company
on its capital stock if its stockholders' equity would be reduced below the
amount required for the liquidation account. See "The Conversion-- Liquidation
Rights." For information concerning regulations which apply to the Association
in determining the amount of proceeds which may be retained by the Company and
regarding a savings institution's ability to make capital distributions,
including payment of dividends to its holding company, see "Federal and State
Taxation--Federal Taxation--Distributions" and "Regulation--Federal Regulation
of Savings Institutions--Limitation on Capital Distributions."
Unlike the Association, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Association. The Company is subject, however, to the requirements of
Delaware law, which generally limits dividends to an amount equal to the excess
of the net assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital (generally defined as the aggregate par
value of the outstanding shares of the Company's capital stock having
22
27
a par value plus the amount of the consideration paid for shares of the
Company's capital stock without par value) or, if there is no such excess, to
its net profits for the current and/or immediately preceding fiscal year.
Additionally, in connection with the Conversion, the Company and
Association have committed to the OTS that during the one-year period following
the consummation of the Conversion, the Company will not make any distribution
to stockholders that, for federal tax purposes, would be treated as a return of
capital without prior approval of the OTS.
MARKET FOR THE COMMON STOCK
The Company and Association have not previously issued capital stock
and, consequently, there is no established market for the Common Stock. The
Company has applied to have its Common Stock listed on the AMEX under the
symbol "___" upon completion of the Conversion. Such approval is subject to
various conditions, including completion of the Conversion and the satisfaction
of applicable listing criteria. There can be no assurance that the Common
Stock will be able to meet the applicable listing criteria in order to maintain
its listing on the AMEX or that an active and liquid trading market will
develop or, if developed, will be maintained. A public market having the
desirable characteristics of depth, liquidity and orderliness, however, depends
upon the presence in the marketplace of both willing buyers and sellers of
Common Stock at any given time, which is not within the control of the Company.
No assurance can be given that an investor will be able to resell the Common
Stock at or above the Purchase Price of the Common Stock after the Conversion.
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CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Association at June 30, 1998, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion, including the issuance of shares to the Foundation, based upon the
sale of the number of shares indicated in the table and the other assumptions
set forth under "Pro Forma Data."
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
--------------------------------------------------------
1,851,500
SHARES
1,190,000 1,400,000 1,610,000 (15% ABOVE
SHARES SHARES SHARES MAXIMUM
(MINIMUM (MIDPOINT (MAXIMUM OF
OF OF OF ESTIMATED
ASSOCIATION ESTIMATED ESTIMATED ESTIMATED PRICE
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE) (1)
------------ -------------- -------------- ------------- ------------
(IN THOUSANDS)
Borrowings:
Deposits (2).............................................. $102,604 $102,604 $102,604 $102,604 $102,604
FHLB advances and other borrowings........................ -- -- -- -- --
-------- -------- -------- -------- --------
Total................................................... $102,604 $102,604 $102,604 $102,604 $102,604
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000
shares authorized; none to be issued.................... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 5,000,000
shares authorized; shares to be issued
as reflected............................................ -- 12 15 17 19
Additional paid-in capital(3)............................. -- 11,114 13,173 15,233 17,601
Retained earnings(4)...................................... 9,362 9,362 9,362 9,362 9,362
Unrealized loss on available-for-sale securities, net..... (131) (131) (131) (131) (131)
Less: Expense of contribution to the
Foundation, net of taxes(5)........................ -- (357) (420) (483) (555)
Plus: Shares issued to the Foundation.................... -- 595 700 805 926
Less: Common Stock acquired by the ESOP(6)............... -- (1,000) (1,176) (1,352) (1,555)
Less: Common Stock acquired by
the Stock-Based Incentive Plan (7)................. -- (500) (588) (676) (778)
-------- ------- ------- ------- -------
Total stockholders' equity............................ $ 9,231 $19,095 $20,935 $22,775 $24,889
======== ======== ======== ======== ========
- ------------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock to the Foundation at a value of $10.00 per share or to the issuance
of additional shares for option grants under the Stock-Based Incentive Plan
intended to be adopted by the Company. An amount equal to 10% of the
shares of Common Stock issued in the Conversion, including shares issued to
the Foundation, will be reserved for issuance upon the exercise of options
to be granted under the Stock-Based Incentive Plan. See "Risk
Factors--Possible Dilutive Effect of Stock-Based Incentive Plan," Footnote
4 to the tables under "Pro Forma Data" and "Management of the
Association--Other Benefit Plans."
(4) The retained earnings of the Association will be substantially restricted
after the Conversion. See "The Conversion--Liquidation Rights" and
"Regulation--Federal Savings Institution Regulation--Limitations on Capital
Distributions."
(5) Represents the value of the contribution of Common Stock to the Foundation
at $10.00 per share reduced by the associated tax benefit of $238,000,
$280,000, $322,000 and $370,300 at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively. The realization of the
federal tax benefit is limited annually to 10% of the Company's annual
taxable income, subject to the ability of the Company to carry forward any
unused portion of the deduction for five years following the year in which
the contribution is made. For state income tax purposes, the Company will
be able to deduct the contribution and to carry forward any unused portion
of the deduction for a five-year period following the year in which the
contribution is initially made. Such deductions by the Company for
Pennsylvania income tax purposes can be utilized only if the Company
generates sufficient state taxable income on an unconsolidated basis, and
also are subject to the limitation of 10% of unconsolidated income of the
Company.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP
and that the funds used to acquire such shares will be borrowed from the
Company. The Common Stock acquired by the ESOP is reflected as a reduction
of stockholders' equity. See "Management of the Association--Other Benefit
Plans--Employee Stock Ownership Plan."
(7) Assumes an amount equal to 4% of the shares of Common Stock sold in the
Conversion and issued to the Foundation, is purchased by the Stock-Based
Incentive Plan through open market purchases at the Purchase Price. The
Common Stock purchased by the Stock-Based Incentive Plan is reflected as a
reduction of stockholders' equity. See "Risk Factors--Possible Dilutive
Effect of Stock-Based Incentive Plan," Footnote 3 to the table under "Pro
Forma Data" and "Management of the Association--Other Benefit Plans."
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PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $11.1 million and $15.2 million (or $17.6
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription Offering to Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders; (ii) directors, officers and employees
of the Association and members of their immediate families (collectively,
"Insiders") will purchase an aggregate of $757,500 of Common Stock and the ESOP
will purchase 8% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation; (iii) Sandler O'Neill & Partners,
L.P. ("Sandler O'Neill") will receive a fee equal to 2.0% of the aggregate
Purchase Price of shares sold in the Subscription and Community Offerings,
excluding shares purchased by directors, officers, employees and any immediate
family member thereof and the ESOP for which Sandler O'Neill will not receive a
fee; and (iv) Conversion expenses, excluding the marketing fees paid to Sandler
O'Neill, will be approximately $570,000 Actual Conversion expenses may vary
from those estimated.
Pro forma consolidated net income of the Company for the fiscal year
ended June 30, 1998, has been calculated as if the Common Stock had been sold
at the beginning of the fiscal year and the net proceeds had been invested at
5.23%, which is the arithmetic average of the weighted average yield earned by
the Association on its interest-earning assets and the weighted average rate
paid on its deposits during such period (as required by OTS regulations). The
tables below do not reflect the effect of withdrawals from deposit accounts for
the purchase of Common Stock or the effect of any possible use of the net
Conversion proceeds. The pro forma after-tax yield for the Company and the
Association is assumed to be 3.14% for the fiscal year ended June 30, 1998,
based on an effective tax rate of 40.0%. Historical and pro forma net earnings
per share amounts have been calculated by dividing historical and pro forma
amounts by the indicated number of shares of Common Stock issued, as adjusted
to give effect to the purchase of shares by the ESOP and the issuance of shares
to the Foundation. Historical and pro forma stockholders' equity per share
amounts have been calculated by dividing historical and pro forma amounts by
the indicated number of shares of Common Stock issued.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be stated in an amount greater
than amounts that would be available for distribution to stockholders in the
event of liquidation.
The following tables summarize historical data of the Association and
pro forma data of the Company at or for the fiscal year ended June 30, 1998,
based on the assumptions set forth above and in the table and should not be
used as a basis for projections of market value of the Common Stock following
the Conversion. The tables below give effect to Stock Awards reserved for
grant under the Stock-Based Incentive Plan, which is expected to be adopted by
the Company following the Conversion. See Footnote 3 to the table and
"Management of the Association-- Other Benefit Plans." No effect has been
given in the tables to the possible issuance of additional shares of Common
Stock upon the exercise of stock options to be granted under the Stock-Based
Incentive Plan, nor does book value give any effect to the liquidation account
to be established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders or, in the event of liquidation of the Association, to
the tax effect of the bad debt reserve and other factors. See Footnote 5 to
the table below, "The Conversion-- Liquidation Rights" and "Management of the
Association-- Other Benefit Plans." THE FOLLOWING TABLE ASSUMES THAT THE
FOUNDATION IS APPROVED AS PART OF THE CONVERSION AND THEREFORE GIVES EFFECT TO
THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF THE COMPANY'S COMMON STOCK TO
THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE CONVERSION. THE
ESTIMATED PRICE RANGE, AS SET FORTH HEREIN AND IN THE TABLE BELOW, TAKES INTO
ACCOUNT THE DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE FOUNDATION.
25
30
AT OR FOR THE FISCAL YEAR ENDED JUNE 30, 1998
----------------------------------------------------------------------------
1,190,000 SHARES 1,400,000 SHARES 1,610,000 SHARES 1,851,500 SHARES
SOLD AT $10.00 SOLD AT $10.00 SOLD AT $10.00 SOLD AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (7)
------------------ ------------------ ----------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross Proceeds ..................................... $11,900 $14,000 $16,100 $18,515
Plus: Shares issued to Foundation (equal to
5% of the stock sold in the Conversion)... 595 700 805 926
--- --- --- ---
Pro forma market capitalization .................... $12,495 $14,700 $16,905 $19,441
======= ======= ======= =======
Gross proceeds ..................................... $11,900 $14,000 $16,100 $18,515
Less: Offering expenses and commissions ........... (774) (812) (851) (895)
------- ------- ------- -------
Estimated net proceeds ............................. 11,126 13,188 15,249 17,620
Less: Common Stock purchased by ESOP .............. (1,000) (1,176) (1,352) (1,555)
Common Stock purchased by Stock-Based
Incentive Plan ........................... (500) (588) (676) (778)
Estimated net proceeds, as adjusted ............. $ 9,626 $11,424 $13,221 $15,287
======= ======= ======= =======
Consolidated net earnings (1):
Historical ...................................... $617 $ 617 $ 617 $ 617
Pro forma earnings on net proceeds .............. 302 359 415 480
Less: Pro forma ESOP adjustment (2) ............ (50) (59) (68) (78)
Pro forma Stock-Based Incentive Plan
adjustment (3) ........................ (60) (71) (81) (93)
------ ------ ------ ------
Pro forma net earnings .......................... $ 809 $ 846 $ 883 $ 926
======= ======= ======= =======
Per share net earnings (1):
Historical ...................................... $0.53 $0.45 $0.39 $0.34
Pro forma earnings on net proceeds .............. 0.26 0.26 0.27 0.27
Less: Pro forma ESOP adjustment (2) ............ (0.04) (0.04) (0.04) (0.04)
Pro forma Stock-Based Incentive Plan
adjustment (3) ........................ (0.05) (0.05) (0.05) (0.05)
----- ----- ----- -----
Pro forma net earnings per share ................ $0.70 $0.62 $0.57 $0.52
===== ===== ===== =====
Stockholders' equity:
Historical ...................................... $ 9,231 $ 9,231 $ 9,231 $ 9,231
Estimated net proceeds .......................... 11,126 13,188 15,249 17,620
Plus: Tax Benefit of Foundation(4) ............. 238 280 322 371
Less: Common Stock acquired by ESOP (2) ........ (1,000) (1,176) (1,352) (1,555)
Common Stock acquired by Stock-Based
Incentive Plan (3) .................... (500) (588) (676) (778)
------ ------- ------- -------
Pro forma stockholders' equity (3)(4)(5)(6) ..... $19,095 $20,935 $22,774 $24,889
======= ======= ======= =======
Stockholders' equity per share:
Historical ...................................... $7.39 $6.28 $5.46 $4.75
Estimated net proceeds .......................... 8.91 8.97 9.02 9.06
Plus: Tax Benefit of Foundation(4) ............. 0.19 0.19 0.19 0.19
Less: Common Stock acquired by ESOP (2) ........ (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock-Based
Incentive Plan (3) .................... (0.40) (0.40) (0.40) (0.40)
------ ------- ------- -------
Pro forma stockholders' equity
per share (3)(4)(5)(6) ....................... $15.29 $14.24 $13.47 $12.80
====== ====== ====== ======
Offering price as a percentage of pro forma
stockholders' equity per share ................... 65.43% 70.22% 74.23% 78.11%
Offering price to pro forma net earnings per share.. 14.31x 16.10x 17.73x 19.49x
(footnotes on next page)
26
31
- ------------------------
(1) Does not give effect to the non-recurring expense that is expected to be
recognized in the second quarter of fiscal 1999 if the establishment of the
Foundation is approved. In that event, the Company will recognize an
after-tax expense for the amount of the contribution to the Foundation
which is expected to be $357,000, $420,000, $483,000 and $555,000 at the
minimum, midpoint, maximum, and maximum as adjusted, of the Estimated Price
Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be purchased by
the ESOP. For purposes of this table, the funds used to acquire such
shares are assumed to have been borrowed by the ESOP from the Company. The
amount to be borrowed is reflected as a reduction of stockholders' equity.
The Association intends to make annual contributions to the ESOP in an
amount at least equal to the principal and interest requirement of the
debt. The Association's total annual payment of the ESOP debt is based
upon 12 equal annual installments of principal, with an assumed interest
rate at 8.5%. The pro forma net earnings assume: (i) that the
Association's contribution to the ESOP is equivalent to the debt service
requirement for the year ended June 30, 1998, and was made at the end of
the period; (ii) that 8,330, 9,800, 11,270 and 12,961 shares at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, were committed to be released during the year ended June 30,
1998 at an average fair value of $10.00 per share in accordance with
Statement of Position ("SOP") 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the
net earnings per share calculations. See "Management of the Association--
Other Benefit Plans--Employee Stock Ownership Plan."
(3) Gives effect to the Stock Awards available for grant under the Stock-Based
Incentive Plan expected to be adopted by the Company following the
Conversion and presented for approval at a meeting of stockholders. The
Stock-Based Incentive Plan intends to acquire an amount of Common Stock
equal to 4% of the shares of Common Stock sold in the Conversion and
issued to the Foundation, or 49,980, 58,800, 67,620 and 77,763 shares of
Common Stock at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Price Range, respectively, either through open market
purchases, if permissible, or from authorized but unissued shares of Common
Stock or treasury stock of the Company, if any. Funds used by the Stock-
Based Incentive Plan to purchase the shares will be contributed to the
Stock-Based Incentive Plan by the Company. In calculating the pro forma
effect of the Stock-Based Incentive Plan, it is assumed that the shares
were acquired by the Stock- Based Incentive Plan at the beginning of the
period presented in open market purchases at the Purchase Price and that
20% of the amount contributed was an amortized expense during such period.
The issuance of authorized but unissued shares of the Company's Common
Stock to the Stock-Based Incentive Plan instead of open market purchases
would dilute the voting interests of existing stockholders by approximately
3.8% and pro forma net earnings per share would be $0.68, $0.61, $0.55 and
$0.51 at the minimum, midpoint, maximum, and 15% above the maximum of the
range, respectively, and pro forma stockholders' equity per share would be
$15.08, $14.08, $13.34 and $12.70 at the minimum, midpoint, maximum, and 15%
above the maximum of the range, respectively. There can be no assurance
that stockholder approval of the Stock-Based Incentive Plan will be
obtained, or that the actual purchase price of the shares will be equal to
the Purchase Price. See "Management of the Association--Other Benefit
Plans."
(4) Assumes a combined federal and state effective income tax rate of 40%.
(5) No effect has been given to the issuance of additional shares of Common
Stock upon the exercise of options to be granted under the Stock-Based
Incentive Plan. An amount equal to 10% of the Common Stock issued in the
Conversion, including shares issued to the Foundation, or 124,950, 147,000,
169,050 and 194,408 shares at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Price Range, respectively, will be reserved
for future issuance upon the exercise of options to be granted under the
Stock-Based Incentive Plan. The issuance of Common Stock pursuant to the
exercise of options under the Stock-Based Incentive Plan will result in the
dilution of existing stockholders' interests. Assuming all options were
exercised at the end of the period at an exercise price of $10.00 per
share, the pro forma net earnings per share would be $0.66, $0.59, $0.54 and
$0.49, respectively, and the pro forma stockholders' equity per share would
be $14.80, $13.86, $13.16 and $12.55, respectively. See "Management of the
Association--Other Benefit Plans."
(6) The retained earnings of the Association will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation--Federal Regulation of
Savings Institutions--Limitation on Capital Distributions."
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
27
32
COMPARISON OF VALUATION AND
PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of
the Conversion, Keller has estimated that the pro forma market capitalization
of the Association would be approximately $15.4 million, at the midpoint, which
is approximately $700,000 greater than the pro forma market capitalization of
the Association if the Foundation is approved by members of the Association and
would result in approximately a $1.4 million increase, or 10.0%, in the amount
of Common Stock offered for sale in the Conversion. The pro forma price to
book ratio and pro forma price to earnings ratio would be approximately the
same under both the current appraisal and the estimate of the value of the
Company without the Foundation. Further, assuming the midpoint of the
Estimated Price Range, pro forma stockholders' equity per share and pro forma
earnings per share would be substantially the same with the Foundation as
without the Foundation. In this regard, pro forma stockholders' equity and pro
forma net income per share would be $14.25 and $0.62, respectively, at the
midpoint of the estimate, assuming no Foundation, and $14.24 and $0.62
respectively, with the Foundation. The pro forma price to book ratio and the
pro forma price to earnings ratio are 70.18% and 16.21x, respectively, at the
midpoint of the estimate, assuming no Foundation and are 70.22% and 16.10x,
respectively, with the Foundation. This estimate by Keller was prepared at the
request of the OTS and is solely for purposes of providing members with
sufficient information with which to make an informed decision on the
Foundation. There is no assurance that in the event the Foundation 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 the Company would be the
same as that estimated herein. Any appraisal prepared at that time would be
based on the facts and circumstances existing at that time, including, among
other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at June 30, 1998.
AT THE MINIMUM AT THE MIDPOINT
-------------------------- --------------------------
WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Estimated offering amount ................ $11,900 $13,090 $14,000 $15,400
Pro forma market capitalization .......... 12,495 13,090 14,700 15,400
Total assets ............................. 121,854 122,713 123,694 124,703
Total liabilities ........................ 102,759 102,759 102,759 102,759
Pro forma stockholders' equity ........... 19,095 19,954 20,935 21,944
Pro forma consolidated net
earnings ............................... 809 838 846 880
Pro forma stockholders' equity
per share .............................. 15.29 15.24 14.24 14.25
Pro forma consolidated net
earnings per share ..................... 0.70 0.69 0.62 0.62
Pro Forma Pricing Ratios:
Offering Price as a percentage
of pro forma stockholders'
equity per share ..................... 65.43% 65.60% 70.22% 70.18%
Offering price to pro forma net
earnings per share ................... 14.31x 14.47x 16.10x 16.21x
Offering price to assets .............. 10.25% 10.67% 11.88% 12.35%
Pro Forma Financial Ratios:
Return on assets ...................... 0.66% 0.68% 0.68% 0.71%
Return on stockholders' equity ........ 4.24% 4.20% 4.04% 4.01%
Stockholders' equity to assets ........ 15.67% 16.26% 16.92% 17.60%
AT THE MAXIMUM
AT THE MAXIMUM AS ADJUSTED
-------------------------- ----------------------------
WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
------------ ------------ ------------ --------------
(DOLLARS IN THOUSANDS)
Estimated offering amount ................ $16,100 $17,710 $18,515 $20,367
Pro forma market capitalization .......... 16,905 17,710 19,441 20,367
Total assets ............................. 125,533 126,693 127,648 128,982
Total liabilities ........................ 102,759 102,759 102,759 102,759
Pro forma stockholders' equity ........... 22,774 23,934 24,889 26,223
Pro forma consolidated net
earnings ............................... 883 923 926 971
Pro forma stockholders' equity
per share .............................. 13.47 13.51 12.80 12.88
Pro forma consolidated net
earnings per share ..................... 0.57 0.56 0.52 0.52
Pro Forma Pricing Ratios:
Offering Price as a percentage
of pro forma stockholders'
equity per share ..................... 74.23% 74.00% 78.11% 77.67%
Offering price to pro forma net
earnings per share ................... 17.73x 17.79x 19.49x 19.42x
Offering price to assets .............. 13.47% 13.98% 15.23% 15.79%
Pro Forma Financial Ratios:
Return on assets ...................... 0.70% 0.73% 0.73% 0.75%
Return on stockholders' equity ........ 3.88% 3.85% 3.72% 3.70%
Stockholders' equity to assets ........ 18.14% 18.89% 19.50% 20.33%
28
33
SECURITY SAVINGS ASSOCIATION OF HAZLETON
STATEMENTS OF INCOME
The following Statement of Income of the Association for the fiscal
years ended June 30, 1998, 1997 and 1996 have been audited by Parente,
Randolph, Orlando, Carey & Associates, independent auditors, whose report
thereon is included elsewhere in this Prospectus. These Statements of Income
should be read in conjunction with the Financial Statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Prospectus.
FOR THE FISCAL YEARS ENDED JUNE 30,
-------------------------------------
1998 1997 1996
------- -------- -------
(DOLLARS IN THOUSANDS)
Interest income:
Loans .................................................... $5,415 $5,181 $5,134
Interest and dividends on securities:
Taxable interest income(1) ............................ 1,887 1,805 1,717
Nontaxable interest income ............................ 3 -- --
Dividends ............................................. 37 35 33
Interest-bearing deposits with banks ..................... 398 419 575
------ ------ ------
Total interest income .............................. 7,740 7,440 7,459
Interest expense:
Deposits ................................................. 4,260 4,029 4,230
------ ------ ------
Net interest income ......................................... 3,480 3,411 3,229
Provision for loan losses ................................... 176 34 102
------ ------ ------
Net interest income after provision
for loan losses .......................................... 3,304 3,377 3,127
------ ------ ------
Noninterest income:
Other loan fees and service charges ...................... 266 241 234
Net realized gain on sale of securities .................. 1 17 --
Other .................................................... 37 26 24
------ ------ ------
Total noninterest income ........................ 304 284 258
------ ------ ------
Noninterest expenses:
Salaries and employee benefits ........................... 1,299 1,269 1,222
Occupancy and equipment expenses ......................... 234 214 250
FDIC deposit insurance premiums .......................... 64 753 220
Data processing .......................................... 138 133 141
Professional fees ........................................ 104 98 85
Foreclosed real estate expenses, net ..................... 136 142 4
Other noninterest expenses .............................. 510 498 504
------ ------ ------
Total noninterest expenses ............................ 2,485 3,107 2,426
------ ------ ------
Income before provision for income taxes .................... 1,123 554 959
Provision for income taxes .................................. 506 344 362
------ ------ ------
Net income .................................................. $ 617 $ 210 $ 597
====== ====== ======
- -------------------------
(1) Includes interest earned on FHLB demand accounts.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
29
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no
results of operations. The Association's results of operations are dependent
primarily on net interest income, which is the difference between the income
earned on its loan and investment portfolios and its cost of funds, consisting
of the interest paid on deposits. Results of operations are also affected by
the Association's provision for loan losses, security sales activities, service
charges and other fee income, and noninterest expense. The Association's
noninterest expense principally consists of compensation and employee benefits,
office occupancy and equipment expense, federal deposit insurance premiums,
data processing, professional fees, advertising and business promotion and
other expenses. Results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in interest
rates, government policies and actions of regulatory authorities.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. The
Company does not undertake -- and specifically disclaims any obligation -- to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
MANAGEMENT STRATEGY
The Association's operating strategy has been that of a
community-based banking institution, offering a wide variety of savings
products to its retail customers, while concentrating on residential and
consumer lending and, to a lesser extent, multi-family and commercial real
estate and construction lending. In order to promote long-term financial
strength and profitability, the Association's operating strategy has focused
on: (i) maintaining strong asset quality by originating primarily one- to
four-family mortgage loans and home equity loans and lines of credit secured by
residential real estate located in its market area; (ii) managing its interest
rate risk within the context of its significant fixed-rate one- to four-family
mortgage lending activity; (iii) providing products and delivery systems
directed at the needs and expectations of its customer base, including through
taking advantage of technological advances when appropriate; and (iv)
maintaining a strong regulatory capital position.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The Association's interest rate risk management has involved the
evaluation of the interest rate risk included in certain balance sheet
accounts, the determination of the level of interest rate risk appropriate
given the Association's business strategy, operating environment, capital and
liquidity requirements and performance objectives, and management of its
interest rate risk pursuant to strategies approved by the Board of Directors to
achieve a level of interest rate risk consistent with guidelines approved by
the Board of Directors. Through such management, the Association seeks to
reduce the vulnerability of its operations to changes in interest rates. The
Board of Directors has established an Investment/Asset Liability Committee
("ALCO"), which is responsible for reviewing asset/liability
30
35
policies and the interest rate risk position. The extent of the movement of
interest rates is an uncertainty that could have a negative impact on the
earnings of the Association. See "Risk Factors--Sensitivity to Changes in
Interest Rates."
In recent years, the Association has utilized the following strategies
to manage interest rate risk: (i) originating shorter-term (20 years or less)
fixed-rate mortgage loans, in addition to 30-year fixed-rate loans; (ii)
originating consumer loans which have a generally shorter term and may have a
variable interest rate; (iii) promoting longer-term deposits, particularly
three-year certificates of deposit; and (iv) investing in shorter-term
investment and mortgage-related securities.
Management believes that limiting its exposure to interest rate risk
fluctuations enhances long-term profitability. However, the Association's
strategies also can adversely impact net interest income due to lower yields on
shorter-term investments in comparison to longer-term fixed-rate investments
and whole loans. To promote a higher yield on its investment securities while
at the same time addressing the Association's interest rate risk management
policies, the Association has invested a significant portion of its portfolio
of investment securities in longer-term (more than five years) federal agency
obligations which have call features. Given the rates of such securities in
comparison to current market interest rates, the Association anticipates the
substantial majority of such securities will be called prior to their
contractual maturity. However, if changes in interest rates exceed ranges
anticipated by the Association in estimating the anticipated life of such
callable securities, the Association would be subject to increased interest
rate or reinvestment risk, depending on the direction of the change in market
interest rates.
31
36
NET PORTFOLIO VALUE. The Association's interest rate sensitivity is
primarily monitored by management through the use of a model which generates
estimates of the change in the Association's NPV over a range of interest rate
scenarios. Such model is prepared by a third party for the Association. The
OTS also prepares and sends to the Association a NPV model based upon the
Association's quarterly financial reports to the OTS and assumptions utilized
by the OTS. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts. The NPV ratio, under any interest
rate scenario, is defined as the NPV in that scenario divided by the market
value of assets in the same scenario. The OTS model makes assumptions, among
the other things regarding the annual prepayment rates for residential mortgage
loans, adjustable-rate and fixed-rate, prepayment rates ranged from 4% to 30%
annually. Mortgage-related securities were assumed to prepay at rates between
6% and 62% annually. Investment securities, which include callable federal
agency obligations, are presented based on their stated maturities. Savings
accounts, negotiable order of withdrawal ("NOW") accounts and Money Market Cash
accounts are assumed by the OTS to decay at 14%, 17%, and 31%, respectively,
for each of the following periods: one year, one to two years, two to three
years, three to four years, four to five years and over five years. The
results of the OTS model may vary from the Association's model primarily due to
differences in assumptions utilized, including estimated loan prepayment rates,
reinvestment rates and deposit decay rates. See "Regulation--Federal
Regulation of Savings Institutions." The following table sets forth the OTS's
NPV as of June 30, 1998.
NPV AS % OF PORTFOLIO
CHANGE IN VALUE OF ASSETS
INTEREST RATES NET PORTFOLIO VALUE --------------------------
IN BASIS POINTS ------------------------------------------------------ NPV
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE (1)
- ----------------------- ------------ --------------- -------------------- ------------ -----------
(DOLLARS IN THOUSANDS)
400 $8,608 (3,611) (30)% 7.92% (270)
300 9,728 (2,491) (20) 8.81 (182)
200 10,789 (1,430) (12) 9.62 (100)
100 11,687 (532) (4) 10.27 (35)
Static 12,219 -- -- 10.62 --
(100) 12,847 528 5 11.03 41
(200) 13,232 1,013 8 11.25 63
(300) 13,872 1,653 14 11.64 203
(400) 14,725 2,506 21 12.28 257
- ----------------------
(1) Expressed in basis points.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Association's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets
and liabilities. Accordingly, although the NPV table provides an indication of
the Association's interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of
the effect of changes in market interest rates on the Association's net
interest income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
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37
AVERAGE BALANCE SHEET. The following table sets forth certain
information relating to the Association at and for the fiscal years ended June
30, 1998, 1997 and 1996. The average yields and costs are derived by dividing
income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods shown, except where
noted, otherwise and reflect annualized yields and costs. Average balances are
derived from average monthly balances. The yields and costs include fees which
are considered adjustments to yields.
FOR THE FISCAL YEARS ENDED JUNE 30,
-----------------------------------
AT JUNE 30, 1998 1998
------------------------- -----------------------------------
AVERAGE
YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE INTEREST RATE
--------- ------ --------- ------- ------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans (1):
Real estate(2) . . . . . . . . . . . . . . . . $ 55,782 7.81% $ 55,841 $4,358 7.80%
Consumer . . . . . . . . . . . . . . . . . . . 9,935 8.30 10,331 825 7.99
Commercial real estate . . . . . . . . . . . . 3,946 5.88 3,131 232 7.41
--------- --------- -------
Total loans . . . . . . . . . . . . . . . 69,663 7.77 69,303 5,415 7.81
Mortgage-related securities (3) . . . . . . . . . 2,196 7.24 2,629 159 6.05
Investment securities (4)(5) . . . . . . . . . . 26,487 6.67 26,723 1,768 6.62
Interest-bearing deposits . . . . . . . . . . . 8,586 4.64 5,995 398 6.64
--------- --------- -------
Total interest-earning assets . . . . . . . . 106,932 7.24 104,650 7,740 7.40
--------- ------ --------- ------- ------
NONINTEREST-EARNING ASSETS:
Cash and due from banks . . . . . . . . . . . . . 3,272 3,092
Premises and equipment . . . . . . . . . . . . . 1,364 1,327
Other, less allowance for loan losses . . . . . . 422 767
--------- ---------
Total noninterest-earning assets . . . . . . . 5,058 5,186
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . $111,990 $109,836
========= =========
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement savings . . . . . . . . $ 29,053 2.74 $ 28,788 795 2.76
Money market . . . . . . . . . . . . . . . . . 2,084 2.54 2,151 53 2.46
NOW . . . . . . . . . . . . . . . . . . . . . 10,983 1.38 10,081 152 1.51
Certificates of deposit . . . . . . . . . . . 60,484 5.39 59,342 3,260 5.49
--------- --------- -------
Total interest-bearing deposits . . . . . . 102,604 4.15 100,362 4,260 4.24
------ ------- ------
NONINTEREST-BEARING LIABILITIES:
Other liabilities . . . . . . . . . . . . . . . . 155 513
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . 102,759 100,875
Equity . . . . . . . . . . . . . . . . . . . . . . 9,231 8,961
--------- ---------
Total liabilities and equity . . . . . . . . . . . $ 111,990 $ 109,836
========= =========
Net interest-earning assets . . . . . . . . . . . $ 4,288
Net interest income/interest rate spread (6) . . 3.09% $ 3,480 3.16%
==== ======== ====
Net interest margin as a percentage
of interest-earning assets (7) . . . . . . . . 3.33%
====
Ratio of interest-earning assets to interest-
bearing liabilities . . . . . . . . . . . . . . 104.22% 104.27%
====== ======
FOR THE FISCAL YEARS ENDED JUNE 30,
-----------------------------------------------------------------------
1997 1996
----------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ------- ------ --------- ------- ------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Loans (1):
Real estate(2) . . . . . . . . . . . . . . . . $ 53,399 $4,031 7.55% $ 52,447 $3,995 7.62%
Consumer . . . . . . . . . . . . . . . . . . . 11,212 1,018 9.08 10,932 910 8.32
Commercial real estate . . . . . . . . . . . . 2,080 132 6.35 1,657 229 13.82
--------- ------- --------- -------
Total loans . . . . . . . . . . . . . . . 66,691 5,181 7.77 65,036 5,134 7.89
Mortgage-related securities (3) . . . . . . . . . 4,846 196 4.04 6,562 266 4.05
Investment securities (4)(5) . . . . . . . . . . 24,405 1,644 6.74 21,957 1,484 6.76
Interest-bearing deposits . . . . . . . . . . . 6,282 419 6.67 8,880 575 6.48
--------- ------- --------- -------
Total interest-earning assets . . . . . . . . 102,224 7,440 7.28 102,435 7,459 7.28
--------- ------- ------ --------- ------- ------
NONINTEREST-EARNING ASSETS:
Cash and due from banks . . . . . . . . . . . . . 2,691 2,533
Premises and equipment . . . . . . . . . . . . . 1,101 1,132
Other, less allowance for loan losses . . . . . . 919 579
--------- ---------
Total noninterest-earning assets . . . . . . . 4,711 4,244
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . $106,935 $106,679
========= =========
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement savings . . . . . . . . $ 30,996 827 2.67 $ 32,747 931 2.84
Money market . . . . . . . . . . . . . . . . . 2,374 60 2.53 2,692 74 2.75
NOW . . . . . . . . . . . . . . . . . . . . . 9,065 135 1.49 9,106 190 2.09
Certificates of deposit . . . . . . . . . . . 55,653 3,007 5.40 53,653 3,035 5.66
--------- ------- --------- -------
Total interest-bearing deposits . . . . . . 98,088 4,029 4.11 98,198 4,230 4.31
------- ------ ------- ------
NONINTEREST-BEARING LIABILITIES:
Other liabilities . . . . . . . . . . . . . . . . 513 416
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . 98,601 98,614
Equity . . . . . . . . . . . . . . . . . . . . . . 8,334 8,065
--------- ---------
Total liabilities and equity . . . . . . . . . . . $ 106,935 $ 106,679
========= =========
Net interest-earning assets . . . . . . . . . . . $ 4,136 $ 4,237
Net interest income/interest rate spread (6) . . $ 3,411 3.17% $3,229 2.97%
======== ==== ====== ====
Net interest margin as a percentage
of interest-earning assets (7) . . . . . . . . 3.34% 3.15%
==== ====
Ratio of interest-earning assets to interest-
bearing liabilities . . . . . . . . . . . . . . 104.22% 104.31%
====== ======
- --------------------------
(1) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and include nonperforming loans.
(2) Includes in addition to one- to four-family real estate loans, multi-family
and construction real estate loans which at June 30, 1998
totalled $811,000 and $523,000, respectively.
(3) Includes mortgage-related securities available-for-sale and
held-to-maturity.
(4) Includes investment securities available-for-sale and held-to-maturity and
stock in the FHLB of Pittsburgh.
(5) The average balance of tax-exempt investments in 1998 was not material.
There were no tax-exempt investments owned in 1997 or 1996.
(6) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(7) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
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RATE/VOLUME ANALYSIS. The following table presents the extent to
which changes in interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected the Association's
interest income and interest expense during the periods indicated. Information
is provided in each category with respect to: (i) changes attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) changes
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change. The changes attributable to the combined impact of
volume and rate have been allocated on a proportional basis between changes in
rate and volume.
FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997
COMPARED TO COMPARED TO
FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
--------------------------------- --------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------- ----------------------
RATE VOLUME NET RATE VOLUME NET
-------- ---------- ------- -------- ---------- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans:
Real estate(1) . . . . . . . . . . . . . . $ 138 $ 189 $ 327 $ (37) $ 73 $ 36
Consumer . . . . . . . . . . . . . . . . . (117) (76) (193) 85 23 108
Commercial real estate . . . . . . . . . . 25 75 100 (145) 48 (97)
------ ------- ------- ------- ------- -------
Total. . . . . . . . . . . . . . . . 46 188 234 (97) 144 47
Mortgage-related securities. . . . . . . . . . 74 (111) (37) (1) (69) (70)
Investment securities (2). . . . . . . . . . . (29) 153 124 (4) 164 160
Interest-earning deposits. . . . . . . . . . . (2) (19) (21) 17 (173) (156)
------ ------- ------- ------- ------- -------
Total interest-earning assets. . . . . . 89 211 300 (85) 66 (19)
------ ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement savings. . . . . . . 28 (60) (32) (55) (49) (104)
Money market. . . . . . . . . . . . . . . . (2) (5) (7) (6) (8) (14)
NOW . . . . . . . . . . . . . . . . . . . . 2 15 17 (54) (1) (55)
Certificate of deposit. . . . . . . . . . . 51 202 253 (141) 113 (28)
------ ------- ------- ------- ------- -------
Total interest-bearing liabilities . . . 79 152 231 (256) 55 (201)
------ ------- ------- ------- ---- -- -------
Increase in net interest income . . . . . . . . . $ 10 $ 59 $ 69 $ 171 $ 11 $ 182
====== ======= ======= ======= ======= =======
- ------------------------
(1) Includes in addition to one- to four-family real estate loans, multi-family
and construction real estate loans which at June 30, 1998 totalled $811,000
and $523,000, respectively.
(2) Calculations of rate/volume changes are not presented on a tax equivalent
basis due to the volume of tax-exempt investments in 1998 not being
material. There were no tax-exempt investments owned in 1997 or 1996.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND JUNE 30, 1997.
Total assets increased by $4.6 million, or 4.3%, from $107.4 million
at June 30, 1997 to $112.0 million at June 30, 1998. The growth in assets was
primarily due to loan growth, which was funded through increased deposits and
retained earnings. Cash and due from banks also increased due to the growth in
deposits during 1998 exceeding the growth in loans and investment securities.
Real estate loans increased by $2.9 million, or 5.1%, from $57.1
million at June 30, 1997 to $60.0 million at June 30, 1998 primarily due to
increases in the origination of one- to four-family loans, including the
conversion of construction loans to permanent financing, and multi-family and
commercial real estate loans. One- to four-family loans increased $1.0 million
from $53.7 million at June 30, 1997 to $54.7 million at June 30, 1998.
Multi-family and commercial real estate loans increased $1.5 million from $3.3
million at June 30, 1997 to $4.8 million at June 30, 1998,
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39
a 45.5% increase, primarily due to the Association's increased business
development efforts. Consumer loans decreased by $400,000, or 3.9%, from $10.3
million at June 30, 1997 to $9.9 million at June 30, 1998.
Nonperforming loans increased from $1.6 million at June 30, 1997 to
$1.9 million at June 30, 1998, representing 2.4% and 2.7%, respectively, of
total loans at such dates. Nonperforming assets and troubled debt
restructurings remained stable at $2.1 million for both June 30, 1998 and 1997,
representing 1.9% and 2.0%, respectively, of total assets at such dates.
Total deposits increased by $4.1 million, or 4.2%, from $98.5 million
at June 30, 1997 to $102.6 million at June 30, 1998. The increase was
primarily due to an increase of $3.2 million, or 5.6%, in certificates of
deposit from $57.3 million at June 30, 1997 to $60.5 million at June 30, 1998.
The increase in certificates of deposit was primarily due to the Association's
strategy of offering more competitive rates on such deposits.
Total equity increased $600,000, or 7.0%, from $8.6 million at June
30, 1997 to $9.2 million at June 30, 1998. The increase in equity was a result
of net income of $600,000 for the fiscal year.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND
JUNE 30, 1997.
GENERAL. Net income for fiscal 1998 increased by $407,000, or 193.8%,
to $617,000 from $210,000 for fiscal year 1997. The increase was primarily due
to a decrease in noninterest expense resulting from the absence of the one time
special assessment of $620,000 to recapitalize the SAIF which occurred in the
second quarter of fiscal 1997. Net income also increased due to an increase in
net interest income. These items were slightly offset by an increase in the
provision for loan losses and an increase in noninterest expenses.
INTEREST INCOME. Total interest income increased by $300,000, or
4.1%, from $7.4 million for fiscal 1997 to $7.7 million for fiscal 1998,
primarily due to a $2.4 million, or 2.3%, increase in the average balance of
interest-earning assets and a slight increase in the weighted average yield on
interest-earning assets, which increased from 7.28% for fiscal 1997 to 7.40%
for fiscal 1998. Interest income on real estate loans increased $300,000, or
7.5%, from $4.0 million for fiscal year 1997 to $4.3 million for fiscal year
1998, primarily due to a $2.4 million increase in the average balance of real
estate loans and a slight increase in the weighted average yield from 7.55% for
fiscal 1997 to 7.80% for fiscal 1998. Interest income on consumer loans
decreased $175,000, from $1.0 million for fiscal year 1997 to $825,000 for
fiscal year 1998. This was principally due to decreases in the average balance
of consumer loans from $11.2 million in 1997 to $10.3 million in 1998 and a
decrease in the yield on such loans from 9.08% in 1997 to 7.99% in 1998.
Interest income on mortgage-related securities decreased $37,000 from $196,000
for fiscal 1997 to $159,000 for fiscal 1998 due to the increase in weighted
average yield from 4.04% in 1997 to 6.05% in 1998 being offset by a decrease of
$2.2 million in the average balance of such securities from $4.8 million in
1997 to $2.6 million in 1998. Interest income on investment securities
increased slightly by $100,000, from $1.6 million for fiscal year 1997 to $1.7
million for fiscal year 1998 due to an increase in the average balance of
investment securities from $24.4 million in 1997 to $26.7 million in 1998,
offset by a decrease in the yield on such investments.
INTEREST EXPENSE. Interest expense increased by $200,000, or 5.0%,
from $4.0 million for fiscal 1997 to $4.2 million for fiscal 1998. The
increase in interest expense was primarily the result of increased expense on
certificates of deposit, which was a result of a $3.7 million, or 6.7% increase
in the average balance of such accounts from $55.6 million for fiscal 1997 to
$59.3 million for fiscal 1998. These net increases were partially offset by a
decrease in interest expense on savings accounts of $32,000 due to the
decrease in the average balance of such accounts, which declined from an
average balance of $30.1 million for fiscal 1997 to $28.8 million for fiscal
1998. The increase in the average balance of certificates of deposit and the
decrease in the average balance of savings accounts was due primarily to the
Association's efforts to solicit certificate accounts by more competitively
pricing such accounts and by customers shifting funds from lower-yielding
savings accounts to higher-yielding certificates of deposit.
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40
PROVISION FOR LOAN LOSSES. The Association's provision for loan
losses for fiscal 1998 was $176,000, compared to $34,000 for fiscal 1997. The
increase in the provision for loan losses and corresponding increase in the
Association's allowance for loan losses reflected an increase in the amount of
delinquent and substandard loans. As a result, at June 30, 1998, the allowance
for loan losses was 0.65% of total loans, compared to 0.64% at June 30, 1997.
The Association anticipates that, as a result of its increasing emphasis on
consumer and multi-family and commercial real estate loans, it may need to
maintain an allowance for loan losses in the future at a level that is higher
than that which it maintained in recent periods to offset any greater risk
resulting from the shifting composition of its loan portfolio. See "Business
of the Association - Delinquent Loans, Classified Assets and Foreclosed Real
Estate" and "Allowance for Loan Losses."
NONINTEREST INCOME. In fiscal 1998, the Association experienced a
$20,000 increase in noninterest income from $284,000 in fiscal year 1997 to
$304,000 for fiscal year 1998 due primarily to an increase in loan fees and
service charges associated with the implementation of surcharges on ATM
transactions and the increase in the average balance of loans originated.
NONINTEREST EXPENSE. Total noninterest expense decreased from $3.1
million for fiscal 1997 to $2.5 million for fiscal 1998 due primarily to a
reduction in the FDIC deposit insurance premiums in fiscal 1998 and the absence
of a one-time charge of $620,000 in order to recapitalize the SAIF fund which
occurred in the fourth quarter of 1997. As a result of the FDIC premium
reduction and absence of the SAIF assessment in fiscal 1998, FDIC insurance
assessments and premiums decreased from $750,000 for fiscal 1997 to $64,000 for
fiscal 1998. Noninterest expense other than FDIC premiums and the SAIF special
assessment increased approximately $66,000 for fiscal 1998 compared to fiscal
1997. Compensation and employee benefits increased $30,000, or 2.4%, primarily
due to normal increases in salaries as well as increases in benefit costs.
PROVISION FOR INCOME TAXES. Income tax expense totaled $506,000 for
fiscal 1998, compared to $344,000 for fiscal 1997, resulting in an effective
tax rate of 45.1 % for fiscal 1998 compared to 62.1% for fiscal 1997. The
increase in income tax expense in fiscal 1998 was attributable to higher
pre-tax income, which increased from $554,000 in 1997 to $1.1 million in 1998,
offset in part by a lower effective tax rate. The fiscal 1997 effective tax
rate of 62.1% was inordinately high as a result of a one time recognition of a
deferred tax liability of $136,000 for the recapture of certain of the
Association's bad debt reserve as a result of a change in federal income tax
law. The 1997 effective tax rate was also impacted by a reduced state income
tax rate also attributable to the deferred federal tax expense recognition.
Without the one-time adjustment, the fiscal 1997 effective tax rate would
approximate the fiscal 1998 effective tax rate.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1997 AND
JUNE 30, 1996.
GENERAL. Net income decreased $387,000, or 64.8%, from $597,000 for
fiscal 1996 to $210,000 for fiscal 1997. The decrease was primarily
attributable to a one-time special assessment of $620,000 from the FDIC in
order to recapitalize the SAIF, which was offset, in part, by a $182,000
increase in net interest income.
INTEREST INCOME. Interest income remained stable at $7.4 million for
fiscal 1997 and fiscal 1996, primarily due to the average balance of
interest-earning assets and weighted average yield remaining stable for fiscal
1997 and 1996. Interest income on loans also remained stable at $5.1 million
for fiscal 1997 and 1996 due to the higher average balance of loans being
offset by a decrease in the weighted average yield of loans from 7.89% for
fiscal 1996 to 7.77% for fiscal 1997.
INTEREST EXPENSE. Interest expense decreased by $200,000, or 4.8%,
from $4.2 million for fiscal 1996 to $4.0 million for fiscal 1997 primarily due
to a $200,000 decrease in the average balance of deposits and a decrease in the
weighted average costs of such liabilities from 4.31% for 1996 to 4.11% for
1997, due primarily to the Association's decision to reduce the rate paid on
its savings accounts during 1997 as part of the Association's determination to
extend the maturity of its deposit portfolio by competitively pricing its time
deposit products. The Association's revised deposit pricing strategy of
competitively pricing certificates of deposit and reducing the rate paid on
savings accounts resulted
36
41
in an increase in the average balance of certificates of deposit for 1997
compared to 1996, which was more than offset by the $1.7 million decrease in
the average balance of savings accounts for 1997 compared to 1996. This
movement to certificates of deposit also extended the average maturity of the
Association's deposits.
PROVISION FOR LOAN LOSSES. During 1997, the provision for loan
losses decreased by $68,000 from the prior year's level of $102,000. The
lower provision was based on management's evaluation of existing real estate
market conditions, the level of charge-offs and nonperforming loans, as well as
an evaluation of the general economic conditions in the Association's market
areas. At June 30, 1996, the Association's allowance for loan losses to total
nonperforming loans and to total loans was 23.9% and 0.69% respectively,
compared to 27.1% and 0.64% at June 30, 1997.
NONINTEREST INCOME. Noninterest income increased by $26,000, or
10.1%, from $258,000 in 1996 to $284,000 in 1997. The increase was primarily
attributable to the increase in loan fees and service charges and gains on sale
of securities available-for-sale. The increase in loan fees and service
charges was primarily due to an increase in the average balance of loans and
the implementation of surcharges on ATM transactions.
NONINTEREST EXPENSE. Noninterest expense increased $700,000, or
29.2%, in 1997 to $3.1 million compared to $2.4 million in 1996. The increase
primarily related to the special assessment by the FDIC for the SAIF
recapitalization of $620,000. Compensation and employee benefits also
increased $47,000, or 3.8%, due to normal annual increases in salaries and
benefit costs.
PROVISION FOR INCOME TAXES. Income tax expense decreased by $18,000,
or 5.0%, from $362,000 in fiscal 1996 to $344,000 in fiscal 1997, resulting in
an effective tax rate of 62.1% for fiscal year 1997 compared to 37.8% for
fiscal 1996. The decrease in income tax expense in fiscal 1997 was
attributable to a decrease in the Association's pre-tax earnings for fiscal
1997 compared to fiscal 1996, offset by a $136,000 deferred tax expense related
to the change in income tax law relating to the Association's tax bad debt
reserve. The 1997 effective tax rate was also impacted by a reduced state
income tax rate also attributable to the deferred federal income tax expense
recognition. The Association's effective tax rate for fiscal 1997 was 62.1% as
compared to 37.8% for fiscal 1996 as a result of this change.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, principal and
interest payments on loans, mortgage-backed and investment securities. The
Association uses the funds generated to support its lending and investment
activities as well as any other demands for liquidity such as deposit outflows.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows, mortgage prepayments and the exercise of call features
are greatly influenced by general interest rates, economic conditions and
competition. The Association has continued to maintain the required levels of
liquid assets as defined by OTS regulations. This requirement of the OTS,
which may be varied at the direction of the OTS depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and
short-term borrowings. The Association's currently required liquidity ratio is
4.0%. At June 30, 1998, 1997, 1996, 1995, and 1994, the Association's
liquidity ratios were 22.9%, 21.1%, 21.1%, 19.4% and 25.6%, respectively.
At June 30, 1998, the Association exceeded all of its regulatory
capital requirements with a tangible capital level of $9.4 million, or 8.4% of
total adjusted assets, which is above the required level of $1.7 million, or
1.5%; core capital of $9.4 million, or 8.4%, of total adjusted assets, which is
above the required level of $4.5 million, or 4.0% and risk-based capital of
$9.8 million, or 16.9%, of risk-weighted assets, which is above the required
level of $4.6 million, or 8.0%. See "Regulatory Capital Compliance."
37
42
The Association has other sources of liquidity if a need for
additional funds arises, including FHLB advances. At June 30, 1998, the
Association did not have any advances outstanding from the FHLB, and at June
30, 1998 had an overall borrowing capacity from the FHLB of $5.9 million.
The Association's most liquid assets are cash and due from banks,
interest-bearing deposits with banks and its investment and mortgage-related
securities available-for-sale. The levels of these assets are dependent on the
Association's operating, financing, lending and investing activities during any
given period. At June 30, 1998, cash and due from banks, interest-bearing
deposits with banks and investment securities available for sale totalled $19.8
million, or 17.7% of total assets.
At June 30, 1998, the Association had commitments to originate loans
and unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $2.0 million. The Association anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificate accounts, which are scheduled to mature in less than one year from
June 30, 1998, totalled $38.8 million. The Association expects that
substantially all of the maturing certificate accounts will be retained by the
Association at maturity.
The initial impact of the Conversion on the liquidity and capital
resources of the Company will be significant as it will substantially increase
the liquid assets of the Company and the capital base on which the Company
operates. Additionally, the Company expects the substantial majority of
Conversion proceeds will initially be invested in readily marketable investment
grade securities which, if liquidity needs developed, could be sold by the
Company to provide additional liquidity. Further, the additional capital
resulting from the Offerings is expected to increase the capital base of the
Company. At June 30, 1998, the Association had total equity, determined in
accordance with GAAP, of $9.2 million, or 8.2% of total assets, which
approximated the Association's regulatory tangible capital at that date of 8.4%
of assets. An institution with a ratio of tangible capital to total assets of
greater than or equal to 5% is considered to be "well-capitalized" pursuant to
OTS regulations. Assuming that the Company uses 50% of the net proceeds at
the maximum of the Estimated Price Range to purchase the stock of the
Association, the Association's GAAP capital will increase to $16.9 million or a
ratio of GAAP capital to adjusted assets, on a pro forma basis, of 14.1% after
the Conversion. In the event that the holding company form of organization is
not utilized and all of the net Conversion proceeds, at the midpoint of the
Estimated Price Range, are retained by the Association, the Association's
ratios of tangible and core capital to adjusted assets, on a pro forma basis,
will both increase to 18.0% after Conversion. The investment of the net
proceeds from the sale of the Common Stock is expected to provide the
Association with additional income to increase further its capital position.
The additional capital may also assist the Association in offering new programs
and expanded services to its customers. See "Use of Proceeds."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "96" is stored on the
system and represents 1996. The Association relies significantly on an outside
service bureau. That service bureau has completed its inventory and assessment
of its "Year 2000" compliance and is scheduled to have resolved all identified
problems by the end of 1998. This will provide for a full year of testing for
compliance. The Association has also completed its inventory and assessment
and has completed upgrading its internal system to handle the "Year 2000"
problem. The Association currently is testing its upgrades and will perform
extensive tests with the service bureau system. The cost to the Association
for the internal upgrade, not including staff time, has been less than $50,000.
There can be no assurances, however, that the performance by the Association
and its service bureau will be effective to remedy all potential problems. To
the extent the Company's systems are not fully Year 2000 compliant, there can
be no assurance that potential systems interruptions or the cost necessary to
update software would not have a materially adverse effect on the Company's
business, financial condition, results of operations and business prospects.
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IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results generally in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Association's operations. Unlike industrial companies, nearly all
of the assets and liabilities of the Association are monetary in nature. As a
result, interest rates have a greater impact on the Association's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. In June 1996, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it
no longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with a pledge of collateral.
The Statement became effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Adoption of this Statement did not have a material
impact on the net income, equity, or financial position of the Association.
ACCOUNTING FOR EARNINGS PER SHARE. In February 1997, the FASB issued
SFAS No. 128, "Earnings Per Share." This statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities
with publicly-held common stock or potential common stock. This statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, "Earnings Per Share," and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods, and earlier application is not permitted.
REPORTING COMPREHENSIVE INCOME. In September 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Association will make the appropriate
disclosures in the applicable financial statements, as required.
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
In September 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services,
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geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. Management has not
yet determined the impact, if any, of this statement on the Association.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In
June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
connection with the implementation of SFAS No. 133, the Association may
transfer debt securities classified as held-to-maturity to the
available-for-sale category. Such a transfer will not call into question the
Association's intention to hold other debt to maturity in the future. SFAS No.
133 is effective for financial statements for periods beginning after June 15,
1999. Management has not yet determined the impact, if any, of this statement
on the Association.
BUSINESS OF THE ASSOCIATION
GENERAL
The Association's principal business has been and continues to be
attracting retail deposits from the general public in the areas surrounding its
four banking offices and investing those deposits, together with funds
generated from operations, primarily in one- to four-family mortgage loans and
consumer loans. The Association currently originates, for investment,
adjustable- and fixed-rate one- to four-family mortgage loans, as well as a
variety of consumer loans, including home equity loans, lines of credit,
automobile and education loans. To a lesser extent, the Association also
originates multi-family and commercial real estate loans and construction
loans. The Association also invests in mortgage-related and investment
securities, primarily U.S. government and agency obligations, and certificates
of deposit in other financial institutions and other permissible investments.
The Association's revenues are derived principally from interest on its loans,
and to a lesser extent, interest and dividends on its investment and
mortgage-related securities and certificates of deposit investments, and other
noninterest income. The Association's primary sources of funds are deposits
and principal and interest payments on loans and mortgage-related securities.
MARKET AREA AND COMPETITION
The Association is a community-oriented banking institution offering a
variety of financial products and services to meet the needs of the communities
it serves. The Association's lending and deposit gathering is concentrated in
its market area consisting of Luzerne and Carbon counties in Northeast
Pennsylvania. The Association invests primarily in loans secured by first and
second mortgages on properties located in its market area.
The Association maintains two banking branch offices in Hazleton (in
Luzerne County), one in Weatherly (in Carbon County), and one in Drums (in
Luzerne County). Hazleton is situated approximately 100 miles from
Philadelphia and New York City and approximately 50 miles from Allentown and
the Wilkes-Barre/Scranton area.
The economy of the greater Hazleton area is characterized by
diversified light manufacturing and is the site of production facilities for
several manufacturers including Union Camp, Hershey-Cadbury Chocolates,
Quebacor and Hazleton Pumps, Inc. As a consequence, the manufacturing sector
employs more than one third of the area's work force. The Hazleton area has
excellent access to major highway transportation routes including Interstates
80 and 81 as well as rail transportation. The population of Luzerne County has
remained relatively static and has one of the oldest average ages for all
counties in the United States. The unemployment rate in the area is greater
than the national average.
The Association faces significant competition both in generating loans
and in attracting deposits. The Association's primary market area is highly
competitive and the Association faces direct competition from a significant
number of financial institutions, many with a state wide or regional presence
and, in some cases, a national presence.
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45
Many of these financial institutions are significantly larger and have greater
financial resources than the Association. The Association's competition for
loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from savings banks and
associations, commercial banks and credit unions. In addition, the Association
faces increasing competition for deposits from non-bank institutions such as
brokerage firms and insurance companies in such instruments as short-term money
market funds, corporate and government securities funds, mutual funds and
annuities. Competition may also increase as a result of the removal of
restrictions on the interstate operations of financial institutions. See "Risk
Factors--Highly Competitive Industry and Geographic Area."
In addition, the Association recognizes that its customer base
increasingly focuses on convenience and access to services. The Association
has addressed these customer desires recently through the implementation of
telephone banking system and the introduction of a new debit card.
Additionally, the Association intends to expand its telephone banking system to
promote bill payment services and install automated teller machines ("ATMs").
The Association will continue to evaluate and enhance its service delivery
system.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Association's loan portfolio consists
primarily of mortgage loans secured by one- to four-family residential real
estate, consumer loans and multi-family and commercial real estate loans. At
June 30, 1998, the Association's loans totalled $69.9 million, of which $54.7
million, or 78.2%, were one- to four-family residential mortgage loans. Total
real estate mortgage loans included 28.7% of adjustable-rate loans, which are
indexed primarily to the United States Treasury Bill rates and the prime rate
as reported in The Wall Street Journal.
The Association's consumer loans at June 30, 1998 aggregated $9.9
million, or 14.2% of total loans. Such consumer loans included $6.3 million of
home equity loans and lines of credit, $1.0 million of automobile loans,
$345,000 of education loans and $2.3 million of other consumer loans. At June
30, 1998, the Association also had $5.3 million, or 7.6% of total loans, in
multi-family and commercial real estate loans and construction loans.
The types of loans that the Association may originate are subject to
federal and state laws and regulations. Interest rates charged by the
Association on loans are affected by the demand for such loans and the supply
of money available for lending purposes and the rates offered by competitors.
These factors are, in turn, affected by, among other things, economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, and legislative tax policies.
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46
The following table sets forth the composition of the Association's
loan portfolio in dollar amounts and as a percentage of the portfolio at the
dates indicated.
AT JUNE 30,
-----------------------------------------------------------
1998 1997
------------------------------ --------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Real estate loans:
One- to four-family.......................... $54,722 78.24% $53,685 79.59%
Multi-family and commercial.................. 4,757 6.80 3,263 4.84
Construction................................. 523 0.75 194 0.29
------- ------ ------- ------
Total real estate loans................ 60,002 85.79 57,142 84.72
------- ------ ------- ------
Consumer loans:
Home equity loans and
lines of credit............................ 6,306 9.02 6,848 10.15
Automobile................................... 967 1.38 1,067 1.58
Education.................................... 345 0.49 16 0.02
Secured by deposits.......................... 907 1.30 937 1.39
Other........................................ 1,410 2.02 1,441 2.14
------- ------ ------- ------
Total consumer loans................... 9,935 14.21 10,309 15.28
------- ------ ------- ------
Total loans............................... 69,937 100.00% 67,451 100.00%
====== ======
Less:
Deferred loan origination fees
and discounts.............................. 274 284
Allowance for loan losses.................... 452 429
------- -------
Total loans, net.......................... $69,211 $66,738
======= =======
AT JUNE 30,
-------------------------------------------------------------
1996 1995
------------------------------ ----------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Real estate loans:
One- to four-family.......................... $51,561 78.36% $50,494 78.11%
Multi-family and commercial.................. 2,955 4.49 2,538 3.93
Construction................................. 298 0.45 505 0.78
------- ------ ------- ------
Total real estate loans................ 54,814 83.30 53,537 82.82
------- ------ ------- ------
Consumer loans:
Home equity loans and
lines of credit............................ 6,820 10.37 7,208 11.14
Automobile................................... 1,245 1.89 1,362 2.11
Education.................................... 711 1.08 568 0.88
Secured by deposits.......................... 858 1.30 812 1.26
Other........................................ 1,353 2.06 1,159 1.79
------- ------ ------- ------
Total consumer loans................... 10,987 16.70 11,109 17.18
------- ------ ------- ------
Total loans............................... 65,801 100.00% 64,646 100.00%
====== ======= ======
Less:
Deferred loan origination fees
and discounts.............................. 283 302
Allowance for loan losses.................... 447 401
------- -------
Total loans, net.......................... $65,071 $63,943
======= =======
AT JUNE 30,
------------------------------
1994
------------------------------
PERCENT
AMOUNT OF TOTAL
------ --------
(DOLLARS IN THOUSANDS)
Real estate loans:
One- to four-family.......................... $47,015 81.28%
Multi-family and commercial.................. 2,143 3.71
Construction................................. 407 0.70
------- -----
Total real estate loans................ 49,565 85.69
------- -----
Consumer loans:
Home equity loans and
lines of credit............................ 5,361 9.27
Automobile................................... 796 1.38
Education.................................... 341 0.59
Secured by deposits.......................... 685 1.18
Other........................................ 1,092 1.89
------ ------
Total consumer loans................... 8,275 14.31
------ ------
Total loans............................... 57,840 100.00%
======
Less:
Deferred loan origination fees
and discounts.............................. 278
Allowance for loan losses.................... 215
------
Total loans, net.......................... $57,347
=======
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LOAN MATURITY. The following table shows the remaining contractual
maturity of the Association's total loans at June 30, 1998. The table does not
include the effect of future principal prepayments.
AT JUNE 30, 1998
-----------------------------------------------------------
MULTI-
ONE- TO FAMILY AND
FOUR- COMMERCIAL TOTAL
FAMILY(1) REAL ESTATE CONSUMER LOANS
------------- --------------- ------------ --------
(IN THOUSANDS)
Amounts due in:
One year or less.......................................... $ 11 $ -- $ 242 $ 253
After one year:
More than one year to three years................ 330 426 1,589 2,345
More than three years to five years.............. 1,313 327 2,888 4,528
More than five years to 10 years ................ 8,393 360 5,095 13,848
More than 10 years to 15 years .................. 16,920 2,633 81 19,634
More than 15 years .............................. 27,377 1,912 40 29,329
------- ------ ------ -------
Total amount due.............................. $54,344 $5,658 $9,935 $69,937
======= ====== ====== =======
- ---------------------------
(1) Includes construction loans for the construction of one- to four-family
residences, which generally convert to permanent financing upon completion
of the construction phase.
The following table sets forth, at June 30, 1998, the dollar amount of
loans contractually due after June 30, 1999, and whether such loans have fixed
interest rates or adjustable interest rates.
DUE AFTER JUNE 30, 1999
-----------------------------------------
FIXED ADJUSTABLE TOTAL
---------- -------------- --------
(IN THOUSANDS)
Real estate loans:
One- to four-family(1)............................ $40,904 $13,263 $54,167
Multi-family and commercial ...................... 1,893 3,931 5,824
------- ------- -------
Total real estate loans........................ 42,797 17,194 59,991
Consumer loans ...................................... 8,235 1,458 9,693
------- ------- -------
Total loans.................................... $51,032 $18,652 $69,684
======= ======= =======
- ---------------------------
(1) Includes construction loans for the construction of one- to
four-family residences, which generally convert to permanent financing
upon completion of the construction phase.
ORIGINATION AND SALE OF LOANS. The Association's mortgage lending
activities are conducted primarily by its loan personnel operating at its
banking offices. All loans originated by the Association are underwritten
pursuant to the Association's policies and procedures. For fiscal 1998 and
1997, the Association originated $14.8 million and $13.4 million of loans,
respectively. The Association originates both adjustable- and fixed-rate
loans. The Association's ability to originate fixed- or adjustable-rate loans
is dependent upon the relative customer demand for such loans, which is
affected by the current and expected future level of interest rates. All real
estate loans originated by the Association are originated for investment.
During fiscal years 1998 and 1997, the Association originated $8.6
million and $7.1 million, respectively, of one- to four-family mortgage loans.
In addition, during fiscal years 1998 and 1997, the Association originated $2.1
million and $1.4 million, respectively, of construction loans, all of which
were for owner financing of single-family properties, which, upon completion of
the construction phase, generally will convert to permanent financing. Also,
the Association originated $1.0 million and $872,000, respectively, of
multi-family and commercial real estate loans during fiscal 1998 and 1997.
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Also, during fiscal 1998 and 1997, respectively, the Association
originated $3.6 million and $4.0 million of consumer loans, consisting of $1.4
million and $2.0 million, respectively, of home equity loans and lines of
credit, $813,000 and $713,000, respectively, of automobile loans, $457,000 and
$191,000, respectively, of education loans, and $913,000 and $1.1 million,
respectively, of other consumer loans.
The following table sets forth the Association's loan originations and
principal repayments and prepayments for the periods indicated:
FOR THE FISCAL YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1997 1996
------- ------- --------
(IN THOUSANDS)
Loans at beginning of period........................ $68,882 $66,604 $65,282
Originations:
Real estate:
One- to four-family........................ 8,567 7,109 6,500
Multi-family and commercial................ 1,034 872 681
Construction .............................. 2,060 1,362 1,269
------ ------ ------
Total real estate loans ................ 11,661 9,343 8,450
------ ------ ------
Consumer:
Home equity loans and lines of credit...... 1,374 1,974 1,367
Automobile ................................ 813 713 919
Education.................................. 457 191 210
Unsecured lines of credit.................. -- -- --
Other...................................... 913 1,168 947
------ ------ ------
Total consumer loans.................... 3,557 4,046 3,443
------ ------ ------
Total loans originated.................. 15,218 13,389 11,893
------ ------ ------
Deduct:
Principal loan repayments and prepayments........ 12,335 10,593 10,326
Transfers to foreclosed real estate.............. 718 518 245
------ ------ ------
Total deductions........................ 13,053 11,111 10,571
------ ------ ------
Net loan activity .................................. 2,165 2,278 1,322
------ ------ ------
Loans at end of period (1).................... $71,047 $68,882 $66,604
====== ====== ======
- ------------------------
(1) Loans at end of period include loans in process of $1.1 million, $1.4
million and $803,000 for fiscal years 1998, 1997 and 1996, respectively.
ONE- TO FOUR-FAMILY MORTGAGE LENDING. One- to four-family mortgage
loan originations are generally obtained by the Association's in-house loan
representatives, from existing or past customers, and through referrals from
members of the Association's local community. At June 30, 1998, the
Association's one- to four-family mortgage loans totalled $54.7 million, or
78.2% of total loans. Of the one- to four-family mortgage loans outstanding at
that date, 75.5% were fixed-rate mortgage loans and 24.5% were adjustable-rate
mortgage ("ARM") loans.
The Association currently offers a variety of fixed-rate mortgage
loans, including 30-year and 15-year mortgage loans. The Association also
currently offers ARM loans with a term of 30 years and an interest rate which
adjusts annually from the outset of the loan. The interest rates for the
Association's ARM loans adjust in accordance with an index based on United
States Treasury Bill rates. The Association originates ARM loans with
initially discounted rates, often known as "teaser rates." The Association's
ARM loans generally provide for periodic (not more
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49
than 2%) caps on the increase or decrease in the interest at any adjustment
date. Currently, the Association has a contractual rate ceiling of 5% over the
life of the loan.
The origination of ARM loans, as opposed to fixed-rate residential
mortgage loans, helps reduce the Association's exposure to increases in
interest rates. However, adjustable-rate loans generally pose credit risks not
inherent in fixed-rate loans, primarily because as interest rates rise, the
underlying payments of the borrower rise, thereby increasing the potential for
default. Periodic and lifetime caps on interest rate increases help to reduce
the credit risks associated with adjustable-rate loans but also limit the
interest rate sensitivity of such loans.
Most one-to-four-family mortgage loans are underwritten according to
FNMA and FHLMC guidelines. Generally, the Association originates
one-to-four-family residential mortgage loans in amounts up to 80% of the lower
of the appraised value or the selling price of the property securing the loan
and up to 95% of the appraised value or selling price if private mortgage
insurance ("PMI") is obtained. Mortgage loans originated by the Association
generally include due-on-sale clauses which provide the Association with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Association's consent.
Due-on-sale clauses are an important means of adjusting the yields on the
Association's fixed-rate mortgage loan portfolio and the Association has
generally exercised its rights under these clauses. The Association requires
fire, casualty, title and, in certain cases, flood insurance on all properties
securing real estate loans made by the Association.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Association
originates adjustable-rate multi-family and commercial real estate loans that
generally are secured by properties used for a combination of residential and
retail purposes. Also, the Association participates in commercial real estate
loans promoted by a local regional development agency. At June 30, 1998, the
Association had $4.8 million of multi-family and commercial real estate loans.
At that date, the Association's largest multi-family or commercial real estate
loan were five commercial real estate loans which ranged from $264,000 to
$395,000 and were secured by commercial real estate a combination of lease
assignments, rents and equipment.
A multi-family mortgage loan may be made to an amount up to 70% of the
lower of the appraised value or sales price of the underlying property with a
term of up to 30 years. The Association's adjustable-rate multi-family loans
are offered at interest rates which adjust annually. The Association also
generally requires an appraisal on the property conducted by an independent
appraiser and title insurance.
The Association's underwriting procedures for commercial real estate
loans provide that such loans generally may be made in amounts up to 70% of the
lower of the appraised value or purchase price of the property unless the
property is owned by an individual who lives more than 50 miles from the
property. In those cases, a commercial real estate loan may only be made in
amounts up to 65% of the lower of the appraised value or purchase price of the
property. The Association may request PMI on a case by case basis. These
adjustable-rate loans may be made with terms up to 20 years and are generally
offered at interest rates which adjust every five years, in accordance with an
index based on the prime rate as published in The Wall Street Journal. The
factors considered by the Association include: the net operating income of the
mortgaged premises before debt service and depreciation; the debt coverage
ratio (the ratio of net earnings to debt service); and the ratio of loan amount
to appraised value.
Multi-family and commercial real estate loans generally are considered
to involve a higher degree of credit risk than financing on improved,
owner-occupied real estate. Multi-family and commercial real estate loans
generally involve larger principal amounts than one- to four-family residential
mortgage loans. In addition, because multi-family and commercial real estate
loans often are dependent on successful operation and management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy to a greater extent than one- to four-family
residential loans.
CONSTRUCTION LENDING. The Association also offers residential
construction loans. Such lending has consisted primarily of loans for the
construction of presold one- to four-family residences which convert into
permanent financing upon the completion of construction. The Association
generates residential construction loans primarily through direct contact with
the borrower or home builders, and these loans involve properties located in
the Association's market area.
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50
Such loans require that an appraisal be conducted by a qualified appraiser and
the Association review plans, specifications and cost estimates. The appraiser
must also conduct an inspection following completion of the work. The amount of
construction advances to be made, together with the sum of previous
disbursements, may not exceed the percentage of completion of the construction.
The maximum loan-to-value ratio for such loans is 95%. Furthermore, borrowers
have six months to complete the home and only pay interest on amounts disbursed
during the construction process. The Association requires that it possess the
first and only lien on these types of loans. At June 30, 1998, the
Association's largest construction loan was a performing loan with an aggregate
commitment of $396,000 secured by a single-family residence located in Luzerne
County. At that date, construction loans totalled $523,000 (net), or 0.8% of
the Association's total loans. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development.
CONSUMER LENDING. Consumer loans at June 30, 1998 amounted to $9.9
million or 14.2% of the Association's total loans. These loans include home
equity loans and lines of credit, automobile loans, education loans and other
consumer loans. Such loans are generally originated in the Association's
primary market area and if over $5,000 must be secured by real estate,
automobiles or a titled vehicle. These loans are typically shorter term and
generally have higher interest rates than one- to four-family mortgage loans.
The maximum limit on consumer loans, excluding home equity loans and home
equity lines of credit, is $50,000.
At June 30, 1998, home equity loans and lines of credit accounted for
$6.3 million, or 9.0% of total loans and 63.5% of consumer loans. The
Association generally offers home equity loans with terms of up to 120 months.
The Association also offers home equity lines of credit with terms up to 120
months with adjustable rates of interest which adjust on a quarterly basis.
The adjustable rate of interest is indexed to the prime rate as reported in The
Wall Street Journal on the last day of the month preceding adjustment.
Generally, the maximum loan-to-value ratio on both home equity loans and home
equity lines of credit is 75%.
The Association also offers automobile loans on both new and used
cars. Loans are offered with 60 month terms and loan-to-value ratios of 80% on
new cars. The Association will also finance high dollar new cars for an
extended term greater than 60 months. For used cars, the maximum loan-to-value
ratio is the lesser of the retail value shown in the NADA Used Car Guide or the
contract price and the terms for such loans are determined based on the age of
the vehicle, but are generally limited to 60 months. However, the Association
will not make a loan on an automobile over five years old unless such
automobile is deemed an investment property. In those cases, an inspection is
required and the valuation is determined by the retail value as listed in the
Cars of Particular Interest booklet. The Association also offers loans on
recreational vehicles with terms up to 15 years for new and 84 months for used
vehicles and loan-to- value ratios of 80% for new and used recreational
vehicles.
Other consumer loans include education loans which are federally
guaranteed and originated under regulations of the Pennsylvania Higher
Education Assistance Agency, deposit-secured loans, and other personal and
unsecured loans. During the last two years, it has become the policy of the
Association to sell its education loans once the borrower has left school to
Sallie Mae with servicing released.
Loans secured by rapidly depreciable assets such as automobiles or
that are unsecured entail greater risks than one- to four-family mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely
to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
establishes the lending policies and loan approval limits of the Association.
Such policies provide that all mortgage loans will be reviewed and either
approved or rejected by the Executive Committee of the Board of Directors or
the full Board of Directors, except those loans made under consumer lending
guidelines. Additionally, the Board of Directors has authorized the following
persons to approve loans up to the amounts indicated: branch managers may
approve loans up to $5,000; the Vice President,
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51
Lending may approve loans up to $10,000; loans up to $20,000 may be approved by
the Association's President and Chief Executive Officer; two officers
signatures are required for loans over $20,000 but less than $30,000; and loans
over $30,000 require the approval of the Board of Directors. All approved
loans are reported monthly to the Board of Directors.
DELINQUENT LOANS, CLASSIFIED ASSETS AND FORECLOSED REAL ESTATE
DELINQUENCIES AND CLASSIFIED ASSETS. Reports listing all delinquent
accounts are generated and reviewed by management and the Board of Directors on
a monthly basis. The procedures taken by the Association with respect to
delinquencies vary depending on the nature of the loan, period and cause of
delinquency and whether the borrower has been habitually delinquent. When a
borrower fails to make a required payment on a loan, the Association takes a
number of steps to have the borrower cure the delinquency and restore the loan
to current status. The Association generally sends the borrower a written
notice of non-payment after the loan is first past due. The Association's
guidelines provide that telephone, written correspondence and/or face-to-face
contact will be attempted to ascertain the reasons for delinquency and the
prospects of repayment. When contact is made with the borrower at any time
prior to foreclosure, the Association will attempt to obtain full payment, work
out a repayment schedule with the borrower to avoid foreclosure or, in some
instances, accept a deed in lieu of foreclosure. In the event payment is not
then received or the loan not otherwise satisfied, additional letters and
telephone calls generally are made. If the loan is still not brought current
or satisfied and it becomes necessary for the Association to take legal action,
which typically occurs after a loan is 90 days or more delinquent, the
Association will commence foreclosure proceedings against any real or personal
property that secures the loan. If a foreclosure action is instituted and the
loan is not brought current, paid in full, or refinanced before the foreclosure
sale, the property securing the loan generally is sold at foreclosure and, if
purchased by the Association, becomes foreclosed real estate.
Applicable regulations and the Association's Asset Classification
Policy require that the Association utilize an internal asset classification
system as a means of reporting problem and potential problem assets. The
Association has incorporated the OTS internal asset classifications as a part
of its credit monitoring system. The Association currently classifies problem
and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An
asset is considered "Substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "Doubtful" have all
of the weaknesses inherent in those classified "Substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified as "Loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the
policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality
47
52
problems; that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management has
established acceptable allowance evaluation processes that meet the objectives
set forth in the policy statement. Although management believes that, based on
information currently available to it at this time, its allowance for loan
losses is adequate, actual losses are dependent upon future events and, as
such, further additions to the level of allowances for loan losses may become
necessary. In addition, the OTS or other banking agencies may require the
Association to recognize additions to the allowance, based on their judgments
about information available to them at the time of their examination.
The Board of Directors and management review the results of the
reports on a monthly basis. The Association classifies assets in accordance
with the management guidelines described above. At June 30, 1998, the
Association had $1.9 million of assets designated as Substandard which
consisted of mortgage and consumer loans. At that same date the Association
had $6,000 of assets classified as Loss consisting of four loans. All assets
designated Loss by the Association are fully reserved. The following table
sets forth the delinquencies in the Association's loan portfolio as of the
dates indicated.
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------------- -------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------- ------------------------ -------------------- ---------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF OF BALANCE OF OF BALANCE OF OF BALANCE OF
LOANS LOANS LOANS LOANS LOANS LOANS LOANS LOANS
------- ---------- --------- ------------- ------- ----------- ---------- ---------------
(DOLLARS IN THOUSANDS)
Real Estate Loans:
One- to four-family ...... 3 $112 21 $1,443 9 $717 19 $1,188
Multi-family and
commercial.............. -- -- 6 247 -- -- 5 174
Consumer Loans:
Home equity loans and
lines of credit ........ -- -- 11 200 1 40 10 200
Automobile................ 2 9 -- -- 1 1 2 13
Other .................... 4 7 4 6 1 -- 2 11
------ ------ ------ ------ ----- ------- ------ ------
Total.................. 9 $ 128 42 $1,896 12 $758 38 $1,586
====== ====== ====== ====== ===== ======= ====== ======
Delinquent Loans to
Total Loans .............. 0.18% 2.74% 1.14% 2.38%
JUNE 30, 1996
--------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
--------------------------- ----------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF OF BALANCE OF
LOANS LOANS LOANS LOANS
----------- ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
Real Estate Loans:
One- to four-family .............................. 6 $146 17 $1,050
Multi-family and commercial ...................... -- -- 6 304
Consumer Loans:
Home equity loans and lines of credit ............ 2 21 5 116
Automobile........................................ 1 -- 2 8
Other ............................................ 7 12 4 14
------ ------ ------ ------
Total.......................................... 16 $179 34 $1,492
====== ====== ====== ======
Delinquent Loans to Total Loans...................... 0.27% 2.29%
NONPERFORMING ASSETS AND IMPAIRED LOANS. The following table sets
forth information regarding nonaccrual loans, foreclosed real estate (including
a $66,000 loan which was a troubled debt restructuring effect in 1998) and
troubled debt restructurings. At June 30, 1998, nonaccrual loans and troubled
debt restructurings totalled $1.9 million and consisted of 42 loans. At such
date, foreclosed real estate totalled $221,000 and consisted of seven one- to
four-
48
53
family properties. It is the policy of the Association to cease accruing
interest on loans 90 days or more past due (unless the loan principal and
interest are determined by management to be fully secured and in the process of
collection) and to charge off all accrued interest. For the year ended June
30, 1998, the amount of additional interest income that would have been
recognized on nonaccrual loans if such loans had continued to perform in
accordance with their contractual term was approximately $102,000. At June 30,
1998, the Association had a $291,000 recorded investment in impaired loans
which had specific allowances of $35,000. At June 30, 1997, there were
$175,000 of impaired loans with specific loan loss allowances of $60,000.
AT JUNE 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
One- to four-family real estate ........................ $1,477 $1,188 $1,055 $1,087 $1,220
Consumer ............................................... 206 224 138 178 146
Multi-family and commercial ............................ 181 174 304 326 151
------ ------ ------ ------ ------
Total(1) ............................................ 1,864 1,586 1,497 1,591 1,517
Foreclosed real estate(2) ................................. 221 531 171 -- 107
------ ------ ------ ------ ------
Total nonperforming assets(3) ....................... 2,085 2,117 1,668 1,591 1,624
Troubled debt restructurings .............................. -- -- 373 -- --
------ ------ ------ ------ ------
Troubled debt restructurings and
total nonperforming assets .............................. $2,085 $2,117 $2,041 $1,591 $1,624
====== ====== ====== ====== ======
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans ............................... 2.69% 2.38% 2.87% 2.49% 2.65%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets .............................. 1.86% 1.97% 1.89% 1.53% 1.59%
- -------------------------------
(1) Total nonaccrual loans equals total nonperforming loans.
(2) Foreclosed real estate balances are shown net of related loss allowances.
(3) Nonperforming assets consist of nonperforming loans (and impaired loans)
and foreclosed real estate.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is
established through a provision for loan losses based on management's
evaluation of the risks inherent in its loan portfolio and the general economy.
The allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed
probable and estimable based on information currently known to management. The
allowance is based upon a number of factors, including current economic
conditions, actual loss experience and industry trends. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowance for loan losses. Such agencies
may require the Association to make additional provisions for estimated loan
losses based upon their judgments about information available to them at the
time of their examination. As of June 30, 1998, the Association's allowance for
loan losses was 0.65% of total loans compared to 0.64% as of June 30, 1997.
The Association had nonaccrual loans of $1.9 million and $1.6 million at June
30, 1998 and June 30, 1997, respectively. The increase in the allowance from
June 30, 1997 to June 30, 1998 was the result of an increase in the average
amount of loans from $66.7 million at June 30, 1997 to $69.3 million at June
30, 1998, as well as an increase in charge-off experience. The Association
will continue to monitor and modify its allowances for loan losses as
conditions dictate. While management believes the Association's allowance for
loan losses at June 30, 1998 is sufficient to cover losses inherent in its loan
portfolio, no assurances can be given that the Association's level of allowance
for loan
49
54
losses will be sufficient to cover future loan losses incurred by the
Association or that future adjustments to the allowance for loan losses will
not be necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.
The following table sets forth activity in the Association's allowance
for loan losses for the periods indicated.
AT OR FOR THE FISCAL YEARS ENDED JUNE 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning of year .............. $429 $447 $401 $215 $182
Charged-off loans:
One- to four-family real estate ............... 165 -- -- -- --
Multi-family and commercial real estate ....... 6 -- -- -- --
Consumer ...................................... 7 41 24 59 31
---- ---- ---- ---- ----
Total charged-off loans ..................... 178 41 24 59 31
---- ---- ---- ---- ----
Recoveries on loans previously charged off:
One- to four-family real estate ............... 22 -- -- -- --
Consumer ...................................... 3 9 12 1 1
---- ---- ---- ---- ----
Total recoveries ............................ 25 9 12 1 1
---- ---- ---- ---- ----
Net loans charged-off ..................................... (153) (32) (12) (58) (30)
Provision for loan losses ................................. 176 34 102 249 46
Transfers to allowance for loss on
foreclosed assets ....................................... -- (20) (44) (5) 17
---- ---- ---- ---- ----
Allowance for loan losses, end of period .................. $452 $429 $447 $401 $215
==== ==== ==== ==== ====
Net loans charged-off to average
interest-earning loans .................................. 0.22% 0.05% 0.02% 0.09% 0.05%
---- ---- ---- ---- ----
Allowance for loan losses to total loans .................. 0.65% 0.64% 0.69% 0.63% 0.37%
---- ---- ---- ---- ----
Allowance for loan losses to nonperforming
loans and troubled debt restructuring ................... 24.25% 27.05% 23.90% 25.20% 14.17%
----- ----- ----- ----- -----
Net loans charged-off to allowance for
loan losses ............................................. (33.85)% (7.46)% (2.68)% (14.46)% (13.95)%
------ ----- ----- ------ ------
Recoveries to charge-offs ................................. 14.04% 21.95% 50.00% 1.69% 3.23%
----- ----- ----- ---- ----
50
55
The following table sets forth the Association's allowance for loan
losses in each of the categories listed at the dates indicated and the
percentage of such amounts to the total allowance and to total loans.
AT JUNE 30,
---------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------- -------------------------------- ----------------------------------
% OF PERCENT % OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY CATEGORY TO CATEGORY CATEGORY TO CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- ----------- -------- -------- ----------- -------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
Real estate(1) ......... $273 60.40% 80.08% $278 64.80% 80.95% $298 66.67% 80.17%
Consumer ............... 135 29.87 14.25 120 27.97 15.35 125 27.96 16.77
Multi-family and
commercial ............ 39 8.63 5.67 27 6.30 3.70 22 4.92 3.06
Unallocated ............ 5 1.10 -- 4 0.93 -- 2 0.45 --
---- ------ ------ ---- ------ ----- ---- ------ ------
Total allowance
for loan losses ...... $452 100.00% 100.00% $429 100.00% 100.00% $447 100.00% 100.00%
==== ====== ====== ==== ====== ====== ==== ====== ======
AT JUNE 30,
----------------------------------------------------------------------
1995 1994
---------------------------------- --------------------------------
% OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY CATEGORY TO CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- ----------- -------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
Real estate(1) ......... $275 68.58% 80.31% $139 64.65% 82.85%
Consumer ............... 110 27.43 17.27 67 31.16 14.38
Multi-family and
commercial ............ 13 3.24 2.42 5 2.33 2.77
Unallocated ............ 3 0.75 -- 4 1.86 --
---- ------ ----- ---- ------ ------
Total allowance
for loan losses ...... $401 100.00% 100.00% $215 100.00% 100.00%
==== ====== ====== ==== ====== ======
- ---------------------
(1) Includes one- to four-family real estate loans and construction loans.
51
56
FORECLOSED REAL ESTATE. At June 30, 1998, the Association had
$221,000 of foreclosed real estate consisting of seven one-to four-family
properties. When the Association acquires property through foreclosure or deed
in lieu of foreclosure, it is initially recorded at the lesser of carrying
value of the loan or fair value of the property at the date of acquisition less
costs to sell. Thereafter, if there is a further deterioration in value, the
Association provides for a specific valuation allowance and charges operations
for the diminution in value. It is the policy of the Association to have
obtained an appraisal or broker's price opinion on all real estate subject to
foreclosure proceedings prior to the time of foreclosure. It is the
Association's policy to require appraisals on a periodic basis on foreclosed
properties and conducts inspections on foreclosed properties.
INVESTMENT ACTIVITIES
Pennsylvania-chartered savings institutions have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies and certificates of deposit
of insured banks and savings institutions. Subject to various restrictions,
state-chartered savings institutions may also invest their assets in
investment-grade corporate debt securities and mutual funds whose assets
conform to the investments that a state-chartered savings institution is
otherwise authorized to make directly. Additionally, the Association must
maintain minimum levels of investments that qualify as liquid assets under OTS
regulations. See "Regulation -Federal Regulation of Savings
Institutions-Liquidity." Historically, the Association has maintained liquid
assets above the minimum OTS requirements and at a level considered to be
adequate to meet its normal daily activities.
The investment policy of the Association, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and
credit risk and to complement the Association's lending activities. The
Association primarily utilizes investments in securities for liquidity
management and as a method of deploying excess funding not utilized for loan
originations. Generally, the Association's investment policy is more
restrictive than the OTS regulations allow and, accordingly, the Association
has invested primarily in U.S. Government and agency securities, which qualify
as liquid assets under the OTS regulations, and U.S. Government sponsored
agency issued mortgage-backed securities. As required by SFAS No. 115, the
Association has established an investment portfolio of securities that are
categorized as held-to-maturity, available- for-sale or held for trading. The
Association generally invests in securities as a method of utilizing funds not
utilized for loan origination activity and as a method of maintaining liquidity
at levels deemed appropriate by management. The Association does not currently
maintain a portfolio of securities categorized as held for trading. At June
30, 1998, the available-for-sale securities portfolio totalled $7.9 million, or
7.1% of assets and the held-to-maturity portfolio totalled $20.8 million, or
18.6% of assets.
At June 30, 1998, the Association had invested $3.6 million in FNMA,
FHLMC and GNMA mortgage-related securities, or 3.2% of total assets, of which
62.8% were classified as held-to-maturity. In addition, $6.3 million, or 22.0%
of the Association's securities, were debt obligations issued by federal
agencies which generally have stated maturities from 3 to 15 years but which
also have call features. Such callable securities allow the issuer, after a
certain time period, to repay the security prior to its stated maturity. Based
on interest rate ranges anticipated by the Association, the Association
estimates that the substantial majority of such securities will be called prior
to their stated maturities. The Association is subject to additional interest
rate risk and reinvestment risk compared to its evaluation of that risk if
changes in interest rates exceed ranges anticipated by the Association in
estimating the anticipated life of such callable investment securities.
Investments in mortgage-related securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby changing the net
yield on such securities. There is also reinvestment risk associated with the
cash flows from such securities or in the event such securities are redeemed by
the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates. Of the Association's investment in
mortgage-related securities at June 30, 1998, 62.8% were being
held-to-maturity.
52
57
The following table sets forth certain information regarding the
amortized cost and fair value of the Association's securities at the dates
indicated.
AT JUNE 30,
------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- -------- --------- --------- --------
Investment securities: (IN THOUSANDS)
Debt securities held-to-maturity:
Obligations of U.S. government agencies.................. $ 2,801 $ 2,810 $ 7,425 $ 7,395 $ 5,947 $ 5,876
Certificates of deposit.................................. 15,457 15,457 12,595 12,595 11,477 11,474
Other securities......................................... 244 242 116 114 1,085 1,076
-------- -------- -------- -------- -------- --------
Total.............................................. 18,502 18,509 20,136 20,104 18,509 18,426
-------- -------- -------- -------- -------- --------
Debt securities available-for-sale:
Obligations of U.S. Treasury and U.S.
government agencies.................................... 3,548 3,548 -- -- 1,074 1,120
Other securities......................................... 2,561 2,406 2,188 2,010 2,636 2,394
-------- -------- -------- -------- -------- --------
Total.............................................. 6,109 5,954 2,188 2,010 3,710 3,514
-------- -------- -------- -------- -------- --------
Equity securities available-for-sale:
FHLB stock............................................... 594 594 566 566 542 542
-------- -------- -------- -------- -------- --------
Total investment securities........................ 25,205 25,057 22,890 22,680 22,761 22,482
-------- -------- -------- -------- -------- --------
Mortgage-related securities:
Mortgage-related securities held-to-maturity:
FHLMC.................................................... 472 477 1,698 1,698 1,058 1,067
FNMA..................................................... 1,450 1,458 1,904 1,905 1,676 1,665
GNMA..................................................... 200 203 267 273 314 314
Collateralized mortgage obligations...................... 159 159 837 831 2,517 2,498
-------- -------- -------- -------- -------- --------
Total mortgage-related securities held-to-
maturity.......................................... 2,281 2,297 4,706 4,707 5,565 5,544
-------- -------- -------- -------- -------- --------
Mortgage-related securities available-for-sale:
FHLMC.................................................... -- -- -- -- 342 343
FNMA..................................................... 578 582 678 656 764 739
GNMA..................................................... 740 771 982 1,016 1,132 1,164
-------- -------- -------- -------- -------- --------
Total mortgage-related securities available-
for-sale......................................... 1,318 1,353 1,660 1,672 2,238 2,246
-------- -------- -------- -------- -------- --------
Total mortgage-related securities.................. 3,599 3,650 6,366 6,379 7,803 7,790
-------- -------- -------- -------- -------- --------
Total securities................................... $28,804 $28,707 $29,256 $29,059 $30,564 $30,272
======== ======== ======== ======== ======== ========
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58
The following table sets forth the Association's securities activities
for the periods indicated.
FOR THE FISCAL YEARS ENDED JUNE 30,
----------------------------------------
1998 1997 1996
--------- ---------- ---------
(IN THOUSANDS)
MORTGAGE-RELATED SECURITIES:
Mortgage-related securities, beginning of period(1) ............... $ 6,378 $ 7,811 $ 7,409
======== ======== ========
Purchases,
Mortgage-related securities - held-to-maturity .................. 650 1,850 1,850
Maturities and calls,
Mortgage-related securities - held-to-maturity .................. (2,300) (1,941) --
Repayments and prepayments,
Mortgage-related securities ..................................... (1,125) (1,350) (1,407)
Increase(decrease) in net premium ................................. 8 4 (45)
Increase in unrealized gain ....................................... 23 4 4
-------- -------- --------
Net increase (decrease) in mortgage-related securities .......... (2,744) (1,433) 402
-------- -------- --------
Mortgage-related securities, end of period ........................ $ 3,634 $ 6,378 $ 7,811
======== ======== ========
INVESTMENT SECURITIES (2):
Investment securities, beginning of period(3) ..................... $ 22,712 $ 22,565 $ 21,849
======== ======== ========
Purchases,
Investment securities - held-to-maturity ........................ 12,571 11,597 13,291
Investment securities - available-for-sale ...................... 3,949 25 --
Sales,
Investment securities - available-for-sale ...................... -- (1,021) --
Repayments and prepayments ........................................ (22) (833) (680)
Maturities and calls:
Investment securities - held-to-maturity ........................ (14,176) (9,625) (11,646)
Investment securities - available-for-sale ...................... -- -- (266)
Increase (decrease) in net premium ................................ (7) (14) 16
Increase in unrealized gain ....................................... 23 18 1
-------- -------- --------
Net increase in investment securities ........................... 2,338 147 716
-------- -------- --------
Investment securities, end of period .............................. $ 25,050 $ 22,712 $ 22,565
======== ======== ========
- -------------------
(1) Includes mortgage-related securities available-for-sale.
(2) Includes certificates of deposit.
(3) Includes investment securities available-for-sale.
54
59
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Association's
investment securities and mortgage-related securities as of June 30, 1998.
AT JUNE 30, 1998
-------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN 5 YEARS
ONE YEAR OR LESS TO FIVE YEARS TO 10 YEARS
------------------------ ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
----------- ------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Held-to-maturity securities:
Investment securities:
Municipal securities(1) ...... $ -- --% $ -- --% $ -- --%
Obligations of U.S.
Government agencies ....... 250 5.70 500 6.45 1,500 7.14
Certificates of deposit ...... 11,498 5.88 3,959 6.23 -- --
Corporate obligations ........ -- -- -- -- -- --
Mortgage-related securities .... 670 5.04 431 6.92 508 7.33
------- ---- ------ ---- ------ ----
Total securities
at amortized cost ......... $12,418 5.83% $4,890 6.31% $2,008 7.19%
======= ==== ====== ==== ====== ====
Available-for-sale securities:
Investment securities:
Municipal securities(1) ...... $ -- --% $ -- --% $ 198 4.38%
Obligations of the U.S.
government agencies ....... -- -- 750 6.17 2,298 6.63
Equity securities ............ 595 4.96 -- -- -- --
Mutual funds ................. 2,187 -- -- -- -- --
Mortgage-related
securities .................... -- -- 279 6.56 3 8.99
------- ---- ------ ---- ------ ----
Total securities
at fair value ............. $ 2,782 4.96% $ 1,029 6.27% $ 2,499 6.45%
======= ==== ======= ==== ======= ====
AT JUNE 30, 1998
-----------------------------------------------
MORE THAN 10 YEARS TOTAL
----------------------- -----------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Held-to-maturity securities:
Investment securities:
Municipal securities(1) ...... $ 165 4.55% $ 165 4.55%
Obligations of U.S.
Government agencies ....... 551 7.39 2,801 6.94
Certificates of deposit ...... -- -- 15,457 5.97
Corporate obligations ........ 79 6.20 79 6.20
Mortgage-related securities .... 672 7.20 2,281 6.54
------ ---- ------- ----
Total securities
at amortized cost ......... $1,467 6.92% $20,783 6.15%
====== ==== ======= ====
Available-for-sale securities:
Investment securities:
Municipal securities(1) ...... 175 4.48% $ 373 4.42%
Obligations of the U.S.
government agencies ....... 500 6.99 3,548 6.58
Equity securities ............ -- -- 595 4.96
Mutual funds ................. -- -- 2,187 --
Mortgage-related
securities .................... 1,036 7.80 1,318 7.54
------ ---- ------- ----
Total securities
at fair value ............. $1,711 7.22% $ 8,021 6.47%
====== ==== ======= ====
- ----------------------
(1) Weighted average yield data for municipal securities is not presented on a
tax equivalent basis due to the immaterial amount of municipal securities
at June 30, 1998.
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments and cash flows
generated from operations are the primary sources of the Association's funds
for use in lending, investing and for other general purposes.
DEPOSITS. The Association offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposits consist of
checking, money market, savings, NOW, club accounts, certificate accounts and
Individual Retirement Accounts. More than 58% of the funds deposited in the
Association are in certificate of deposit accounts. At June 30, 1998, core
deposits (savings, NOW and money market accounts) represented 41.1% of total
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Deposits have remained relatively static in recent years.
Deposits increased $4.1 million, or 4.2%, from $98.5 million at June 30, 1997
to $102.6 million at June 30, 1998 and decreased $800,000, or 0.8%, the
previous year, from $99.3 million at June 30, 1996 to $98.5 million at June 30,
1997.
The Association's deposits are obtained predominantly from the areas
in which its branch offices are located. The Association has historically
relied primarily on customer service and long-standing relationships with
customers to attract and retain these deposits; however, market interest rates
and rates offered by competing financial institutions significantly affect the
Association's ability to attract and retain deposits. The Association uses
traditional means of advertising its deposit products, including radio and
print media and generally does not solicit deposits from outside its market
area. The Association has not actively solicited certificate accounts in
excess of $100,000 or used brokers to
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obtain deposits in recent years. However, the Association has used brokers to
obtain deposits in the past and if circumstances warranted, would in the future
seek deposits through those methods. At June 30, 1998, 64.2% of the
Association's certificate of deposit accounts were to mature within one year.
Further increases in short-term certificate of deposit accounts, which tend to
be more sensitive to movements in market interest rates than core deposits, may
result in the Association's deposit base being less stable than if it had a
large amount of core deposits which, in turn, may result in further increases
in the Association's cost of deposits.
The following table presents the deposit activity of the Association
for the periods indicated:
FOR THE FISCAL YEARS ENDED JUNE 30,
---------------------------------------------------
1998 1997 1996
--------- ----------- ----------
(IN THOUSANDS)
Increase (decrease) before interest credited .................... $ 977 $(4,077) $ (436)
Interest credited ............................................... 3,162 3,194 3,386
------- ------- -------
Net increase (decrease) ......................................... $ 4,139 $ (883) $ 2,950
======= ======= =======
At June 30, 1998, the Association had $13.6 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
MATURITY PERIOD AMOUNT
--------------- ------
(IN THOUSANDS)
Three months or less.................................... $2,095
Over 3 through 6 months................................. 3,342
Over 6 through 12 months................................ 2,729
Over 12 months.......................................... 5,385
------
Total........................................... $13,551
=======
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The following table sets forth the distribution of the Association's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented and such information at
June 30, 1998. Averages for the periods presented utilize month-end balances.
FOR THE FISCAL YEARS ENDED JUNE 30,
------------------------------------------------
AT JUNE 30, 1998 1998 1997
------------------------------------ -------------------------------------- ---------
PERCENT OF
PERCENT TOTAL
OF TOTAL AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE PAID BALANCE DEPOSITS RATE PAID BALANCE
------------ ---------- ---------- -------------- --------------------- ---------
(DOLLARS IN THOUSANDS)
Passbook and statement savings........... $ 29,053 28.32% 2.74% $ 28,788 28.68% 2.76% $ 30,996
Money market............................. 2,084 2.03 2.54 2,151 2.14 2.46 2,374
NOW...................................... 10,983 10.70 1.38 10,081 10.04 1.51 9,065
Certificates of deposit.................. 60,484 58.95 5.39 59,342 59.14 5.49 55,653
-------- ------ -------- ------ --------
Total average deposits............. $102,604 100.00% 4.15% $100,362 100.00% 4.24% $ 98,088
======== ====== ==== ======== ====== ==== ========
FOR THE FISCAL YEARS ENDED JUNE 30,
-------------------------------------------------------------------
1997 1996
----------------------------- ------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
DEPOSITS RATE PAID BALANCE DEPOSITS RATE PAID
----------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Passbook and statement savings........... 31.60% 2.67% $ 32,747 33.35% 2.84%
Money market............................. 2.42 2.53 2,692 2.74 2.75
NOW...................................... 9.24 1.49 9,106 9.27 2.09
Certificates of deposit.................. 56.74 5.40 53,653 54.64 5.66
------ -------- ------
Total average deposits............. 100.00% 4.11% $ 98,198 100.00% 4.31%
====== ==== ======== ====== ====
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The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at June 30, 1998.
PERIOD TO MATURITY FROM JUNE 30, 1998
------------------------------------------------------------
LESS ONE TWO TO OVER
THAN ONE TO TWO THREE THREE
YEAR YEARS YEARS YEARS TOTAL
---------- ------- ---------- ------- -------
(DOLLARS IN THOUSANDS)
CERTIFICATE ACCOUNTS:
2.60 to 4.00% . . . . . . . . . . . . . . $ 103 $ -- $ -- $ -- $ 103
4.01 to 5.00% . . . . . . . . . . . . . . 11,280 6 -- -- 11,286
5.01 to 6.00% . . . . . . . . . . . . . . 24,418 4,446 2,507 2,337 33,708
6.01 to 7.00% . . . . . . . . . . . . . . 3,006 5,005 1,865 4,574 14,450
7.01 to 8.00% . . . . . . . . . . . . . . -- 100 -- 837 937
---------- ------- ---------- ------- -------
Total certificate accounts . . . . . . $38,807 $9,557 $4,372 $7,748 $60,484
======= ====== ====== ====== =======
PROPERTIES
The Association currently conducts its business through four full
service banking offices located in Luzerne and Carbon counties in Northeast
Pennsylvania. The following table sets forth the Association's offices as of
June 30, 1998.
NET BOOK VALUE
ORIGINAL OF PROPERTY OR TOTAL
YEAR DATE OF LEASEHOLD DEPOSITS AT
LEASED OR LEASED OR LEASE IMPROVEMENTS AT JUNE 30,
LOCATION OWNED ACQUIRED EXPIRATION JUNE 30, 1998 1998
- --------- ------------ ------------ ------------ --------------- -----------
(DOLLARS IN THOUSANDS)
ADMINISTRATIVE/HOME OFFICE:
31 W. Broad Street
Hazleton, Pennsylvania 18201 . . . . . . . . . Owned 1968 -- $103 $64,556
25 W. Broad Street (1)
Hazleton, Pennsylvania 18201 . . . . . . . . . Owned 1987 -- 272 --
BRANCH OFFICES:
Laurel Mall Office Building
345 Laurel Mall owned, land June 1,
Hazleton, Pennsylvania 18201 . . . . . . . . . leased 1980 2000 333 20,269
Weatherly Office
140 Carbon Street
Weatherly, Pennsylvania 18252 . . . . . . . . Owned 1975 -- 38 10,736
Drums Office
P.O. Box 4040
Drums, Pennsylvania 18222 . . . . . . . . . . Owned 1994 -- 419 7,043
- ------------
(1) This building, which houses the home office's loan department, is adjacent
and connected to the property at 31 W. Broad Street.
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LEGAL PROCEEDINGS
The Association is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business.
Such routine legal proceedings, in the aggregate, are believed by management to
be immaterial to the Company's financial condition or results of operations.
PERSONNEL
As of June 30, 1998, the Association had 39 authorized full-time
employee positions. The employees are not represented by a collective
bargaining unit and the Association considers its relationship with its
employees to be good. See "Management of the Association--Other Benefit Plans"
for a description of certain compensation and benefit programs offered to the
Association's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Association will report their income on
a calendar year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Association's reserve for bad
debts discussed below. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Association or the Company. The Association has
not been audited by the IRS in the past five years.
BAD DEBT RESERVE. For taxable years beginning after December 31, 1995,
the Association is entitled to take a bad debt deduction for federal income tax
purposes which is based on its current or historic net charge-offs. For tax
years beginning prior to December 31, 1995, the Association as a qualifying
thrift had been permitted to establish a reserve for bad debts and to make
annual additions to such reserve, which were deductible for federal income tax
purposes. Under such prior tax law, generally the Association recognized a bad
debt deduction equal to 8% of taxable income.
Under the 1996 Tax Act, the Association is required to recapture all
or a portion of its additions to its bad debt reserve made subsequent to the
base year (which is the Association's last taxable year beginning before
January 1, 1988). This recapture is required to be made, after a deferral
period based on certain specified criteria, ratably over a six-year period
commencing in the Association's calendar 1998 tax year. The Association, in
fiscal 1997, recorded a deferred tax liability for this bad debt recapture. As
a result, the recapture is not anticipated to effect on the Association's
future net income or federal income tax expense for financial reporting
purposes.
POTENTIAL RECAPTURE OF BASE YEAR BAD DEBT REVENUE. The Association's
bad debt reserve as of the base year is not subject to automatic recapture as
long as the Association continues to carry on the business of banking. If the
Association no longer qualifies as a bank, the balance of the pre-1988 reserves
(the base year reserves) are restored to income ratio over a six-year period
beginning in the tax year the Association no longer qualifies as a bank. Such
base year bad debt reserve subject to recapture to the extent that the
Association makes "non-dividend distributions" that are considered as made from
the base year bad debt. To the extent that such reserves exceed the amount
that would have been allowed under the experience method ("Excess
Distributions"), then an amount based on the amount distributed will be
included in the Association's taxable income. Non-dividend distributions
include distributions in excess of the Association's current and accumulated
earnings and profits, distributions in redemption of stock, and distributions
in partial or complete liquidation. However, dividends paid out of the
Association's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Association's bad debt reserve. Thus, any dividends to the Company
that would reduce amounts appropriated to the Association's bad debt reserve
and deducted for federal income tax purposes would create a tax liability for
the Association. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Association makes a "non-dividend distribution," then
approximately one and one-half times the amount so used
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would be includable in gross income for federal income tax purposes, assuming a
34% corporate income tax rate (exclusive of state and local taxes). See
"Regulation" and "Dividend Policy" for limits on the payment of dividends of
the Association. The Association does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of
the bad debt reserve deduction claimed by the Association over the deduction
that would have been allowable under the experience method is treated as a
preference item for purposes of computing the AMTI. Only 90% of AMTI can be
offset by net operating loss carryovers of which the Association currently has
none. AMTI is increased by an amount equal to 75% of the amount by which the
Association's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses). In
addition, for taxable years beginning after June 30, 1986 and before January 1,
1996, an environmental tax of 0.12% of the excess of AMTI (with certain
modifications) over $2.0 million is imposed on corporations, including the
Association, whether or not an Alternative Minimum Tax ("AMT") is paid. The
Association does not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may
exclude from its income 100% of dividends received from the Association as a
member of the same affiliated group of corporations. The corporate dividends
received deduction is generally 70% in the case of dividends received from
unaffiliated corporations with which the Company and the Association will not
file a consolidated tax return, except that if the Company or the Association
own more than 20% of the stock of a corporation distributing a dividend then
80% of any dividends received may be deducted.
STATE AND LOCAL TAXATION
The Company and its non-thrift Pennsylvania subsidiaries are subject
to the Pennsylvania Corporate Net Income Tax and Capital Stock and Franchise
Tax. The Corporate Net Income Tax rate for 1998 is 9.99% and is imposed on the
Company's and its non-thrift subsidiaries' unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax
is a property tax imposed at the rate of 1.275% of a corporation's capital
stock value, which is determined in accordance with a fixed formula. The
Company is also required to file an annual report with and pay an annual
Franchise tax to the State of Delaware.
The Association is taxed under the Pennsylvania Mutual Thrift
Institutions Tax Act (the "MTIT"), as amended, to include thrift institutions
having capital stock. Pursuant to the MTIT, the Company's tax rate is 11.5%.
The MTIT exempts the Company from all other taxes imposed by the Commonwealth
of Pennsylvania for state income tax purposes and from all local taxation
imposed by political subdivisions, except taxes on real estate and real estate
transfers. The MTIT is a tax upon net earnings, determined in accordance with
generally accepted accounting principals ("GAAP") with certain adjustments.
The MTIT, in computing GAAP income, allows for the deduction of interest earned
on Pennsylvania and federal securities, while disallowing a percentage of a
thrift's interest expense deduction in the proportion of interest income on
those securities to the overall interest income of the Company. Net operating
losses, if any, thereafter can be carried forward three years for MTIT
purposes. The Association has not been audited by the Commonwealth of
Pennsylvania in the last five years.
REGULATION
GENERAL
The Association is subject to extensive regulation, examination and
supervision by the Pennsylvania Department, as its chartering agency, the OTS,
as its federal banking regulator, and the FDIC, as the deposit insurer. The
Association is a member of the FHLB System. The Association's deposit accounts
are insured up to applicable limits by the SAIF managed by the FDIC. The
Association must file reports with the Commissioner of the Pennsylvania
Department, the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the Pennsylvania Department,
the OTS and the FDIC to test the Association's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive
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framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the Pennsylvania Department, the OTS, the
FDIC or the Congress, could have a material adverse impact on the Company, the
Association and their operations. The Company, as a savings and loan holding
company, will also be required to file certain reports with, and otherwise
comply with the rules and regulations of the OTS and of the Securities and
Exchange Commission (the "SEC") under the federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the Pennsylvania Department, the OTS, the FDIC or the
Congress, could have a material impact on the Company, the Association, their
operations or the Conversion and Reorganization. Congress currently has under
consideration various proposals to eliminate the federal thrift charter,
abolish the OTS and restrict the activities of savings and loan holding
companies. The outcome of such legislation is uncertain. Therefore, the
Association is unable to determine the extent to which legislation, if enacted,
would affect its business.
Certain of the regulatory requirements applicable to the Association
and to the Company are referred to below or elsewhere herein. The description
of statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Association and the Company
and is qualified in its entirety by reference to such statutes and regulations.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
BUSINESS ACTIVITIES. The activities of Pennsylvania chartered, FDIC
insured savings institutions are governed by the Pennsylvania Savings
Association Code of 1967, as amended (the "Savings Association Code"), the Home
Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal
Deposit Insurance Act ("FDI Act") and the regulations issued by the agencies to
implement these statutes. These laws and regulations delineate the nature and
extent of the activities in which savings associations may engage.
ACTIVITIES AND INVESTMENTS. The FDI Act imposes certain restrictions
on the activities and investments of state savings associations such as the
Association. No state savings association may engage as principal in any
activity that is not permissible for federally chartered savings associations
unless the association is in compliance with federal regulatory capital
requirements and the FDIC has determined that the activity does not pose a
significant risk to the deposit insurance fund. A state savings association
may engage in an activity that is permissible for a federal savings
association, but in a greater amount, only if the institution is in capital
compliance and the FDIC had not determined that engaging in that amount of
activity does not pose a risk to the affected deposit insurance fund. Also, a
state savings association may not acquire directly an equity investment of a
type or in an amount that is not permissible for a federal association.
However, a state savings association may acquire shares of service corporations
so long as the institution is in capital compliance and the FDIC determines
that no significant risk to the deposit insurance fund is posed by the amount
that the institution seeks to acquire or the activities of the savings
association.
LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans-to-one borrower.
Generally, this limit is 15% of the Association's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such loan
is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. At June 30, 1998, the Association's
general policy is to limit loans-to-one borrower to $500,000. At June 30,
1998, the Association's largest aggregate amount of loans-to-one borrower
consisted of $630,000.
QTL TEST. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up
to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the
value of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments,
including certain
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mortgage-backed and related securities) in at least nine months out of each 12
month period. A savings association that fails the QTL test must either
convert to a bank charter or operate under certain restrictions. As of June
30, 1998, the Association maintained 78.11% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered as "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose
limitations upon all capital distributions by a savings institution, such as
cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level. An
institution that exceeds all fully phased-in regulatory capital requirements
before and after a proposed capital distribution ("Tier 1 Association") and has
not been advised by the OTS that it is in need of more than normal supervision,
could, after prior notice to, but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of: (i) 100% of its
net earnings to date during the calendar year plus the amount that would reduce
by one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year; or (ii)
75% of its net earnings for the previous four quarters. Any additional capital
distributions would require prior OTS approval. In the event the Association's
capital fell below its capital requirements or the OTS notified it that it was
in need of more than normal supervision, the Association's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit
a proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
LIQUIDITY. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than
a specified percentage (currently 4%) of its net withdrawable deposit accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The Association's average liquidity ratio
for the year ended June 30, 1998 was 22.9%, which exceeded the applicable
requirements. The Association has never been subject to monetary penalties for
failure to meet its liquidity requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS and the Pennsylvania Department to fund the various
agencies' operations. The assessments paid by the Association to these
agencies for the years ended June 30, 1998 and 1997 totaled $59,000 and
$57,000, respectively.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to
engage in transactions with related parties or "affiliates" (i.e., any company
that controls or is under common control with an institution, including the
Company and any non-savings institution subsidiaries that the Company may
establish) is limited by Sections 23A and 23B of the Federal Reserve Act.
Section 23A restricts the aggregate amount of covered transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B generally requires
that certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.
ENFORCEMENT. Under the FDI Act, the OTS has primary federal
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or $1 million per day in especially egregious cases. Under the FDI Act,
the FDIC has the authority to recommend to the Director of the OTS
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that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal and state law also
establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before capital
becomes impaired. The Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final regulations establish deadlines for the submission and review
of such safety and soundness compliance plans.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage ("core" or "Tier 1" capital) ratio and an 8% risk based capital
standard. Core (Tier 1) capital is defined as common stockholder's equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights and
credit card relationships. The OTS regulations require that, in meeting the
leverage ratio, tangible and risk-based capital standards institutions
generally must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. In addition, the OTS prompt
corrective action regulation provides that a savings institution that has a
leverage capital ratio of less than 4% (3% for institutions receiving the
highest examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions. See "- Prompt Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS
capital regulation based on the risks OTS believes are inherent in the type of
asset. The components of core capital are equivalent to those discussed
earlier under the 3% leverage standard. The components of supplementary
capital currently include cumulative preferred stock, long-term perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and, within specified limits, the allowance for
loan and lease losses. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct
an interest rate component in calculating its total capital under the
risk-based capital rule. The interest rate risk component is an amount equal
to one-half of the difference between the institution's measured interest rate
risk and 2%, multiplied by the estimated economic value of the association's
assets. That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Under the
rule, there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital
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requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The
rule also provides that the Director of the OTS may waive or defer an
association's interest rate risk component on a case-by-case basis. The OTS
has postponed the date that the component will first be deducted from an
institution's total capital to provide it with an opportunity to review the
interest rate risk approaches taken by the other federal banking agencies.
At June 30, 1998, the Association met each of its capital
requirements, in each case on a fully phased-in basis. See "Regulatory Capital
Compliance" for a table which sets forth in terms of dollars and percentages
the OTS tangible, leverage and risk-based capital requirements, the
Association's historical amounts and percentages at June 30, 1998, and pro
forma amounts and percentages based upon the issuance of the shares within the
Estimated Price Range and assuming that a portion of the net proceeds are
retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
capitalization. Generally, a savings institution that has a total risk-based
capital of less than 8.0% or a leverage ratio or a Tier 1 capital to risk-based
assets ratio that is less than 4.0% is considered to be undercapitalized. A
savings institution that has a total risk-based capital less than 6.0%, a Tier
1 risk-based capital ratio of less than 3.0% or a leverage ratio that is less
than 3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is critically undercapitalized. The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an association receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions may
become immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators, restrictions
on growth, and capital distributions and limitations on expansion. The OTS
could also take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior
executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The
FDIC assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An institution
is also placed in one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned with the most well
capitalized, healthy institutions receiving the lowest rates.
Deposits of the Association are presently insured by the SAIF. Both
the SAIF and the BIF are statutorily required to be recapitalized to a 1.25% of
insured reserve deposits ratio. Until recently, members of the SAIF and BIF
were paying average deposit insurance assessments of between 24 and 25 basis
points. The BIF met the required reserve in 1995, whereas the SAIF was not
expected to meet or exceed the required level until 2002 at the earliest. This
situation was primarily due to the statutory requirement that SAIF members make
payments on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of from 0 to 27 basis points under which
92% of BIF members paid an annual premium of only $2,000. With respect to SAIF
member institutions, the FDIC adopted a final rule retaining the previously
existing assessment rate schedule
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applicable to SAIF member institutions of 23 to 31 basis points. As long as the
premium differential continued, it may have had adverse consequences for SAIF
members, including reduced earnings and an impaired ability to raise funds in
the capital markets. In addition, SAIF members, such as the Association could
have been placed at a substantial competitive disadvantage to BIF members with
respect to pricing of loans and deposits and the ability to achieve lower
operating costs.
On September 30, 1996, the President of the United States signed into
law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among
other things, imposed a special one-time assessment on SAIF member
institutions, including the Association, to recapitalize the SAIF. As required
by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on
SAIF assessable deposits held as of March 31, 1995, payable November 27, 1996
(the "SAIF Special Assessment"). The SAIF Special Assessment was recognized by
the Association as an expense in the quarter ended June 30, 1997 and is
generally tax deductible. The SAIF Special Assessment recorded by the
Association amounted to $619,763 on a pre-tax basis and $372,000 on an
after-tax basis.
The Funds Act also spread the obligations for payment of the FICO
bonds across all SAIF and BIF members. Beginning on January 1, 1997, BIF
deposits were assessed for a FICO payment of 1.3 basis points, while SAIF
deposits pay 6.48 basis points. Full pro rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or
the date the BIF and SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable
to that of BIF members. SAIF members will also continue to make the FICO
payments described above. The FDIC also lowered the SAIF assessment schedule
for the fourth quarter of 1996 to 18 to 27 basis points. Management cannot
predict the level of FDIC insurance assessments on an on-going basis, whether
the federal thrift charter will be eliminated or whether the BIF and SAIF will
eventually be merged.
The Association's assessment rate for fiscal 1998 ranged from 15.3 to
15.8 basis points, and the regular premium paid for this period was $62,000.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Association.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. The Association, as a member of the FHLB, is required to
acquire and hold shares of capital stock in the FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20
of its advances (borrowings) from the FHLB, whichever is greater. The
Association was in compliance with this requirement with an investment in FHLB
stock at June 30, 1998 of $594,600. FHLB advances must be secured by specified
types of collateral and all long-term advances may only be obtained for the
purpose of providing funds for residential housing finance. At June 30, 1998,
the Association had no FHLB advances and repurchase agreements.
The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs.
These requirements could reduce the amount of dividends that the FHLBs pay to
their members and could also result in the FHLBs imposing a higher rate of
interest on advances to their members. For the years ended June 30, 1998, 1997
and 1996, dividends from the FHLB to the Association amounted to approximately
$37,000, $35,000 and $34,000, respectively. If dividends were reduced, the
Association's net interest income would likely also be reduced. Further, there
can be no assurance that the impact of recent or future legislation on the
FHLBs will not also cause a decrease in the value of the FHLB stock held by the
Association.
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FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $47.8 million or
less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $47.8 million, the reserve
requirement is $1.4 million, plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $47.8 million. The first $4.7 million of otherwise
reservable balances (subject to adjustment by the Federal Reserve Board) are
exempted from the reserve requirements. The Association is in compliance with
the foregoing requirements. Because required reserves must be maintained in the
form of either vault cash, a noninterest-bearing account at a Federal Reserve
Bank or a pass-through account as defined by the Federal Reserve Board, the
effect of this reserve requirement is to reduce the's interest-earning assets.
FHLB System members are also authorized to borrow from the Federal Reserve
"discount window," but Federal Reserve Board regulations require institutions
to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
PENNSYLVANIA LAW
INTERSTATE ACQUISITIONS AND BRANCHES. In 1986, Pennsylvania Act No.
260 (the "Pennsylvania Act") became law. The Pennsylvania Act: (1) permits
federal or state savings and loan associations, federal savings banks, and bank
or savings and loan holding companies (collectively, "Thrift Entities") that
are "located" (as defined below) in a state that offers reciprocal rights to
similar Thrift Entities located in Pennsylvania, to acquire 5% or more of a
Pennsylvania Thrift Entity's voting stock, merge or consolidate with a
Pennsylvania Thrift Entity or purchase the assets and assume the liabilities of
the Pennsylvania Thrift Entity and (2) permits a federal or state savings and
loan association or federal savings bank to establish and maintain branches in
Pennsylvania, provided that the state where such foreign Thrift Entity is
located offers reciprocal rights to similar entities located in Pennsylvania
and provided that each state where any bank holding company or savings and loan
holding company owning or controlling 5% or more of the foreign Thrift Entity's
shares is also located in a state that offers reciprocal rights. The
legislation also provides for nationwide branching by Pennsylvania chartered
savings banks and savings and loan associations, subject to the Pennsylvania
Department's approval and certain other conditions.
Under the Pennsylvania Act, a depository is "located" where its
deposits are largest and a holding company is generally "located" where the
aggregate deposits of its subsidiaries are largest. Whether a foreign state's
laws are "reciprocal" is determined by the Pennsylvania Department, which may
impose limitations and conditions on the branching and acquisition activities
of a Thrift Entity located in a foreign state in order to make the laws of such
state reciprocal to Pennsylvania law with respect to the type of transaction at
issue. In determining whether to approve an interstate thrift acquisition, the
Pennsylvania Department is directed to consider the effects the proposed
acquisition would have on the availability in Pennsylvania of basic banking and
transaction account services. If the Pennsylvania Department determines that
the overall performance of any Pennsylvania Thrift Entity involved in the
transaction has not been materially deficient in providing suitable credit and
financial services to its communities, it may approve the application without
imposing any terms or conditions. Otherwise, the Pennsylvania Department may
impose such terms and conditions as it deems appropriate to improve such
overall performance over a stated period of time. Additionally, the
Pennsylvania Department may impose requirements, both before and after approval
of an acquisition, to assure the availability to the public of those basic
transaction account services deemed necessary by the Pennsylvania Department.
PENNSYLVANIA SAVINGS ASSOCIATION CODE. The Association is
incorporated under the Savings Association Code which contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Association and its affairs. The Savings Association Code delegates extensive
rulemaking power and administrative discretion to the Pennsylvania Department
so that the supervision and regulation of Pennsylvania chartered association
may be flexible and readily responsive to changes in economic conditions and in
savings and lending practices. The Pennsylvania Department exercises its power
through the Savings Association Bureau.
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One of the purposes of the Savings Association Code is to provide
associations with the opportunity to be competitive with each other and with
other financial institutions existing under other state, federal and foreign
laws. To this end, the Savings Association Code provides Pennsylvania chartered
savings associations with all of the powers enjoyed by federal savings
associations, subject to regulation by the Pennsylvania Department.
A Pennsylvania savings association may locate or change the location
of its principal place of business, and may establish an office anywhere in the
Commonwealth or in certain states within the Pennsylvania region, with the
prior approval of the Pennsylvania Department. See "--Interstate Acquisitions
and Branches."
The Pennsylvania Department shall examine each savings association at
least once each year. The Savings Association Code permits the Pennsylvania
Department to accept the examinations and reports of the Federal Savings and
Loan Insurance Corporation (now the OTS) in lieu of their own examination. The
Pennsylvania Department may order any association to discontinue any violation
of law or unsafe or unsound business practice and may direct any director,
officer, attorney or employee of an association engaged in an objectionable
activity, after the Pennsylvania Department has ordered the activity to be
terminated, to show cause at a hearing before the Savings Association Bureau of
the Pennsylvania Department why such person should not be removed.
HOLDING COMPANY REGULATION
The Company will be a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company will be required
to register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings institution.
The Association must notify the OTS 30 days before declaring any dividend to
the Company.
As a unitary savings and loan holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Association continues to
be a QTL. See "- Federal Regulation of Savings Institutions - QTL Test" for a
discussion of the QTL requirements. Upon any non-supervisory acquisition by
the Company of another savings association, the Company would become a multiple
savings and loan holding company (if the acquired institution is held as a
separate subsidiary) and would be subject to extensive limitations on the types
of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company ("BHC") Act,
subject to the prior approval of the OTS, and to other activities authorized by
OTS regulation. Recently proposed legislation would limit the activities of
unitary savings and loan holding companies to those permissible for multiple
savings and loan holding companies. See "Risk Factors - Financial Institution
Regulation and Possible Legislation".
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a multiple savings and loan holding
company from acquiring more than 5% of a company engaged in activities other
than those authorized for multiple savings and loan holding companies by the
HOLA; or acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if
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the laws of the state of the target savings institution specifically permit
such acquisitions. "See -- Interstate Acquisitions and Branches."
The Secretary of Banking for the Pennsylvania Department (the
"Secretary") may require any savings and loan holding company to furnish such
reports as the Secretary deems appropriate to the proper supervision of such
companies. Unless the Secretary deems otherwise, reports prepared by Federal
authorities are satisfactory to meet such requirement. The Secretary may make
examinations of the Company, the cost of which shall be assessed against and
paid by the Company. Additionally, the Secretary shall have the authority to
issue rules, regulations and orders as may be necessary and the authority to
order a savings and loan holding company to cease and desist from engaging in
an activity which constitutes a services risk to the financial safety,
soundness or stability of the savings association.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended ("Securities Act"), for the registration of
the Common Stock to be issued pursuant to the Conversion. Upon completion of
the Conversion, the Company's Common Stock will be registered with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company will then be subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common
Stock to be issued in the Conversion does not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of the Company or (ii) the average weekly volume
of trading in such shares during the preceding four calendar weeks. Provision
may be made in the future by the Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain
circumstances.
MANAGEMENT OF THE COMPANY
The Board of Directors' of the Company is divided into three classes,
each of which contains approximately one-third of the Board. The directors
shall be elected by the stockholders of the Company for staggered three year
terms, or until their successors are elected and qualified. One class of
directors, consisting of Messrs. Richard C. Laubach and John J. Raynock, has a
term of office expiring at the first annual meeting of stockholders, a second
class, consisting of Messrs. Frederick L. Barletta, Peter B. Deisroth and
George J. Hayden, has a term of office expiring at the second annual meeting of
stockholders, and a third class, consisting of Messrs. Joseph E. Lundy, Vincent
L. Marusak and Anthony P. Sidari, has a term of office expiring at the third
annual meeting of stockholders. Information concerning the principal
occupations, employment and other information concerning the directors and
officers of the Company during the past five years is set forth under
"Management of the Association--Biographical Information."
The following individuals are the executive officers of the Company
and hold the offices set forth below opposite their names.
POSITION(S) HELD WITH
EXECUTIVE COMPANY
--------- ---------------------
Richard C. Laubach President and Chief Executive Officer
David P. Marchetti, Sr. Chief Financial Officer and Treasurer
Nancy Latoff Corporate Secretary
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The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal at the discretion of the Board of
Directors.
DIRECTOR COMPENSATION
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company. For
information regarding fees paid to the Association's Board of Directors see
"Management of the Association--Director Compensation."
MANAGEMENT OF THE ASSOCIATION
DIRECTORS
The following table sets forth certain information regarding the Board
of Directors of the Association.
POSITION(S) HELD DIRECTOR TERM
NAME AGE(1) WITH THE ASSOCIATION SINCE EXPIRES
- ------- ------ ---------------------- -------- ---------
Vincent L. Marusak 74 Chairman of the Board 1972 1998
Richard C. Laubach 60 Director, President and Chief Executive 1989 1998
Officer
Frederick L. Barletta 64 Director 1983 1998
Peter B. Deisroth 60 Director 1980 1998
George J. Hayden 61 Director 1984 1998
Joseph E. Lundy 75 Director 1964 1998
John J. Raynock 67 Director 1987 1998
Anthony P. Sidari 67 Director 1964 1998
- ------------------------
(1) As of June 30, 1998
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the
executive officers of the Association who are not also directors.
AGE POSITION(S) HELD WITH
NAME (1) ASSOCIATION
---- --- ---------------------
David P. Marchetti, Sr. 45 Vice President, Chief Operating Officer
Joseph P. Correale 46 Vice President - Lending
- -----------------------
(1) As of June 30, 1998
Each of the executive officers of the Association will retain his/her
office in the converted Association until their re-election at the annual
meeting of the Board of Directors of the Association, held immediately after
the first annual meeting of stockholders subsequent to the Conversion, and
until their successors are elected and qualified or until they are removed or
replaced. Officers are subject to re-election by the Board of Directors
annually.
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BIOGRAPHICAL INFORMATION
DIRECTORS
Vincent L. Marusak was an executive at Lehigh Gas and Oil Company and
a partner at Lehigh Supply prior to his retirement in 1991. Mr. Marusak has
served on the Association's Board of Directors since 1972 and has served as
Chairman of the Board since 1989.
Richard C. Laubach joined the Association in 1982 as Chief Lending
Officer and continued in that position until 1987 when he was named Chief
Executive Officer. In 1989, Mr. Laubach was also named President of the
Association. Mr. Laubach has been a director since 1989.
Frederick L. Barletta was President and Chief Executive Officer of the
Pines Golf Course and Restaurant in Edgewood, Pennsylvania prior to his
retirement in 1997. Mr. Barletta has been a director of the Association since
1983.
Peter B. Deisroth has been a manager of Peton Fashions, a retail
company, and Advanced Mailing Services, a mail fulfillment house since 1994.
Prior to 1994, Mr. Deisroth was the general merchandise manager of Peton
Fashions. Mr. Deisroth is also a general partner of several retail companies
and the sole proprietor of Dizzy's Pizza. He has served on the Association's
Board of Directors since 1980.
George J. Hayden is the President of George J. Hayden, Inc., an
electrical contracting firm. Mr. Hayden is also the President of several
Wendy's fast food restaurants. Mr. Hayden has served as a director of the
Association since 1984.
Joseph E. Lundy worked in the insurance industry for over 45 years
prior to his retirement in 1991. Mr. Lundy has been a director of the
Association since 1964.
John J. Raynock is secretary and treasurer of E and R Plumbing and
Heating Inc. Mr. Raynock has served on the Association's Board of Directors
since the Association's merger with Anthracite Building and Loan Association of
Weatherly, Pennsylvania in 1987.
Anthony P. Sidari has been an attorney for over 40 years. Mr. Sidari
has served as a director of the Association since 1964. He also serves as a
solicitor for the Association.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
David P. Marchetti, Sr. joined the Association in 1986 and served as
branch office coordinator and later controller until 1991, when he was named
Vice-President, Chief Operating Officer.
Joseph P. Correale joined the Association in 1986 as a loan officer
until 1989 when he was named Assistant Vice President, Lending. In 1992, Mr.
Correale was named Vice-President, Lending.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE ASSOCIATION AND THE
COMPANY
The Association's Board of Directors meets twice per month and may
have additional special meetings called in the manner specified in the Bylaws.
The Board of Directors of the Association has established the
following committees:
The Executive Committee consists of Messrs. Laubach (President and
Chairman), Marusak (Vice President), Deisroth (Treasurer), Sidari (Solicitor),
Barletta and Hayden. The purpose of this committee is to formulate internal
policies, set long-term objectives and evaluate issues of major importance to
the Association and then to make
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recommendations to the whole Board. The committee meets when necessary and did
not meet during the fiscal year ended June 30, 1998.
The Audit and Compliance Committee consists of Messrs. Lundy
(Chairman), Deisroth, Hayden, Laubach and Sidari. The purpose of this
committee is to oversee external audit activities, review the procedures used
to establish the loan loss provision and approve the classification of assets.
The Audit and Compliance Committee meets quarterly and met three times during
the fiscal year ended June 30, 1998.
The Budget Committee consists of Messrs. Lundy (Chairman and
Compliance Officer), Barletta, Hayden, Laubach and Marusak. The purpose of
this committee is to review the Compliance Officer's report and to review and
approve the Association's annual budget. This committee meets semi-annually
and met two times during the fiscal year ended June 30, 1998.
The Investment, Asset/Liability Management Committee consists of,
Messrs. Laubach (Chairman), Barletta, Deisroth, Hayden and Raynock. The
Investment, Asset/Liability Management Committee meets quarterly and approves
all investments, the sale of assets and the borrowing of monies by the
Association and reviews the Association's interest rate risk. The Investment,
Asset/Liability Management Committee met 11 times during the fiscal year ended
June 30, 1998.
The Loan Committee consists of Messrs. Marusak (Chairman), Barletta,
Deisroth, Laubach, Lundy and Raynock. The Loan Committee reviews the lending
guidelines, loan portfolio and delinquency reports. The Loan Committee meets
semi-annually and met five times during the fiscal year ended June 30, 1998.
The Property Committee consists of Messrs. Marusak (Chairman),
Barletta, Hayden, Laubach and Raynock. The Property Committee meets as needed
and is responsible for overseeing the structure and maintenance of the
Association's physical properties. The Property Committee met three times
during the fiscal year ended June 30, 1998.
Additionally, the Association has a number of other management
committees including the Evaluation, Salary and Bonus Committee, Personnel
Committee and Security Committee.
The Board of Directors of the Company has established the following
committees: the Audit Committee consisting of Messrs. Deisroth, Hayden and
Lundy; the Compensation Committee consisting of Messrs. Barletta, Hayden,
Lundy, Marusak and Sidari; the Nominating Committee consisting of Messrs.
Barletta, Deisroth and Raynock; and the Pricing Committee consisting of Messrs.
Barletta, Marusak and Raynock.
DIRECTOR COMPENSATION
All directors receive $400 for each Board meeting attended and for a
maximum of three unattended meetings. All outside directors of the Association
also receive $250 for each committee meeting attended. In addition, the
treasurer of the Board of Directors receives a $3,000 annual retainer. The
Association also provides life insurance for all of the directors. The
Association pays $550 annually for a $90,000 policy for Mr. Laubach, $306
annually for $50,000 policies for Messrs. Barletta, Deisroth and Hayden, $199
annually for $32,500 policies for Messrs. Marusak, Raynock and Sidari and $130
annually for a $21,125 policy for Mr. Lundy.
DIRECTOR EMERITUS
The Association has one Director Emeritus. Pursuant to the
Association's Bylaws, a director may not serve beyond the Annual Meeting of
Members immediately following his or her attainment of age 75 with the
exception of all directors serving on January 2, 1988. Any director who
retires because of the age limitation may be appointed as Director Emeritus.
The Directors Emeritus shall be compensated for each meeting attended, at the
same rate of compensation as the Directors, but may not vote at any meeting of
the Board of Directors or be counted in determining a quorum.
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EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth the cash
compensation paid by the Association for services rendered in all capacities
during the fiscal year ended June 30, 1998, to the Chief Executive Officer and
to executive officers of the Association who received cash compensation in
excess of $100,000 ("Named Executive Officers").
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
------------------------- -------------------------- --------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITIONS YEAR ($) ($) ($)(2) ($) (#) ($) ($)
- -------------------- --------- -------- ------- ------------ ---------- ------------- --------- --------------
Richard C. Laubach
President and Chief
Executive Officer 1998 $123,400 10,000 -- -- -- -- --
- ----------------------
(1) Under Annual Compensation, the column titled "Salary" includes director's
fees.
(2) For fiscal year 1998, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the year; (b)
payments of above-market preferential earnings on deferred compensation;
(c) payments of earnings with respect to long-term incentive plans prior to
settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock. For fiscal year 1998, the Association had
no restricted stock or stock related plans in existence.
EMPLOYMENT AGREEMENTS
Upon consummation of the Conversion, the Association and the Company
intend to enter into employment agreements (collectively, the "Employment
Agreements") with Messrs. Laubach and Marchetti (individually, the
"Executive"). The Employment Agreements are subject to the review and approval
of the OTS and may be amended as a result of such OTS review. Review of
compensation arrangements by the OTS does not indicate, and should not be
construed to indicate, that the OTS has passed upon the merits of such
arrangements. The Employment Agreements are intended to ensure that the
Association and the Company will be able to maintain a stable and competent
management base after the Conversion. The continued success of the Association
and the Company depends to a significant degree on the skills and competence of
Messrs. Laubach and Marchetti.
The Employment Agreements will provide for a three-year term. The
Association Employment Agreements will provide that, commencing on the first
anniversary date of entering into the agreement and continuing each such
anniversary date thereafter, the Board of Directors of the Association may
extend the agreement for an additional year so that the remaining term shall be
three years, unless written notice of non-renewal is given by the Board of
Directors of the Association after conducting a performance evaluation of the
Executive. The terms of the Company Employment Agreements shall automatically
renew on a daily basis, unless written notice of non-renewal is given by the
Board of Directors of the Company. The Association and Company Employment
Agreements provide that the Association and Company will review the Executive's
base salary annually. Initially, the Employment Agreements will provide for
base salaries of $133,400 and $61,490, for Messrs. Laubach and Marchetti,
respectively. In addition to the base salary, the Employment Agreements will
provide for, among other things, participation in various employee benefit
plans and arrangements, stock-based benefits plans, and fringe benefits
applicable to similarly situated executive personnel.
The Employment Agreements provide for termination of the Executive by
the Association or the Company for cause (as described in the agreements) at
any time. In the event the Association or the Company chooses to terminate the
Executive's employment for reasons other than for cause or, in the event of the
Executive's resignation from the Association or the Company upon: (i) failure
to re-elect the Executive to his current offices; (ii) a material change in the
Executive's functions, duties or responsibilities; (iii) a relocation of the
Executive's principal place of employment by more than 25 miles; (iv)
liquidation or dissolution of the Association or the Company; or (v) a breach
of the Employment Agreements by the Association or the Company, the Executive
or, in the event of the Executive's
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death, his beneficiary, would receive an amount equal to the base salary
payments due to the Executive and the contributions that would have been made
on the Executive's behalf to any employee benefit plans of the Association or
the Company during the remaining term of the Employment Agreement. The
Association and the Company would also continue or pay for the Executive's
life, health and disability coverage for the remaining term of the Employment
Agreement. Upon any termination of the Executive, the Executive is subject to
a covenant not to compete with the Company or the Association for one year.
Under the Employment Agreements, if involuntary termination or, under
certain circumstances, voluntary termination, follows a change in control of
the Association or the Company, the Executive or, in the event of the
Executive's death, his beneficiary, would receive a severance and/or liquidated
damages payment equal to the greater of: (i) the payments due under the
agreement for the remaining terms of the agreement; or (ii) three times the
average of the five preceding taxable years' annual compensation (subject to
certain limitations contained in the Association Employment Agreement). The
Association and the Company would also continue the Executive's life, health,
and disability coverage for thirty-six months from the date of termination.
Notwithstanding that both agreements provide for a severance payment in the
event of a change in control, the Executive may receive a severance payment
under only one agreement.
The Company will guarantee payments to the Executive under the
Association Employment Agreement in the event that payments or benefits are not
paid by the Association. The Company will make any payment required under the
Company Employment Agreements. Pursuant to the Employment Agreements, the
Company or Association will pay all reasonable costs and legal fees paid or
incurred by the Executive pursuant to any dispute or question of interpretation
relating to the Employment Agreements, if the Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement. The Employment
Agreements also provide that the Association and Company shall indemnify the
Executive to the fullest extent allowable under federal, Pennsylvania and
Delaware law, respectively. In the event of a change in control of the
Association or Company, the total amount of payments due under the Employment
Agreements, based solely on the base salaries to be paid to Messrs. Laubach and
Marchetti, under the agreements upon the consummation of the Conversion and
excluding any benefits under any employee benefit plan which may otherwise
become payable would equal approximately $298,000 and $161,000, respectively.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Association intends to enter into three-year
Change in Control Agreements (the "CIC Agreements") with two vice presidents of
the Association, none of whom will be covered by an Employment Agreement.
Commencing on the first anniversary date of a CIC Agreement and continuing on
each anniversary thereafter, the Board of Directors may renew the agreement for
an additional year. Each CIC Agreement will provide that in the event
voluntary or involuntary termination follows a change in control of the
Association or the Company, as the case may be, the officer covered by the
agreement would receive a severance payment equal to three times the officer's
average annual compensation for the 36 months preceding his termination
(subject to certain limitations contained in the Association's Change in
Control Agreement). The Association would also continue to pay for the
officer's life, health and disability coverage for 36 months following
termination. In the event of a change in control of the Association or the
Company the total payments that would be due under the CIC Agreements, based
solely on the current annual compensation paid to the two vice presidents
covered by the CIC Agreements and excluding any benefits under any employee
benefit plan which may be payable; would be approximately $210,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Association's Board of Directors, upon consummation of the
Conversion, intends to establish the Security Savings Association of Hazleton
Employee Severance Compensation Plan ("Severance Plan") to provide eligible
employees with severance pay benefits in the event of a change in control of
the Association or the Company. Management personnel with employment or CIC
Agreements are not eligible to participate in the Severance Plan. Generally,
employees will participate in the Severance Plan if they have completed at
least one (1) year of service with the Association. The Severance Plan vests
in each participant a contractual right to the benefits such participant is
entitled to thereunder. Under the Severance Plan, in the event of a change in
control of the Association or the Company,
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eligible employees who terminate employment within one year of the change in
control (for reasons specified under the Severance Plan), will receive a
severance payment. If the participant, whose employment has terminated, has
completed at least six months of service, the participant will be entitled to
cash equal to one-twelfth of their current annual compensation for each year of
service completed with the Association, up to a maximum of 199% of current
annual compensation. In the event the provisions of the Severance Plan were
triggered, the total amount of payments that would be due thereunder, based
solely upon current salary levels, would be approximately $414,000.
INSURANCE PLANS
All full-time employees of the Association, upon completion of the
applicable introductory period, are covered as a group for comprehensive
hospitalization, including major medical and long-term disability insurance.
Life insurance is also provided to employees and directors.
OTHER BENEFIT PLANS
PENSION PLAN. The Association participates in the Financial
Institutions Retirement Fund (the "Retirement Fund") to provide retirement
benefits for eligible employees. Employees are eligible to participate in the
Retirement Plan after the completion of 12 consecutive months of employment
with the Association and the attainment of age 21. Hourly paid employees are
excluded from participating in the Retirement Plan. Benefits payable to a
participant under the Retirement Plan are based on the participant's years of
service and salary. The formula for normal retirement benefits payable
annually under the Retirement Plan is 2% multiplied by years of benefit service
multiplied by the average of the participant's highest five years of salary
paid by the Association. A participant may elect early retirement as early as
age 45. However, such participant's normal retirement benefits will be reduced
by an early retirement factor based on age at early retirement. Participants
generally have no vested interest in Retirement Plan benefits prior to the
completion of five years of service with the Association. Following the
completion of five years of vesting service, or in the event of a participant's
attainment of age 65, death or termination of employment due to disability, a
participant will become 100% vested in the accrued benefits under the
Retirement Plan. The table below reflects the pension benefit payable to a
participant assuming various levels of earnings and years of service.
The following table sets forth the estimated annual benefits payable
upon retirement at age 65.
FIVE YEAR YEARS OF BENEFIT SERVICE
AVERAGE -------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
------------- ------- ------- ------- ------- --------
$ 25,000 $ 7,500 $10,000 $12,500 $15,000 $ 17,500
50,000 15,000 20,000 25,000 30,000 35,000
75,000 22,500 30,000 37,500 45,000 52,500
100,000 30,000 40,000 50,000 60,000 70,000
125,000 37,500 50,000 62,500 75,000 87,500
150,000 45,000 60,000 75,000 90,000 105,000
160,000 48,000 64,000 80,000 96,000 112,000
The benefits listed in the table above for the Retirement Plan are not
subject to a deduction for Social Security benefits or any other offset amount.
As of June 30, 1998, Richard C. Laubach had 15 years of credited service.
EMPLOYEE STOCK OWNERSHIP PLAN. The Association intends to establish a
tax-qualified employee stock ownership plan (the "ESOP") in connection with the
Conversion. Generally, employees will become participants in the ESOP upon the
completion of one year of service with the Association (with credit given for
service with the Association prior to adoption of the plan) and attainment of
age 21. With the consent of the Association, an affiliate of the Association
may also adopt the ESOP for the benefit of its employees.
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The Association expects a committee of the Board of Directors to serve
as the administrative committee of the ESOP (the "ESOP Committee"). The ESOP
Committee will appoint an unrelated corporate trustee for the ESOP prior to the
Conversion. Among other matters, the ESOP Committee may generally instruct the
trustee regarding the investment of funds contributed to the ESOP, subject to
the terms of the plan document and the trust agreement. The Association
expects the ESOP to purchase 8% of the Common Stock issued in the Conversion.
As part of the Conversion, and in order to fund the ESOP's purchase of the
Common Stock issued in the Conversion, the ESOP will borrow 100% of the
aggregate purchase price of the Common Stock from either the Company or a
third-party lender.
The trustee of the ESOP will repay the loan principally from the
Association's annual contributions to the ESOP over an expected period of 12
years. Subject to receipt of any necessary regulatory approvals or opinions,
the Association may make contributions to the ESOP for repayment of the loan
since some participants in the ESOP will be employees of the Association or,
alternatively, the Association may reimburse the Company for contributions made
by the Company with respect to employees of the Association. The Association
expects the initial interest rate (which may be fixed or variable) for the loan
to be at or near the prime rate on or about the date of Conversion.
The trustee of the ESOP will pledge the shares of Common Stock
purchased by the ESOP in connection with the Conversion as collateral for the
loan and will hold the shares in a suspense account under the plan. As the
trustee repays the loan, the trustee will release a portion of the shares from
the suspense account and allocate them to the accounts of active participants
in the ESOP based on each participant's compensation (as determined under the
terms of the plan) relative to all participants' compensation for the plan
year. In the event of a change in control of the Association or the Company
prior to complete repayment of the loan, the ESOP trustee, in accordance with
the terms of the plan document, will sell enough shares of Common Stock held in
the suspense account to repay the loan in full. Upon repayment of the loan, the
ESOP trustee will then allocate all remaining shares of Common Stock held in
the suspense account to the accounts of active participants based on each
participant's account balance as of a specific date or based on some other
method set forth in the plan document.
Participants will become vested in contributions made to the ESOP by
the Association at the rate of twenty percent per year of vesting service (with
credit given for service with the Association prior to its adoption of the
ESOP). Accordingly, participants will become fully vested in their accounts
under the ESOP after completing five years of vesting service. The Association
expects that participants will also become fully vested in their accounts under
the ESOP upon the attainment of their early or normal retirement age while an
employee of the Association, upon their death, upon a change in control of the
Association or the Company, or upon termination of the plan. Benefits
generally become distributable under the ESOP and potentially become subject to
income tax upon death, retirement, disability or other separation from service.
The ESOP trustee will vote all allocated shares held in the ESOP in
accordance with the instructions of the plan participants. The ESOP trustee,
subject to its fiduciary duties under ERISA, will vote the unallocated shares
(i.e., those held in the suspense account) and allocated shares for which it
receives no proper voting instructions in a manner calculated to most
accurately reflect the instructions it receives from participants regarding the
allocated stock. In the event no shares have been allocated under the ESOP at
the time such shares are to be voted, each participant shall be deemed to have
one share allocated to his or her account for voting purposes.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Code limits the amount of
compensation the Association may consider in providing benefits under its
tax-qualified retirement plans, such as the Pension Plan and the ESOP. The
Code further limits the amount of contributions and benefit accruals under such
plans on behalf of any employee. To provide benefits to make up for the
reduction in benefits flowing from these limits in connection with the Pension
Plan and ESOP, the Association intends to implement a non-qualified deferred
compensation arrangement known as a "Supplemental Executive Retirement Plan"
("SERP"). The SERP will generally provide benefits to eligible individuals
(designated by the Board of Directors of the Association or its affiliates)
that cannot be provided under the Pension Plan and/or ESOP as a result of the
limitations imposed by the Code, but that would have been provided under the
Pension Plan and/or ESOP but for such limitations. In addition to providing
for benefits lost under tax-qualified plans as a result of limitations imposed
by the Code, the SERP will also make up lost ESOP benefits to designated
individuals who retire,
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who terminate employment in connection with a change in control, or whose
participation in the ESOP ends due to termination of the ESOP in connection
with a change in control (regardless of whether the individual terminates
employment) prior to the complete scheduled repayment of the ESOP loan.
Generally, upon the retirement of an eligible individual or upon a change in
control of the Association or the Company prior to complete repayment of the
ESOP Loan, the SERP will provide the individual with a benefit equal to what
the individual would have received under the ESOP had he remained employed
throughout the term of the ESOP or had the ESOP not been terminated prior to
the scheduled repayment of the ESOP loan. An individual's benefits under the
SERP become payable upon the participant's retirement (in accordance with the
standard retirement policies of the Association), upon the change in control of
the Association or the Company or as determined under the ESOP and Pension
Plan.
The Association may establish a grantor trust in connection with the
SERP to satisfy the obligations of the Association with respect to the SERP.
The assets of the grantor trust would remain subject to the claims of the
Association's general creditors in the event of the Association's insolvency
until paid to the individual pursuant to the terms of the SERP.
STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of
Directors of the Company intends to adopt the Stock-Based Incentive Plan which
will provide for the grant of options to purchase Common Stock ("Stock
Options"), and the award of restricted shares of Common Stock ("Stock Awards")
to eligible officers, employees, and directors of the Company and Association.
Stock Options granted under the Plan may be intended to qualify as Incentive
Stock Options under Section 422 of the Code ("Incentive Stock Options") or
options that do not so qualify ("Non-Statutory Stock Options"). The plan may
also provide for certain limited rights that, in the event of a change in
control, may permit the option holder to receive a cash payment in lieu of
exercise of the option or distribution of the Stock Award. The Company expects
to provide such stock-based benefits under the Stock-Based Incentive Plan or,
in the alternative, under one or more separate stock benefit plans.
In the event the Stock-Based Incentive Plan (or any separate plan(s))
is adopted within one year after the Conversion, OTS regulations require such
plan to be approved by a majority of the Company's stockholders at a meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion. The Company intends to grant Stock Options in an amount up to 10%
of the shares of Common Stock issued in connection with the Conversion,
including shares issued to the Foundation (169,050 shares based upon the
maximum of the Estimated Price Range), and intends to grant Stock Awards in an
amount up to 4% of the shares of Common Stock issued in connection with the
Conversion, including shares issued to the Foundation (67,620 shares based upon
the maximum of the Estimated Price Range). Stock Awards will be granted under
the Stock-Based Incentive Plan at no cost to the recipients. While no decision
has been made, as yet, it is possible that the grants of Stock Options and
Stock Awards could involve a substantial portion or all of the options and
awards available under the Stock-Based Incentive Plan. The Company may fund the
plan through the purchase of Common Stock by a trust established in connection
with the Stock-Based Incentive Plan (or any separate plan(s)) or from
authorized but unissued shares. The Board of Directors of the Company intends
to appoint an independent fiduciary to serve as trustee of any trust
established in connection with the Stock-Based Incentive Plan. In the event
that additional authorized but unissued shares are acquired by the Stock-Based
Incentive Plan or its participants after the Conversion, the interests of
existing shareholders would be diluted. See "Pro Forma Data."
The Company expects to design the grants of Stock Options and Stock
Awards to attract and retain qualified personnel in key positions, provide
officers and key employees with a propriety interest in the Company as an
incentive to contribute to the success of the Company, and reward key employees
for outstanding performance. All employees of the Company and its
subsidiaries, including the Association, will be eligible to participate in the
Stock-Based Incentive Plan. It is expected that the committee administering
the plan will determine the terms of awards granted to officers and employees.
The committee will also determine whether Stock Options will qualify as
Incentive Stock Option or Non-Statutory Stock Options, as described below, the
number of shares subject to each Stock Option and Stock Award, the exercise
price of each Stock Option, the method of exercising Stock Options, and when
Stock Options become exercisable or Stock Awards vest. Only employees may
receive grants of Incentive Stock Options. Directors who are not employees may
receive only grants of Non-Statutory Stock Options. If the Stock-Based
Incentive Plan (or other separate plans) is adopted within one year after
conversion, OTS regulations provide that no individual officer or
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employee of the Association may receive more than 25% of the Stock Options
available under the Stock-Based Incentive Plan (or any separate plan for
officers and employees) and non-employee directors may not receive more than 5%
individually, or 30% in the aggregate, of the Stock Options available under the
Stock-Based Incentive Plan (or any separate plan for directors). OTS
regulations also provide that no individual officer or employee of the
Association may receive more than 25% of the Stock Awards available
under the Stock-Based Incentive Plan (or any separate plan for officers and
employees) and non-employee directors may not receive more than 5%
individually, or 30% in the aggregate, of the Stock Awards available
under the Stock-Based Incentive Plan (or any separate plan for directors).
Unless sooner terminated, the Stock-Based Incentive Plan will remain
in effect for a period of ten years from the earlier of adoption by the Board
of Directors of the Company or approval by the Company's stockholders. Subject
to stockholder approval, the Company anticipates granting Stock Options under
the plan at an exercise price equal to at least the fair market value of the
underlying Common Stock on the date of grant.
An individual will not recognize taxable income upon the grant of a
Non-Statutory Stock Option or Incentive Stock Option or upon the exercise of an
Incentive Stock Option, provided the individual does not dispose of the shares
received through the exercise of the Incentive Stock Option such option for at
least one year after the date the individual receives the shares in connection
with the stock option exercise and two years after the date of grant of the
stock option (a "disqualifying disposition"). No compensation deduction will
generally be available to the Company as a result of the exercise of Incentive
Stock Options unless there has been a disqualifying disposition. In the case
of a Non-Statutory Stock Option and in the case of a disqualifying disposition
of share received in connection with the exercise of an Incentive Stock Option,
an individual will recognize ordinary income upon exercise of the stock option
(or upon the disqualifying disposition) in an amount equal to the amount by
which the exercise price exceeds the fair market value of the Common Stock
purchased by exercising the stock option on the date of exercise. The amount
of any ordinary income recognized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an
Incentive Stock Option will be a deductible expense to the Company for tax
purposes. In the case of limited rights, the holder will recognize any amount
paid to him or her upon exercise in the year in which the payment is made and
the Company will be entitled to a deduction for federal income tax purposes of
the amount paid.
Grants of Stock Awards may be made in the form of base grants and/or
performance grants (the vesting of which would be contingent upon performance
goals established by the committee administering the plan). In establishing
any performance goals, the committee may utilize the annual financial results
of the Company, actual performance of the Company as compared to targeted goals
such as the ratio of the Association's net worth to total assets, the Company's
return on average assets, or such other performance standards as determined by
the committee with the approval of the Board of Directors of the Company.
When a participant becomes vested with respect to Stock Award, the
participant will recognize ordinary income equal to the fair market value of
the Common Stock at the time of vesting (unless the participant made an
election pursuant to Section 83(b) of the Code). The amount of income
recognized by the participant will be a deductible expense for tax purposes for
the Company. When restricted Stock Awards become vested and shares of Common
Stock are actually distributed to participants, the participants receive
amounts equal to any accrued dividends with respect thereto, if not earlier
received. Prior to vesting, recipients of Stock Awards may direct the voting
of the shares awarded to them. Shares not subject to grants and shares
allocated subject to the achievement of performance goals will be voted by the
trustee in proportion to the directions provided with respect to shares subject
to grants. Vested shares will be distributed to recipients as soon as
practicable following the day on which they vest.
The vesting periods for awards under the Stock-Based Incentive Plan
will be determined by the committee administering the Plan. If the Company
adopts the Stock-Based Incentive Plan (or any separate plans for employees and
directors) within one year after conversion, awards would become vested and
exercisable subject to applicable OTS
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regulations, which require that any awards begin vesting no earlier than one
year from the date of shareholder approval of the plan and, thereafter, vest at
a rate of no more than 20% per year and may not be accelerated except in the
case of death or disability. Stock Options could be exercisable for a period
of time (likely three months) following the date on which the employee or
director ceases to perform services for the Association or the Company, except
that in the event of death or disability, options accelerate and become fully
vested and could be exercisable for up to one year thereafter or such other
period of time as determined by the Company. In the case of death or
disability, Stock Options may be exercised for a period of 12 months or such
other period of time as determined by the committee. However, any Incentive
Stock Options exercised more than three months following the date the employee
ceases to perform services as an employee would be treated essentially as a
Non-Statutory Stock Option. In the event of retirement, if the optionee
continues to perform services as a director or consultant on behalf of the
Association, the Company or an affiliate, unvested options and awards would
continue to vest in accordance with their original vesting schedule until the
optionee ceases to serve as a consultant or director. In the event of death,
disability or normal retirement, the Company, if requested by the optionee, or
the optionee's beneficiary, could elect, in exchange for vested options, to pay
the optionee, or the optionee's beneficiary in the event of death, the amount
by which the fair market value of the Common Stock exceeds the exercise price
of the options on the date of the employee's termination of employment.
Subject to any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and directors) may be
amended subsequent to the expiration of the one-year period to provide for
accelerated vesting of previously granted Stock Options or Stock Awards in the
event of a change in control of the Company or the Association. A change in
control would generally be considered to occur when a person or group of
persons acting in concert acquires beneficial ownership of 20% or more of any
class of equity security of the Company or the Association or in the event of a
tender or exchange offer, merger or other form of business combination, sale of
all or substantially all of the assets of the Company or the Association or
contested election of directors which resulted in the replacement of a majority
of the Board of Directors by persons not nominated by the directors in office
prior to the contested election.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Association offers officers and full-time employees of the
Association who satisfy the general underwriting standards of the Association,
loans with interest rates up to 1% below the current interest rate in effect,
the Insider Loan Rate ("ILR"); provided, however, that the ILR shall not be
below the Association's cost of funds at the time of the approval of the loan.
All ILR loans requested by officers must be approved by the Board of Directors.
The ILR normally ceases upon termination of employment. Upon termination of
the ILR, the interest rate reverts to the contract rate currently in effect.
All other terms and conditions contained in the original mortgage and note
continue to remain in effect. As of June 30, 1998, seven of the Association's
directors and officers had loans with outstanding balances totalling $273,000
in the aggregate. All such loans were made by the Association in the ordinary
course of business, with no favorable terms (except for ILR loans) and such
loans do not involve more than the normal risk of collectibility or present
unfavorable features.
The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its Common Stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any
interest in the transaction.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock
the Association's officers and directors and their associates propose to
purchase, assuming shares of Common Stock are issued at the minimum and maximum
of the Estimated Price Range, including the effect of shares issued to the
Foundation, and that sufficient shares will be
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available to satisfy their subscriptions. The table also sets forth the total
expected beneficial ownership of Common Stock as to all directors and officers
as a group.
AT THE MINIMUM OF THE AT THE MAXIMUM OF THE
ESTIMATED PRICE RANGE ESTIMATED PRICE RANGE
-------------------------- --------------------------
AS A
PERCENT OF AS A PERCENT
NUMBER OF SHARES NUMBER OF OF SHARES
NAME AMOUNT(1) SHARES SOLD SHARES SOLD
- ------ ---------- -------- ----------- -------- --------------
DIRECTORS AND EXECUTIVE OFFICERS:
Vincent L. Marusak $150,000 15,000 1.20% 15,000 0.89%
Richard C. Laubach 50,000 5,000 0.40 5,000 0.29
Frederick L. Barletta 150,000 15,000 1.20 15,000 0.89
Peter B. Deisroth 30,000 3,000 0.24 3,000 0.18
George J. Hayden 150,000 15,000 1.20 15,000 0.89
Joseph E. Lundy 15,000 1,500 0.12 1,500 0.09
John J. Raynock 50,000 5,000 0.40 5,000 0.29
Anthony P. Sidari 150,000 15,000 1.20 15,000 0.89
David P. Marchetti, Sr. 5,000 500 0.04 500 0.03
Joseph P. Correale 7,500 750 0.06 750 0.04
-------- ------ ---- ------ ----
All Directors and Executive
Officers as a Group (10 persons)... $757,500 75,750 6.06% 75,750 4.48%
======== ====== ==== ====== ====
---------------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares issued in the Conversion, including shares
issued to the Foundation.
THE CONVERSION
THE BOARD OF DIRECTORS OF THE ASSOCIATION, AND THE OTS HAVE APPROVED
THE PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE ASSOCIATION
ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN BY SUCH AGENCY. THE OTS NEITHER APPROVED NOR
DISAPPROVED THE ESTABLISHMENT OF THE FOUNDATION. THE PLAN OF CONVERSION IS
ALSO SUBJECT TO RECEIPT OF THE APPROVAL OF THE PENNSYLVANIA DEPARTMENT, WHICH
WILL ONLY CONSIDER SUCH APPROVAL BASED UPON APPROVAL OF THE PLAN OF CONVERSION
BY THE MEMBERS OF THE ASSOCIATION.
GENERAL
The Plan was adopted unanimously on June 26, 1998 and amended on
September 8, 1998 by the Association's Board of Directors, subject to approval
by the Pennsylvania Department and the OTS. Pursuant to the Plan, the
Association will be converted from a Pennsylvania-chartered mutual savings
association to a Pennsylvania-chartered capital stock savings association. It
is currently intended that all of the outstanding capital stock of the
Association will be held by the Company, which is incorporated under Delaware
law. The Plan was approved by the OTS, subject to, among other things,
approval of the Plan by the Association's members. A Special Meeting of
members has been called for this purpose to be held on ________, 1998. The
Pennsylvania Department will only consider approval of the Plan subsequent to
its approval by members of the Association.
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The Company has received the approval of the OTS to become a savings
and loan holding company and to acquire all of the Common Stock of the
Association to be issued in the Conversion. The Company plans to purchase the
shares of issued and outstanding capital stock of the Association in exchange
for 50% of the net proceeds and retain the remaining net proceeds. The
Conversion will be effected only upon completion of the sale of all of the
shares of Common Stock of the Company or the Association, if the holding
company form of organization is not utilized, to be issued pursuant to the
Plan.
The Plan provides that the Board of Directors of the Association may,
at any time prior to the issuance of the Common Stock and for any reason,
decide not to use a holding company form. Such reasons may include possible
delays resulting from overlapping regulatory processing or policies which could
adversely affect the Association's or the Company's ability to consummate the
Conversion and transact its business as contemplated herein and in accordance
with the Association's operating policies. In the event such a decision is
made, the Association will withdraw the Company's registration statement from
the SEC and take steps necessary to complete the Conversion without the
Company, including filing any necessary documents with the OTS. In such event,
and provided there is no regulatory action, directive or other consideration
upon which basis the Association determines not to complete the Conversion, if
permitted by the OTS, the Association will issue and sell the Common Stock of
the Association and subscribers will be notified of the elimination of a
holding company and resolicited (i.e., be permitted to affirm their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their funds will be
promptly refunded with interest at the Association's passbook rate of interest;
or be permitted to modify or rescind their subscriptions), and notified of the
time period within which the subscriber must affirmatively notify the
Association of his intention to affirm, modify or rescind his subscription.
The following description of the Plan assumes that a holding company form of
organization will be used in the Conversion. In the event that a holding
company form of organization is not used, all other pertinent terms of the Plan
as described below will apply to the conversion of the Association from the
mutual to stock form of organization and the sale of the Association's Common
Stock.
The Plan provides generally that (i) the Association will convert from
a mutual savings association to a capital stock savings association and (ii)
the Company will offer shares of Common Stock for sale in the Subscription
Offering to the Association's Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders, and Other Members. Subsequent to the Subscription
Offering, any remaining shares will be offered in a Community Offering with
preference given to certain members of the general public with preference given
to natural persons residing in Luzerne and Carbon counties, Pennsylvania (the
Association's "Local Community") (such natural persons are herein referred to
as "Preferred Subscribers"). The Community Offering may be commenced prior to
completion of the Subscription Offering. It is anticipated that all shares not
subscribed for in the Subscription and Community Offerings will be offered for
sale by the Company to the general public in a Syndicated Community Offering,
or in another offering. The Association has the right to accept or reject, in
whole or in part, any orders to purchase shares of the Common Stock received in
the Community Offering or in the Syndicated Community Offering. See
"--Community Offering" and "--Syndicated Community Offering."
The aggregate price of the shares of Common Stock to be sold in the
Conversion within the Estimated Price Range, currently estimated to be between
$11.9 million and $16.1 million, will be determined based upon an independent
appraisal, prepared by Keller of the estimated pro forma market value of the
Common Stock of the Company. All shares of Common Stock to be issued and sold
in the Conversion, will be sold at the same price. The independent appraisal
will be affirmed or, if necessary, updated at the completion of the
Subscription and Community Offerings, if all shares are subscribed for, or at
the completion of the Syndicated Community Offering. The appraisal has been
performed by Keller, a consulting firm experienced in the valuation and
appraisal of savings institutions. See "--Stock Pricing" for additional
information as to the determination of the estimated pro forma market value of
the Common Stock.
The following is a brief summary of the material aspects of the
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan, as amended. A copy of the Plan is available for
inspection at each branch of the Association and at the Northeast Region and
Washington, D.C. offices of the OTS.
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ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Association's long-standing commitment to
its local community, the Association's Plan of Conversion provides for the
establishment of a charitable foundation in connection with the Association's
Conversion. The Plan provides that the Association and the Company will
establish the Foundation, which will be incorporated under Delaware law as a
non-stock corporation, and will fund the Foundation with Common Stock of the
Company, as further described below. The Company and the Association believe
that the funding of the Foundation with Common Stock of the Company is a means
of establishing a common bond between the Association and the communities in
which the Association operates and thereby enables such communities to share in
the potential growth and success of the Company and the Association over the
long term. By further enhancing the Association's visibility and reputation in
the communities in which it operates, the Association believes that the
Foundation will enhance the long-term value of the Association's community
Banking franchise.
The Foundation would be dedicated to the promotion of charitable purposes
within the communities in which the Association operates, including, but not
limited to, providing grants or donations to support housing assistance, not-
for-profit medical facilities, community groups and other types of organizations
or projects. Establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Association's members eligible to
be cast at the Special Meeting. The Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Association's members
approve the Plan of Conversion, but not the Foundation, the Association intends
to complete the Conversion without the establishment of the Foundation. Failure
to approve the establishment of the Foundation may materially affect the pro
forma market value of the Common Stock. In such an event, the Association may
establish a new Estimated Price Range and commence a resolicitation of
subscribers. In the event of a resolicitation, unless an affirmative response is
received within a specified period of time, all funds will be promptly returned
to investors, as described elsewhere herein. See "--Stock Pricing."
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the
Association operates. The Association has long emphasized community lending and
community development activities and currently has a satisfactory Community
Reinvestment Act ("CRA") rating. The Foundation is being formed as a complement
to the Association's existing community activities, not as a replacement for
such activities. Indeed, the Association intends to continue to emphasize
community lending and community development activities following the Conversion.
However, such activities are not the Association's sole corporate purpose. The
Foundation, conversely, will be completely dedicated to community activities and
the promotion of charitable causes, and may be able to support such activities
in ways that are not presently available to the Association. Since the
Association already engages in community development activities, the Association
believes that the Foundation will enable the Company and the Association to
assist their local community in areas beyond community development and lending.
In this regard, the Board of Directors believes the establishment of a
charitable foundation is consistent with the Association's commitment to
community service. The Boards of Directors of the Association and Company also
believe that the funding of the Foundation with Common Stock of the Company is a
means of enabling the communities in which the Association operates to share in
the potential growth and success of the Company long after completion of the
Conversion. The Foundation accomplishes that goal by providing for continued
ties between the Foundation and Association, thereby forming a partnership with
the Association's community. The establishment of the Foundation would also
enable the Company and the Association to develop a unified charitable donation
strategy and would centralize the responsibility for administration and
allocation of corporate charitable funds. The Association, however, does not
expect the contribution to the Foundation to take the place of the Association's
traditional community lending and charitable activities. The Association expects
in future periods to continue making charitable contributions within its
communities.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under
Delaware law as a non-stock corporation. It is currently anticipated that the
Foundation's board of directors will be comprised of four members, all of whom
will be individuals elected from existing directors and officers of the
Association. As a result, it is expected that less than a majority of the
Association's directors will also serve as directors of the Foundation. The
officers and
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directors of the Association and Company that are expected to serve on the Board
of Directors of the Foundation consist of Messrs. Deisroth, Hayden, Marchetti
and Raynock, who intend to purchase 3,000, 15,000, 500 and 5,000 shares of
Common Stock in the Conversion, respectively. At the supermaximum of the
Estimated Price Range, such purchases equal 0.15%, 0.77%, 0.03% and 0.26%,
respectively, or 1.21% in the aggregate of the total number of shares to be
issued in the Conversion, including shares issued to the Foundation. On an
on-going basis, a Nominating Committee of the board of directors of the
Foundation, will nominate individuals eligible for election to the board of
directors of the Foundation. The members of the Foundation, who are comprised of
its board members, will elect the directors at the annual meeting of the
Foundation from those nominated by the Nominating Committee. Only persons
serving as directors of the Foundation qualify as members of the Foundation with
voting authority. Directors will be divided into three classes with each class
appointed for three-year terms. The certificate of incorporation of the
Foundation will provide that the Foundation is organized exclusively for
charitable purposes as set forth in Section 501(c)(3) of the Code. The
Foundation's certificate of incorporation further will provide 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. A person who is a
director, officer or employee of the Association, or has the power to direct its
management or policies, or otherwise owes a fiduciary duty to the Association,
and who will also serve as a director or employee of the Foundation would be
subject to the requirements of OTS Conflicts of Interest Regulations.
The authority for the affairs of the Foundation will be vested in the
board of directors of the Foundation. The 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 stated purposes for
which the Foundation is 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. The directors will
also be responsible for directing the assets of the Foundation. Pursuant to the
terms of the contribution as mandated by the OTS, all shares of Common Stock
held by the Foundation must be voted in the same ratio as all other shares of
the Company's Common Stock on all proposals considered by stockholders of the
Company; provided, however, that the OTS will waive this voting restriction
under certain circumstances if compliance with the restriction would: (i) cause
a violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of the State of
Delaware to the Foundation; (ii) would cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (iii) would cause the Foundation to be subject to an excise
tax under Section 4941 of the Code. In order for the OTS to waive such voting
restriction, the Company's or the Foundation's legal counsel must render an
opinion satisfactory to OTS that compliance with the voting restriction would
have the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS will grant a waiver of the voting restriction upon
submission of such legal opinion(s) by the Company or the Foundation. In the
event that the OTS waived the voting restriction, the directors would direct the
voting of the Common Stock held by the Foundation. However, a condition to the
OTS approval of the Conversion provides that in the event such voting
restriction is waived or becomes unenforceable, the Director of the OTS, or his
designees, at that time may impose conditions on the composition of the board of
directors of the Foundation or such other conditions or restrictions relating to
the control of the Common Stock held by the Foundation, any of which could limit
the ability of the board of directors of the Foundation to control the voting of
the Common Stock held by the Foundation. There will be no agreements or
understandings with directors of the Foundation regarding the exercise of
control, directly or indirectly, over the management or policies of the Company
or the Association, including agreements related to voting, acquisition or
disposition of the Company's stock. As directors of a nonprofit corporation,
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 purpose for
which the Foundation is established.
The Company will provide office space and administrative support
services to the Foundation. Initially, the Foundation is expected to have no
employees. The board of directors of the Foundation will appoint such officers
as may be necessary to manage the operations of the Foundation. It is
anticipated that initially such officers will be selected from the board of
directors of the Foundation. Any transaction between the Association and the
Foundation will comply with the affiliate transaction restrictions set forth in
Sections 23A and 23B of the Federal Reserve Act, as amended.
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The Company proposes to capitalize the Foundation with Company Common
Stock in an amount equal to 5% of the total amount of Common Stock to be sold in
connection with the Conversion. At the minimum, midpoint and maximum of the
Estimated Price Range, the contribution to the Foundation would equal 59,500,
70,000 and 80,500 shares, which would have a market value of $595,000, $700,000
and $805,000, respectively, based on the Purchase Price. Such contribution, once
made, will not be recoverable by the Company or the Association. The Company and
the Association determined to fund the Foundation with Common Stock rather than
cash because it desired to form a bond with its community in a manner that would
allow the community to share in the potential growth and success of the Company
and the Association over the long term. The funding of the Foundation with stock
also provides the Foundation with a potentially larger endowment than if the
Company contributed cash to the Foundation since, as a shareholder, the
Foundation will share in the potential growth and success of the Company. As
such, the contribution of stock to the Foundation has the potential to provide a
self-sustaining funding mechanism which reduces the amount of cash that the
Company, if it were not making the stock contribution, would have to contribute
to the Foundation in future years in order to maintain a level amount of
charitable grants and donations.
The Foundation would 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 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. One of the conditions imposed on
the gift of Common Stock by the Company is that the amount of Common Stock that
may be sold by the Foundation in any one year shall not exceed 5% of the average
market value of the assets held by the Foundation, except where the board of
directors of the Foundation determines that the failure to sell an amount of
Common Stock greater than such amount would result in a long-term reduction of
the value of the Foundation's assets or would otherwise jeopardize the
Foundation's capacity to carry out its charitable purposes. While there may be
a greater risk associated with a one-stock portfolio in comparison to a
diversified portfolio, the Company believes any such risk is mitigated by the
ability of the Foundation's directors to sell more than 5% of its stock in such
circumstances. Upon completion of the Conversion and the contribution of shares
to the Foundation immediately following the Conversion, the Company would have
1,249,500, 1,470,000 and 1,690,500 shares issued and outstanding at the
minimum, midpoint and maximum of the Estimated Price Range. Because the Company
will have an increased number of shares outstanding, the voting and ownership
interests of shareholders in the Company's Common Stock would be diluted by
4.8%, as compared to their interests in the Company if the Foundation was not
established. For additional discussion of the dilutive effect, see "Comparison
of Valuation and Pro Forma Information With No Foundation" and "Pro Forma
Data."
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. The Company proposes to capitalize the
Foundation with Common Stock in an amount equal to 5% of the total amount of
Common Stock sold in connection with the Conversion. At the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, the contribution
to the Foundation would equal 59,500, 70,000, 80,500 and 92,575 shares,
respectively, which would have a market value of $595,000, $700,000, $805,000
and $925,750, respectively, based on the Purchase Price. Such contribution, once
made, will not be recoverable by the Company or the Association. As a result of
the establishment of the Foundation, the Estimated Price Range, as estimated by
Keller, has decreased and the amount of stock available for sale in the
Offerings has also correspondingly decreased. The amount of the decrease is
119,000, 140,000, 161,000 and 185,150 shares, or $1.2 million, $1.4 million,
$1.6 million and $1.9 million at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Price Range, respectively. See "Pro Forma Data" and
"Comparison of Valuation and Pro Forma Data Information with No Foundation."
TAX CONSIDERATIONS. The Company and the Association have been advised by
their independent accountants that an organization created for the above
purposes will qualify as a 501(c)(3) exempt organization under the Code, and
will be classified as a private foundation rather than a public charity. 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 a request to the IRS to be recognized as an exempt
organization after approval of the Foundation by the
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Association's members at the Special Meeting being held to consider the
Conversion. As long as the Foundation files its application for tax-exempt
status within 15 months from the date of its organization, and provided the IRS
approves the application, the effective date of the Foundation's status as a
Section 501(c)(3) organization will be the date of its organization. The
Company's independent accountants, however, have not rendered any advice on the
condition of the gift which requires that all shares of Common Stock of the
Company held by the Foundation must be voted in the same ratio as all other
shares of the Company's Common Stock, on all proposals considered by
stockholders of the Company. In the event that the Company or the Foundation
receives an opinion of their tax counsel satisfactory to the OTS that compliance
with the voting restriction would cause the Foundation to lose its tax-exempt
status, otherwise have a material adverse tax consequence on the Foundation or
subject the Foundation to an excise tax under Section 4941 of the Code, the OTS
will waive such condition upon submission of such opinion(s) by the Company or
the Foundation. See "--Regulatory Conditions Imposed on the Foundation."
A legal opinion of the OTS 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
limitations set forth in the Code, and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
In addition, under Delaware law, the Company is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must merely be within reasonable limits as to
amount and purpose to be valid. Under the Code, the Company may deduct up to 10%
of its taxable income in any one year and any contributions made by the Company
in excess of the deductible amount will be deductible for federal tax purposes
over each of the five succeeding taxable years. The Company and the Association
believe that the Conversion presents a unique opportunity to establish and fund
a charitable foundation given the substantial amount of additional capital being
raised in the Conversion. In making such a determination, the Company and the
Association considered the dilutive impact of the Foundation on the amount of
Common Stock available to be offered for sale in the Conversion. See "Comparison
of Valuation and Pro Forma Information with No Foundation." Based on such
consideration, the Company and Association believe that the contribution to the
Foundation in excess of the 10% annual limitation is justified given the
Association's capital position and its earnings, the substantial additional
capital being raised in the Conversion and the potential benefits of the
Foundation to the Association's community. In this regard, assuming the sale of
the Common Stock at the midpoint of the Estimated Price Range, the Company would
have pro forma consolidated capital of $20.9 million, or 16.9% of consolidated
assets and the Association's pro forma tangible, core and risk-based capital
ratios would be 13.4%, 13.4% and 26.8%, respectively. See "Regulatory Capital
Compliance," "Capitalization," and "Comparison of Valuation and Pro Forma
Information with No Foundation." Thus, the amount of the contribution will not
adversely impact the financial condition of the Company and the Association and
the Company and the Association therefore believe that the amount of the
charitable contribution is reasonable given the Company and the Association's
pro forma capital positions. As such, the Company and the Association believe
that the contribution does not raise safety and soundness concerns.
The Company and the Association have received an opinion of their
independent accountants that the Company's contribution of its own stock to the
Foundation will not constitute an act of self-dealing, and that the Company will
be entitled to a deduction in the amount of the fair market value of the stock
at the time of the contribution less the nominal par value that the Foundation
is required to pay to the Company for such stock, subject to a limitation based
on 10% of the Company's annual taxable income. The Company, 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 tax purposes.
Thus, while the Company expects, based on the maximum of the Estimated Price
Range, to be able to utilize for federal income tax purposes a charitable
contribution deduction of approximately $141,953 in fiscal year 1999, the
Company is permitted under the Code to carryover the excess of the total
contribution over such 1999 deduction over a five-year period for federal
income tax purposes. For Commonwealth of Pennsylvania state income tax
purposes, the Company also would be able to deduct its contribution to the
Foundation and to carry forward any unused portion over a five-year period,
subject to the limitation based on 10% of the Company's unconsolidated annual
taxable income, and provided the Company generates sufficient state taxable
income on an unconsolidated basis. Assuming the close of the Offerings at the
maximum of the Estimated Price Range, the Company estimates that all of the
federal tax deduction should be deductible over the six-year period. However,
no assurances can be made that the
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Company will have sufficient pre-tax income over the five year period following
the year in which the contribution was made to fully utilize the carryover
related to the excess contribution. Neither the Company nor the Association
expects to make any further contributions to the Foundation within the first
five years following the initial contribution. After that time, the Company and
the Association may consider future contributions to the Foundation. Any such
decisions would be based on an assessment of, among other factors, the financial
condition of the Company and the Association at that time, the interests of
shareholders and depositors of the Company and the Association, and the
financial condition and operations of the Foundation.
Although the Company and the Association have received an opinion of
their independent accountants that the Company is entitled to a deduction for
the charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that the
deduction will be permitted. In such event, the Company's contribution to the
Foundation would be expensed without tax benefit, resulting in a reduction in
earnings in the year in which the IRS makes such a determination. See "Risk
Factors--Establishment of the Charitable Foundation." 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 Code. The Foundation's certificate of incorporation provides 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 Code and its certificate 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
Code, or to distribute such assets to the federal government, or to a state or
local government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
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 fiscal year to maintain its tax-exempt
status. The Foundation will 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 subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in accordance
with written policies adopted by the board of directors, including a conflict of
interest policy; (v) the Foundation will not engage in self-dealing and will
comply with all laws necessary to maintain its tax-exempt status; (vi) any
purchases of Common Stock by the Foundation following that Conversion will be
subject to OTS regulations on stock repurchases; and (vii) any shares of Common
Stock of the Company held by the Foundation must be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company; provided, however, that the OTS will waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware and
the OTS determines the federal law does not preempt the application of the laws
of the State of Delaware to the Foundation; (b) cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (c) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting restriction,
the Company's or the Foundation's legal counsel must render an opinion
satisfactory to OTS that compliance with the voting restriction would have the
effect described in clauses (a), (b) or (c) above. Under those
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circumstances, the OTS will grant a waiver of the voting restriction upon
submission of such opinion(s) by the Company or the Foundation. There can be no
assurances that either a legal or tax opinion addressing these issues will be
rendered, or if rendered, that the OTS will grant an unconditional waiver of the
voting restriction. In this regard, a condition to the OTS approval of the
Conversion provides that in the event such voting restriction is waived or
becomes unenforceable, the Director of the OTS, or his designees, at that time
may impose conditions on the composition of the board of directors of the
Foundation or such other conditions or restrictions relating to the control of
the Common Stock held by the Foundation, any of which could limit the ability of
the board of directors of the Foundation to control the voting of Common Stock
held by the Foundation. In no event will the voting restriction survive the sale
of shares of the Common Stock held by the Foundation.
In addition, establishment of the Foundation is subject to the approval
of a majority of the total outstanding votes of the Association's members
eligible to be cast at the special meeting being held to consider the
Conversion. The Foundation will be considered as a separate matter from approval
of the Plan of Conversion. If the Association's members approve the Plan of
Conversion, but not the Foundation, the Association intends to complete the
Conversion without the establishment of the Foundation. Failure to approve the
Foundation may materially increase the pro forma market value of the Common
Stock being offered for sale in the Offering since the Estimated Price Range,
as set forth herein, takes into account the dilutive impact of the issuance of
shares to the Foundation. See "Comparison of Valuation and Pro Forma
Information With No Foundation."
PURPOSES OF CONVERSION
The Association, as a Pennsylvania-chartered mutual savings and loan
association, does not have shareholders and has no authority to issue capital
stock. By converting to the capital stock form of organization, the Association
will be structured in the form used by commercial banks, other business entities
and a growing number of savings institutions. The Conversion will enhance the
Association's ability to access capital markets, expand its current operations,
acquire other financial institutions or branch offices, provide affordable home
financing opportunities to the communities it serves or diversify into other
financial services to the extent allowable by applicable law and regulation. The
Conversion would also position the Association for a conversion to a commercial
bank charter if the Board of the Association chooses to do so in the future.
The holding company form of organization, if used, would provide
additional flexibility to diversify the Association's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with both mutual and stock institutions, as well as other companies.
Although there are no current arrangements, understandings or agreements
regarding any such opportunities, the Company will be in a position after the
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Association's capital
base is significant. The Conversion will significantly increase the
Association's capital position to a level whereby the Association will be better
positioned to take advantage of business opportunities and engage in activities
which, prior to Conversion, would have been more difficult for the Association
to engage in and still continue to meet its status as a "well capitalized"
institution. At June 30, 1998, the Association had total equity, determined in
accordance with GAAP, of $9.2 million, or 8.2% of total assets, which
approximated the Association's regulatory tangible capital at that date of 8.4%
of assets. An institution with a ratio of tangible capital to total assets of
greater than or equal to 5.0% is considered to be "well-capitalized" pursuant to
OTS regulations. Assuming that the Company uses 50% of the net proceeds at the
maximum of the Estimated Price Range to purchase the stock of the Association,
the Association's GAAP capital will increase to $15.8 million or a ratio of GAAP
capital to adjusted assets, on a pro forma basis, of 13.3% after the Conversion.
In the event that the holding company form of organization is not utilized and
all of the net Conversion proceeds, at the midpoint of the Estimated Price
Range, are retained by the Association, the Association's ratios of tangible and
core capital to adjusted assets, on a pro forma basis, will both increase to
18.0% after Conversion. The investment of the net proceeds from the sale of the
Common Stock is expected to provide the Association with additional income to
increase further
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its capital position. The additional capital may also assist the Association in
offering new programs and expanded services to its customers. See "Use of
Proceeds."
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and any required regulatory approval of an
offering, to raise additional equity capital through further sales of
securities, and to issue securities in connection with possible acquisitions. At
the present time, the Company has no plans with respect to additional offerings
of securities, other than the possible issuance of additional shares upon
exercise of Stock Options under the Stock-Based Incentive Plan or the possible
issuance of authorized but unissued shares to the Stock-Based Incentive Plan for
Stock Awards. Following the Conversion, the Company will also be able to use
stock-related incentive plans to attract and retain executive and other
personnel for itself and its subsidiaries. See "Management of the
Association--Executive Compensation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings institution has both a
deposit account in the institution and a pro rata ownership interest in the net
worth of the institution based upon the balance in his or her account, which
interest may only be realized in the event of a liquidation of the institution
or in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS and the Pennsylvania Department.
However, this ownership interest is tied to the depositor's account and has no
tangible market value separate from such deposit account. Any depositor who
opens a deposit account obtains a pro rata ownership interest in the net worth
of the institution without any additional payment beyond the amount of the
deposit. A depositor who reduces or closes his account receives a portion or all
of the balance in the account but nothing for his ownership interest in the net
worth of the institution, which is lost to the extent that the balance in the
account is reduced.
Consequently, mutual savings institution depositors normally have no way
to realize the value of their ownership interest, which has realizable value
only in the unlikely event that the mutual savings institution is liquidated or
in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual surplus and
reserves after other claims, including claims of depositors to the amounts of
their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Association of accepting deposits and making loans will continue
without interruption. The Association will continue to be subject to regulation
by the OTS and the FDIC. After the Conversion, the Association will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The Directors serving the Association at the time of Conversion will
serve initially as Directors of the Association after the Conversion. The
Directors of the Company will consist initially of individuals currently serving
on the Board of Directors of the Association. All officers of the Association at
the time of Conversion will retain their positions immediately after Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the
Association at the time of Conversion will automatically continue as a depositor
after the Conversion, and each such deposit account will remain the same with
respect to deposit balance, interest rate and other terms. Each such account
will be insured by the FDIC to the same extent as before the Conversion (i.e.,
up to $100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
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EFFECT ON LOANS. No loan outstanding from the Association will be
affected by the Conversion, and the amount, interest rate, maturity and security
for each loan will remain as they were contractually fixed prior to the
Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and
certain borrowers of the Association are members of, and have voting rights in,
the Association as to all matters requiring membership action. Upon Conversion,
depositors and borrowers will cease to be members and will no longer be entitled
to vote at meetings of the Association. Upon Conversion, all voting rights in
the Association will be vested in the Company as the sole stockholder of the
Association. Exclusive voting rights with respect to the Company will be vested
in the holders of Common Stock. Depositors and borrowers of the Association will
not have voting rights after the Conversion except to the extent that they
become stockholders of the Company through the purchase of Common Stock.
TAX EFFECTS. The Association has received an opinion from Muldoon, Murphy
& Faucette with regard to federal income taxation and an opinion from Parente,
Randolph, Orlando, Carey & Associates with regard to Pennsylvania income
taxation which provide that the adoption and implementation of the Plan of
Conversion set forth herein will not be taxable for federal or Pennsylvania
income tax purposes to the Association, its Eligible Account Holders, or its
Supplemental Eligible Account Holders or the Company, except as discussed below.
See "--Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts immediately prior to
liquidation. In the unlikely event that the Association were to liquidate after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see
"--Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Association's capital stock. Pursuant to the rules
and regulations of the OTS, a post-Conversion merger, consolidation, sale of
bulk assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock must be based on the appraised pro forma market value of the Common
Stock, as determined on the basis of an independent valuation. The Association
and the Company have retained Keller to make such valuation. For its services in
making such appraisal, Keller will receive a fee of $21,000 plus reasonable
expenses not to exceed $1,000. The Association and the Company have agreed to
indemnify Keller and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as appraiser, except where Keller's liability
results from its negligence, willful misconduct or bad faith.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Financial Statements. Keller also
considered the following factors, among others: the present and projected
operating results and financial condition of the Company and the Association and
the economic and demographic conditions in the Association's existing marketing
area; certain historical, financial and other information relating to the
Association; a comparative evaluation of the operating and financial statistics
of the Association with those of other similarly situated publicly-traded
savings banks and savings institutions located in the Association's market area
and the Midwest and the Mid-Atlantic areas of the United States; the aggregate
size of the offering of the Common Stock; the impact of Conversion on the
Association's net worth and earnings potential; the proposed dividend policy of
the Company and the Association; and the trading market for securities of
comparable institutions and general conditions in the market for such
securities.
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On the basis of the foregoing, Keller has advised the Company and the
Association that, in its opinion, dated August 14, 1998, the estimated pro forma
market value of the Common Stock, being offered for sale ranged from a minimum
of $11.9 million to a maximum of $16.1 million with a midpoint of $14.0 million.
Based upon the Valuation Range and the Purchase Price for the Common Stock
established by the Board of Directors, the Board of Directors has established
the Estimated Price Range of $11.9 million to $16.1 million, with a midpoint of
$14.0 million, and the Company expects to issue between 1,190,000 and 1,610,000
shares of Common Stock. The Board of Directors of the Company and the
Association have reviewed the appraisal of Keller and in determining the
reasonableness and adequacy of such appraisal consistent with OTS regulations
and policies, have reviewed the methodology and reasonableness of the
assumptions utilized by Keller in the preparation of such appraisal. The
Estimated Price Range may be amended with the approval of the OTS (if required),
if necessitated by subsequent developments in the financial condition of the
Company or the Association or market conditions generally. The $10.00 per share
price for the Common Stock was based on the consideration of a number of
factors, including the potential after market liquidity of the stock, stock
exchange or AMEX listing requirements and other marketing conditions.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK IN
THE OFFERINGS. KELLER DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE ASSOCIATION, NOR DID KELLER VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE ASSOCIATION. THE APPRAISAL
CONSIDERS THE ASSOCIATION AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE ASSOCIATION. MOREOVER, BECAUSE SUCH
APPRAISAL IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN
BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN THE CONVERSION WILL THEREAFTER
BE ABLE TO SELL COMMON STOCK AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE
RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE THEREOF. SEE
"RISK FACTORS--ABSENCE OF MARKET FOR COMMON STOCK."
Following commencement of the Subscription Offering, the maximum of the
Estimated Price Range may be increased up to 15% and the number of shares of
Common Stock to be issued in the Conversion may be increased to 1,851,500 shares
due to regulatory considerations, changes in the market and general financial
and economic conditions, without the resolicitation of subscribers. See
"--Limitations on Common 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 Price Range to fill unfilled orders in the Subscription
Offering.
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Association and the OTS that, to the
best of its knowledge, nothing of a material nature has occurred which, taking
into account all relevant factors, would cause Keller to conclude that the value
of the Common Stock at the price so determined is incompatible with its estimate
of the pro forma market value of the Common Stock at the conclusion of the
Subscription Offering.
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Association and the Company, after consulting with
the OTS, may terminate the Plan and return all funds promptly with interest at
the Association's passbook rate of interest on payments made by check, bank
draft or money order, extend or hold a new Subscription Offering and/or
Community Offering, establish a new Estimated Price Range, commence a
resolicitation of subscribers or take such other actions as permitted by the OTS
in order to complete the Conversion. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable period
of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription Offering
would not exceed 45 days unless further extended by the OTS for periods of up to
90 days not to extend beyond March 30, 2000.
If all shares of Common Stock are not sold through the Subscription
Offering or Community Offering, then the Association and the Company expect to
offer the remaining shares in a Syndicated Community Offering which would occur
as soon as practicable following the close of the Subscription Offering but may
commence during the Subscription Offering subject to prior rights of
subscribers. All shares of Common Stock will be sold at the same price
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per share in the Syndicated Community Offering as in the Subscription Offering
and Community Offering. See "--Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Association, the Company and the OTS
that, to the best of its knowledge, nothing of a material nature has occurred
which, taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
Keller to conclude that the aggregate value of the Common Stock at the Purchase
Price is incompatible with its estimate of the pro forma market value of the
Common Stock of the Company at the time of the Syndicated Community Offering.
Any change which would result in an aggregate purchase price which is below or
more than 15% above the Estimated Price Range would be subject to OTS approval.
If such confirmation is not received, the Association may extend the Conversion,
extend, reopen or commence a new Subscription Offering, Community Offering or
Syndicated Community Offering, establish a new Estimated Price Range and
commence a resolicitation of all subscribers with the approval of the OTS or
take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. 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 Price Range or more than 15%
above the maximum of such range, and the Company and the Association determine
to continue the Conversion, subscribers will be resolicited (i.e., be permitted
to continue their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their subscription funds will be promptly refunded with interest at
the Association's passbook rate of interest, or be permitted to decrease or
cancel their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. A resolicitation, if any, following the conclusion of the
Subscription Offering would not exceed 45 days unless further extended by the
OTS for periods up to 90 days not to extend beyond ________, 2000. If such
resolicitation is not effected, the Association will return all funds promptly
with interest at the Association's passbook rate of interest on payments made by
check, bank draft or money order.
Copies of the appraisal report of Keller, including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of the Association and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement
of the Subscription Offering, the total number of shares to be issued in the
Conversion may be increased or decreased without a resolicitation of
subscribers, provided that the product of the total number of shares times the
price per share is not below the minimum of the Estimated Price Range or more
than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and Keller's estimate of the pro forma market
value of the Common Stock ranging from a minimum of $11.9 million to a maximum,
as increased by 15%, of $18.5 million, the number of shares of Common Stock
expected to be sold in the Conversion is between a minimum of 1,190,000 shares
and a maximum, as adjusted by 15%, of 1,851,500 shares. The actual number of
shares sold between this range will depend on a number of factors and shall be
determined by the Association and Company subject to OTS approval, if necessary.
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
Price Range or more than 15% above the maximum of the Estimated Price Range, if
the Plan is not terminated by the Company and the Association after consultation
with the OTS, purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for the
maximum number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See "--Limitations on Common Stock
Purchases."
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In the event the members of the Association approve the establishment of
the Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares equal to 5.0% of the Common
Stock sold in the Conversion. Assuming the sale of shares in the Offerings at
the maximum of the Estimated Price Range, the Company will issue 80,500 shares
of its Common Stock from authorized but unissued shares to the Foundation
immediately following the completion of the Conversion. In that event, the
Company will have total shares of Common Stock outstanding of 1,690,500 shares.
Of that amount, the Foundation will own 4.8%. Funding the Foundation with
authorized but unissued shares will have the effect of diluting the ownership
and voting interests of persons purchasing shares in the Conversion by 4.8%
since a greater number of shares will be outstanding upon completion of the
Conversion than would be if the Foundation were not established. See "Pro Forma
Data."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts with a balance of $50 or more as of March 31, 1997 ("Eligible
Account Holders"); (2) the ESOP; (3) holders of deposit accounts with a balance
of $50 or more as of _______________, 1998 ("Supplemental Eligible Account
Holders"); and (4) members of the Association, consisting of depositors of the
Association as of __________, 1998, (the "Voting Record Date"), and borrowers
with loans outstanding as of _______________, 1998, which continue to be
outstanding as of the Voting Record Date other than Eligible Account Holders and
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 Common Stock
Purchases."
Deposit accounts which will provide subscription rights to holders
thereof consist of any "savings account," as defined by the Plan of Conversion
consistent with OTS regulations. Pursuant to the Plan and federal regulation,
certain deposits do not qualify as "savings accounts," including but not limited
to noninterest-bearing demand accounts, (primarily noninterest-bearing checking
accounts) and mortgage escrow deposits, maintained at the Association.
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (1)
the amount permitted to be purchased in the Community Offering, currently
$150,000 of Common Stock; (2) one-tenth of one percent (.10%) of the total
offering of shares of Common Stock; or (3) fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of the Eligible Account Holder's Qualifying Deposit (defined by the Plan
as any deposit account in the Association with a balance of $50 or more as of
March 31, 1997) and the denominator is the total amount of Qualifying Deposits
of all Eligible Account Holders, in each case on the Eligibility Record Date,
subject to the overall purchase limitation and exclusive of an increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to 15%.
See "--Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights
for a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock
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equal to the lesser of 100 shares or the number of shares subscribed for by the
Eligible Account Holder. Any shares remaining after that allocation will be
allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
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 less shares being allocated
than if all accounts had been disclosed. The subscription rights of Eligible
Account Holders who are also Directors or Officers of the Association or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the 12
months preceding June 30, 1997.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of Common Stock issued in the Conversion, including shares issued to the
Foundation, and any increase in the number of shares of Common Stock to be
issued in the Conversion after the date hereof as a result of an increase of up
to 15% in the maximum of the Estimated Price Range. The ESOP intends to purchase
8% of the shares to be issued in the Conversion, including shares issued to the
Foundation, or 99,960 shares and 135,240 shares, based on the minimum and
maximum of the Estimated Price Range, respectively. Subscriptions by the ESOP
will not be aggregated with shares of Common Stock purchased directly by or
which are otherwise attributable to any other participants in the Subscription
Offering, including subscriptions of any of the Association's directors,
officers, employees or associates thereof. See "Management of the
Association--Other Benefit Plans--Employee Stock Ownership Plan."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $150,000 of Common Stock, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See "--Limitations on Common Stock
Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more Supplemental
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
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To ensure proper allocation of stock, each Supplemental 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 less shares being
allocated than if all accounts had been disclosed. The subscription rights
received by Eligible Account Holders will be applied in partial satisfaction to
the subscription rights to be received as a Supplemental Eligible Account
Holder.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority nontransferable subscription
rights to subscribe for Common Stock in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $150,000 of Common Stock, or one-tenth of one percent (.10%) of the
total offering of shares of Common Stock, subject to the overall purchase
limitation and exclusive of an increase in shares issued pursuant to an increase
in the Estimated Price Range of up to 15%.
In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock subscribed
for by the Eligible Account Holders, the Employee Plans and the Supplemental
Eligible Account Holders is in excess of the total number of shares of
Conversion Stock being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more remaining
Other Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will terminate at __:__ _.m., Eastern time on ______________, 1998 (the
"Expiration Date"), unless extended for up to 45 days by the Association or such
additional periods with the approval of the OTS. Subscription rights which have
not been exercised prior to the Expiration Date will become void.
The Association will not execute orders until all shares of Common Stock
have been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the
Association pursuant to the Subscription Offering will be returned promptly to
the subscribers with interest and all withdrawal authorizations will be
canceled. If an extension beyond the 45 day period following the Expiration Date
is granted, the Association will notify subscribers of the extension of time and
of any rights of subscribers to modify or rescind their subscriptions and have
their funds returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Association of their intention to
confirm, modify, or rescind their subscription. If an affirmative response to
any resolicitation is not received by the Company from a subscriber, such order
will be rescinded and all subscription funds will be promptly returned with
interest. Such extensions may not go beyond ________, 2000.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the ESOP, the
Supplemental Eligible Account Holders and Other Members, the Association has
intends to offer shares pursuant to the Plan to certain members of the general
public in a Community Offering. The Community Offering may be commenced prior to
the expiration of the Subscription Offering. In the event a Community Offering
is held, a preference will be given to Preferred Subscribers, subject to the
right of the Company to accept or reject any such orders, in whole or in part,
in their sole discretion. Persons purchasing stock in the Community Offering,
together with associates of and persons acting in concert with such persons, may
purchase up to
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$150,000 of Common Stock subject to the maximum purchase limitation and
exclusive of shares issued pursuant to an increase in the Estimated Price Range
by up to 15%. See "--Limitations on Common Stock Purchases." This amount may be
increased to up to a maximum of 5% or decreased to less than $150,000 at the
sole discretion of the Company and the Association. THE OPPORTUNITY TO SUBSCRIBE
FOR SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE
RIGHT OF THE ASSOCIATION AND THE COMPANY, IN ITS SOLE DISCRETION, TO ACCEPT OR
REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN
ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of Preferred Subscribers after completion of the
Subscription Offering and Community Offering, such stock will be allocated first
to each Preferred Subscriber whose order is accepted by the Association, in an
amount equal to the lesser of 100 shares or the number of shares subscribed for
by each such Preferred Subscriber, if possible. Thereafter, unallocated shares
will be allocated among the Preferred Subscribers whose order remains
unsatisfied on a 100 shares per order basis until all such orders have been
filled or the remaining shares have been allocated. If there are any shares
remaining, shares will be allocated to other persons of the general public who
purchase in the Community Offering applying the same allocation described above
for Preferred Subscribers.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Association 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 reside. However, the Plan
provides that the Association and the Company 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 both of the
following apply: (i) a small number of persons otherwise eligible to subscribe
for shares of Common Stock reside in such state; and (ii) the Company or the
Association determines that compliance with the securities laws of such state
would be impracticable for reasons of cost or otherwise, including but not
limited to a request that the Company and the Association or their officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of such state, or a request to register or otherwise
qualify the subscription rights or Common Stock for sale or submit any filing
with respect thereto in such state. Where the number of persons eligible to
subscribe for shares in one state is small, the Association and the Company will
base their decision as to whether or not to offer the Common Stock in such state
on a number of factors, including the size of accounts held by account holders
in the state, the cost of registering or qualifying the shares or the need to
register the Company, its officers, directors or employees as brokers, dealers
or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Association and the Company have engaged Sandler O'Neill as a
consultant and financial advisor in connection with the offering of the Common
Stock, and Sandler O'Neill has agreed to use its best efforts to solicit
subscriptions and purchase orders for shares of Common Stock in the Offerings.
Based upon negotiations between the Association and the Company concerning fee
structure, Sandler O'Neill will receive a fee equal to 2% of the aggregate
Purchase Price of the shares sold in the Subscription and Community Offerings,
excluding shares purchased by directors, officers, employees, and any immediate
family member thereof, and any employee benefit plan of the Company or
Association, including the ESOP for which Sandler O'Neill will not receive a
fee. In the event that a selected dealers agreement is entered into in
connection with a Syndicated Community Offering, the Association will pay a fee
(to be negotiated at such time under such agreement) to such selected dealers,
any sponsoring dealers fees, and a management fee to Sandler O'Neill of 1.5% for
shares sold by a National Association of Securities Dealers, Inc. member firms
pursuant to a selected dealers agreement; provided, however, that any fees
payable to Sandler O'Neill for Common Stock sold by them pursuant to such a
selected dealers agreement shall not exceed 2% of the Purchase Price and
provided, further, however, that the aggregate fees payable to Sandler O'Neill
and the selected dealers will not exceed 5% of the aggregate purchase price of
the Common Stock sold by selected dealers. Fees to Sandler O'Neill and to any
other broker-dealer may be deemed to be underwriting fees, and Sandler O'Neill
and such broker-dealers may be deemed to be underwriters. The Company and the
Association have agreed to indemnify Sandler O'Neill for reasonable costs and
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expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act. Sandler O'Neill has received advances
towards its fees totaling $25,000. Total marketing fees to Sandler O'Neill are
expected to be $204,118 and $280,860 at the minimum and the maximum of the
Estimated Price Range, respectively. See "Pro Forma Data" for the assumptions
used to arrive at these estimates.
Sandler O'Neill will perform proxy solicitation services, conversion
agent services and records management services for the Association in the
Conversion and will receive a fee for these services of $10,000. Reasonable
out-of-pocket expenses shall not exceed $50,000. Directors and executive
officers of the Company and Association may participate in the solicitation of
offers to purchase Common Stock. Questions of prospective purchasers will be
directed to executive officers or registered representatives. Other employees of
the Association may participate in the Offering in ministerial capacities or
providing clerical work in effecting a sales transaction. Such other employees
have been instructed not to solicit offers to purchase Common Stock or provide
advice regarding the purchase of Common Stock. The Company will rely on Rule
3a4-1 under the Exchange Act, and sales of Common Stock will be conducted within
the requirements of Rule 3a4-1, so as to permit officers, directors and
employees to participate in the sale of Common Stock. No officer, director or
employee of the Company or the Association will be compensated in connection
with his participation by the payment of commissions or other remuneration based
either directly or indirectly on the transactions in the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND COMMUNITY OFFERINGs
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in the case of the Subscription Offering or the
termination of the Community Offering in accordance with Rule 15c2-8 of the
Exchange Act, no prospectus will be mailed any later than five days prior to
such date or hand delivered any later than two days prior to such date.
Execution of the stock order form and certification form will confirm receipt or
delivery in accordance with Rule 15c2-8. Stock order and certification forms
will only be distributed with a prospectus.
To purchase shares in the Offerings, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the Association's deposit
account (which may be given by completing the appropriate blanks in the stock
order form), must be received by the Association at any of its offices by 12:00
noon, Eastern time, on the Expiration Date in the case of the Subscription
Offering or the termination of the Community Offering. Stock order forms which
are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Association and Company are not obligated to
accept orders submitted on photocopied or facsimilied stock order forms and will
not accept stock order forms unaccompanied by an executed certification form.
Notwithstanding the foregoing, the Company shall have the right, in its sole
discretion, to permit institutional investors to submit irrevocable orders
together with a legally binding commitment for payment and to thereafter pay for
the shares of Common Stock for which they subscribe in the Community Offering at
any time prior to 48 hours before the completion of the Conversion. The Company
and the Association have the right to waive or permit the correction of
incomplete or improperly executed forms, but do not represent that they will do
so. Once received, an executed stock order form may not be modified, amended or
rescinded without the consent of the Association unless the Conversion has not
been completed within 45 days after the end of the Subscription Offering, unless
such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (March 31,
1997) and/or the Supplemental Eligibility Record Date (_______________, 1998)
and/or the Voting Record Date (__________, 1998) must list all accounts on the
stock order form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in person
at any branch office of the Association, (ii) by check, bank draft or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Association. No wire transfers will be accepted. Interest will be paid
on payments made by cash, check, bank draft or money order at the Association's
passbook rate of interest from the date payment is received until
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the completion or termination of the Conversion. Orders for Common Stock
submitted by subscribers in the Subscription Offering which aggregate $50,000 or
more must be paid by official or certified check or by withdrawal authorization
from a deposit account of the Association. 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 rates until
completion or termination of the Conversion, but a hold will be placed on such
funds, thereby making them unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Association to withdraw the amount of the
purchase price from his deposit account, the Association will do so as of the
effective date of the Conversion. The Association will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the
Association's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or Syndicated
Community Offering if shares remain to be sold in such offerings; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") and
Qualified Plans may use the assets of such IRAs and Qualified Plans to purchase
shares of Common Stock in the Subscription Offering and/or Community Offering,
provided that such IRAs are not maintained at the Association. Persons with
self-directed IRAs and Qualified Plans maintained at the Association must have
their accounts transferred to an unaffiliated institution or broker to purchase
shares of Common Stock in the Subscription Offering and/or Community Offering.
In addition, the provisions of ERISA and IRS regulations require that officers,
directors and ten percent shareholders who use self-directed IRA funds and
Qualified Plans to purchase shares of Common Stock in the Subscription Offering
and/or Community Offering, make such purchases for the exclusive benefit of the
IRAs and Qualified Plans.
Certificates representing shares of Common Stock purchased will be mailed
to purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the ESOP, the Supplemental Eligible Account Holders and Other Members
of the Association, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Conversion.
THE ASSOCIATION AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND
EQUITABLE REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE
TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO
INVOLVE THE TRANSFER OF SUCH RIGHTS.
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SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Association in the sale of the Common Stock. The
Company and the Association have the right to reject orders in whole or in part
in their sole discretion in the Syndicated Community Offering. Neither Sandler
O'Neill nor any registered broker-dealer shall have any obligation to take or
purchase any shares of the Common Stock in the Syndicated Community Offering,
however, Sandler O'Neill has agreed to use its best efforts in the sale of
shares in the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing." Subject
to overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $150,000 of the Common Stock, exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price Range
of up to 15%; provided, however, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons acting
in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to an overall maximum purchase
limitation of the greater of (i) $150,000 or (ii) 1.0% of the shares offered,
exclusive of an increase in shares issued pursuant to an increase in the
Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Association's passbook rate of interest from the date
such payment is actually received by the Association until completion or
termination of the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Association for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Association for deposit in a segregated
account. Although purchasers' funds are not required to be in their accounts
with selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Offering Expiration Date, unless extended by the
Company with the approval of the OTS. Such extensions may not be beyond
________, 2000. See "--Stock Pricing" above for a discussion of rights of
subscribers, if any, in the event an extension is granted.
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LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently
$150,000 of Common Stock; 2) one-tenth of one percent (.10%) of
the total offering of shares of Common Stock; or 3) fifteen times
the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders, in each case on the Eligibility Record
Date subject to the overall maximum purchase limitation in (8)
below and exclusive of an increase in the total number of shares
issued due to an increase in the Estimated Price Range of up to
15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of
the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation, including shares issued in the
event of an increase in the Estimated Price Range of 15%, and
intends to purchase 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of: 1) the
amount permitted to be purchased in the Community Offering,
currently $150,000 of Common Stock; 2) one-tenth of one percent
(.10%) of the total offering of shares of Common Stock; or 3)
fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock
to be issued by a fraction of which the numerator is the amount of
the Qualifying Deposit of the Supplemental Eligible Account Holder
and the denominator is the total amount of Qualifying Deposits of
all Supplemental Eligible Account Holders, in such case on the
Supplemental Eligibility Record Date subject to the overall
maximum purchase limitation in (8) below and exclusive of an
increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the
Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently
$150,000 of Common Stock; or 2) one-tenth of one percent (.10%) of
the total offering of shares of Common Stock, in each case subject
to the overall maximum purchase limitation in (8) below and
exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons acting
in concert with such persons, may purchase in the Community
Offering up to $150,000 of Common Stock, subject to the overall
maximum purchase limitation in (8) below and exclusive of an
increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of and persons acting
in concert with such persons, may purchase in the Syndicated
Offering up to $150,000 of Common Stock, subject to the overall
maximum purchase limitation in (8) below and exclusive of an
increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15% and, provided further
that shares of Common Stock purchased
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in the Community Offering by any persons, together with associates
of or persons acting in concert with such persons, will be
aggregated with purchases in the Syndicated Community Offering in
applying the $150,000 purchase limitation;
(8) Except for the ESOP, the overall maximum number of shares of
Common Stock subscribed for or purchased in all categories of the
Conversion by any person, together with associates of or persons
acting in concert with such persons, shall not exceed the greater
of (i) $150,000 or (ii) 1.0% of the shares of Common Stock offered
in the Conversion exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of
up to 15%; and
(9) No more than 30% of the total number of shares offered for sale in
the Conversion may be purchased by directors and officers of the
Association and their associates in the aggregate, excluding
purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Association, both the individual amount permitted to be subscribed for and
the overall maximum purchase limitation may be increased to up to a maximum of
5% at the sole discretion of the Company and the Association. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Association may be, given the
opportunity to increase their subscriptions up to the then applicable limit. In
addition, the Boards of Directors of the Company and the Association may, in
their sole discretion, increase the maximum purchase limitation referred to
above up to 9.99%, provided that orders for shares exceeding 5% of the shares
being offering in the Subscription and Community Offerings shall not exceed, in
the aggregate, 10% of the shares being offered in the Subscription and Community
Offerings. Requests to purchase additional shares of Common Stock under this
provision will be determined by the Boards of Directors and, if approved,
allocated on a pro rata basis giving priority in accordance with the priority
rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than
1% but the individual amount permitted to be subscribed for may be reduced by
the Association to less than $150,000 subject to paragraphs (2), (4) and (5)
above without the further approval of members or resolicitation of subscribers.
An individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make such
purchase, together with associates of and persons acting in concert with such
person, by also purchasing in other available categories of the Conversion,
subject to availability of shares and the overall maximum purchase limit for
purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion,
including shares issued to the Foundation, at the Adjusted Maximum number of
shares; (ii) in the event that there is an oversubscription by Eligible Account
Holders, to fill unsatisfied subscriptions of Eligible Account Holders,
exclusive of the Adjusted Maximum; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unsatisfied
subscriptions of Supplemental Eligible Account Holders, exclusive of the
Adjusted Maximum; (iv) in the event that there is an oversubscription by Other
Members, to fill unsatisfied subscriptions of Other Members exclusive of the
Adjusted Maximum; and (v) to fill unsatisfied subscriptions in the Community
Offering to the extent possible, exclusive of the Adjusted Maximum, with
preference to institutional investors then a preference to Preferred
Subscribers.
The term "associate" of a person is defined to mean: (i) any corporation,
partnership (other than the Association or a majority-owned subsidiary of the
Association) of which such person is an officer, partner or 10% stockholder;
(ii) any trust or other estate in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; provided,
however, such term shall not include any employee stock benefit plan of the
Association in which such person has a substantial beneficial interest or serves
as a trustee or in a similar fiduciary capacity; and (iii) any relative or
spouse of such person, or any relative of such spouse, who either has the same
home
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as such person or who is a director or officer of the Association. Directors are
not treated as associates of each other solely because of their Board
membership. For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion, see
"Management of the Association--Subscriptions by Executive Officers and
Directors," "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the
Association."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Association in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Association remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his deposit account was to the total value
of all deposit accounts in the Association at the time of liquidation. After the
Conversion, each depositor, in the event of a complete liquidation, would have a
claim as a creditor of the same general priority as the claims of all other
general creditors of the Association. However, except as described below, his
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. He would not have an interest in the value or assets of the
Association above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Association as of the date of its latest balance
sheet contained in the final Prospectus used in connection with the Conversion.
Each Eligible Account Holder and Supplemental Eligible Account Holder, if he
were to continue to maintain his deposit account at the Association, would be
entitled, on a complete liquidation of the Association after the Conversion, to
an interest in the liquidation account prior to any payment to the stockholders
of the Association. Each Eligible Account Holder and Supplemental Eligible
Account Holder would have an initial interest in such liquidation account for
each deposit account, including regular accounts, transaction accounts such as
NOW accounts, money market deposit accounts, and certificates of deposit, with a
balance of $50 or more held in the Association on March 31, 1997 and
_______________, 1998, respectively. Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the total
liquidation account based on the proportion that the balance of his Qualifying
Deposits on the Eligibility Record Date or Supplemental Eligibility Record Date,
respectively, bore to the total amount of all Qualifying Deposits of all
Eligible Account Holders and Supplemental Eligible Account Holders in the
Association. For deposit accounts in existence at both dates separate
subaccounts shall be determined on the basis of the Qualifying Deposits in such
deposit accounts on such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time to time by the proportion of any
such reduction, and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Association.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt
by the Association of either a favorable ruling from the IRS or an opinion with
respect to federal income taxation, and an opinion with respect to Pennsylvania
income taxation, to the effect that the Conversion will not be a taxable
transaction to the Company, the Association, Eligible Account Holders, or
Supplemental Eligible Account Holders except as noted below. The federal
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and Pennsylvania income tax consequences will remain unchanged in the event that
a holding company form of organization is not utilized.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Association has received an opinion of its
counsel, Muldoon, Murphy & Faucette, to the effect that for federal income tax
purposes, among other matters: (i) the Association's change in form from mutual
to stock ownership will constitute a reorganization under section 368(a)(1)(F)
of the Code and neither the Association nor the Company will recognize any gain
or loss as a result of the Conversion; (ii) no gain or loss will be recognized
to the Association or the Company upon the purchase of the Association's capital
stock by the Company or to the Company upon the purchase of its Common Stock in
the Conversion; (iii) no gain or loss will be recognized by Eligible Account
Holders or Supplemental Eligible Account Holders upon the issuance to them of
Deposit Accounts in the Association in its stock form plus their interests in
the liquidation account in exchange for their deposit accounts in the
Association; (iv) the tax basis of the depositors' accounts in the Association
immediately after the Conversion will be the same as the basis of their deposit
accounts immediately prior to the Conversion; (v) the tax basis of each Eligible
Account Holder's and Supplemental Eligible Account Holder's interest in the
liquidation account will be zero; (vi) no gain or loss will be recognized by
Eligible Account Holders or Supplemental Eligible Account Holders upon the
distribution to them of nontransferable subscription rights to purchase shares
of the Common Stock, provided that the amount to be paid for the Common Stock is
equal to the fair market value of such stock; and (vii) the tax basis to the
stockholders of the Common Stock of the Company purchased in the Conversion will
be the amount paid therefor and the holding period for the shares of Common
Stock purchased by such persons will begin on the date on which their
subscription rights are exercised. Parente, Randolph, Orlando, Carey &
Associates has opined that the Conversion will not be a taxable transaction to
the Company, the Association, Eligible Account Holders or Supplemental Eligible
Account Holders for Pennsylvania income tax purposes. Certain portions of both
the federal and the state income tax opinions are based upon the assumption that
the subscription rights issued in connection with the Conversion will have no
value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS and the IRS could disagree with
conclusions reached therein. In the event of such disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding.
Keller has issued an opinion stating that, pursuant to its valuation,
Keller is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration, and afford 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 shares of
Common Stock sold in the Community Offering. Such valuation is not binding on
the IRS. If the subscription rights granted to Eligible Account Holders or
Supplemental Eligible Account Holders are deemed to have an ascertainable value,
receipt of such rights could be taxable to those Eligible Account Holders or
Supplemental Eligible Account Holders who receive and/or exercise the
subscription rights in an amount equal to such value and the Association could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the
Board of Directors of the Association will be final. The Plan provides that the
Association's Board of Directors shall have the discretion to interpret and
apply the provisions of the Plan to particular circumstances and that such
interpretation or application shall be final. This includes any and all
interpretations, applications and determinations made by the Board of Directors
on the basis of such information and assistance as was then reasonably available
for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Association's Board of Directors. After submission of the proxy materials to
the members, the Plan may be
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amended by a two-thirds vote of the Association's Board of Directors at any time
prior to the Special Meeting with the concurrence of the OTS. The Plan may be
amended at any time after the approval of members with the approval of the OTS
and no further approval of the members will be necessary unless otherwise
required by the OTS. By adoption of the Plan, the Association's members will be
deemed to have authorized amendment of the Plan under the circumstances
described above.
The establishment of the Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Association's members
approve the Plan of Conversion, but not the creation of the Foundation, the
Association intends to complete the Conversion without the Foundation. Failure
to approve the establishment of the Foundation may materially increase the pro
forma market value of the Common Stock since the Valuation Range, as set forth
herein, takes into account the dilutive impact of the issuance of shares to the
Foundation. In such an event, the Association may establish a new Estimated
Price Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a specified
period of time, all funds will be promptly returned to investors, as described
elsewhere herein. See "--Stock Pricing."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by
a director or an officer of the Association 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 such director or officer. Each certificate
for restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Common
Stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the same restrictions.
The directors and officers of the Association will also be subject to the
insider trading rules promulgated pursuant to the Exchange Act and any other
applicable requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, officers (or any person who was an officer or director of the
Association after adoption of the Plan of Conversion) and their associates
during the three-year period following Conversion may be made only through a
broker or dealer registered with the SEC, except with the prior written approval
of the OTS. This restriction does not apply, however, to negotiated transactions
involving more than 1.0% of the Company's outstanding Common Stock or to the
purchase of stock pursuant to any stock option plan to be established after the
Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations,
will be prohibited from repurchasing any shares of the Common Stock for three
years after the Conversion except: (i) for an offer to all stockholders on a pro
rata basis; or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing, beginning one year following completion of the
Conversion the Company may repurchase its Common Stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a
twelve-month period; (ii) the repurchases do not cause the Company to become
undercapitalized; and (iii) the Company provides to the Regional Director of the
OTS 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. In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion, provided there are valid and compelling business reasons
for such repurchases and the OTS approves such repurchases.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE ASSOCIATION
GENERAL
The Association's Plan of Conversion provides for the Conversion of the
Association from the mutual to the stock form of organization and, in connection
therewith, a new Stock Articles of Incorporation and Bylaws to be adopted by
members of the Association. The Plan also provides for the concurrent formation
of a holding company, which form of organization may or may not be utilized at
the option of the Board of Directors of the Association. See "The
Conversion--General." In the event that the holding company form of organization
is utilized, as described below, certain provisions in the Company's Certificate
of Incorporation and Bylaws and in its management remuneration entered into in
connection with the Conversion, together with provisions of Delaware corporate
law, may have anti-takeover effects. In the event that the holding company form
of organization is not utilized, the Association's Stock Charter and Bylaws and
management remuneration entered into in connection with the Conversion may have
anti-takeover effects as described below. In addition, regulatory restrictions
may make it difficult for persons or companies to acquire control of either the
Company or the Association.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the material
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Company is necessarily general and reference should be made in each case to
such Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
LIMITATION ON VOTING RIGHTS. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any of
his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Association or Company or shares that are subject to a revocable proxy and
that are not otherwise beneficially owned, or deemed by the Company to be
beneficially owned, by such person and his affiliates. The Certificate of
Incorporation of the Company further provides that this provision limiting
voting rights may only be amended upon the vote of 80% of the outstanding shares
of voting stock (after giving effect to the limitation on voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including a vacancy
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created by an increase in the number of directors or resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the directors then in office. The classified Board is intended
to provide for continuity of the Board of Directors and to make it more
difficult and time consuming for a stockholder group to fully use its voting
power to gain control of the Board of Directors without the consent of the
incumbent Board of Directors of the Company. The Certificate of Incorporation of
the Company provides that a director may be removed from the Board of Directors
prior to the expiration of his term only for cause, upon the vote of 80% of the
outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the
issuance of 5,000,000 shares of Common Stock and 1,000,000 shares of Preferred
Stock. The shares of Common Stock and Preferred Stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee Stock Options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of additional shares pursuant to the
terms of the Stock Program and upon exercise of Stock Options to be issued
pursuant to the terms of the Stock Option Plan, all of which are to be
established and presented to stockholders at the first annual meeting after the
Conversion.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock to
approve certain "Business Combinations," as defined therein, and related
transactions. Under Delaware law, absent this provision, Business Combinations,
including mergers, consolidations and sales of all or substantially all of the
assets of a corporation must, subject to certain exceptions, be approved by the
vote of the holders of only a majority of the outstanding shares of Common
Stock of the Company and any other affected class of stock. Under the
Certificate of Incorporation, at least 80% approval of shareholders is required
in connection with any transaction involving an Interested Stockholder (as
defined below) except (i) in cases where the proposed transaction has been
approved in advance by a majority of those members of the Company's Board of
Directors who are unaffiliated with the Interested Stockholder and were
directors prior to the time when the Interested Stockholder became an
Interested Stockholder or (ii) if the proposed transaction meets certain
conditions set forth therein which are designed to afford the shareholders a
fair price in consideration for their shares in which case, if a stockholder
vote is required, approval of only a majority of the outstanding shares of
voting stock would be sufficient. The term "Interested Stockholder" is defined
to include any individual, corporation, partnership or other entity (other than
the Company or its subsidiary) which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of the
Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of 25% or more of the
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assets of the Company or combined assets of the Company and its subsidiary;
(iii) the issuance or transfer to any Interested Stockholder or its Affiliate by
the Company (or any subsidiary) of any securities of the Company in exchange for
any assets, cash or securities the value of which equals or exceeds 25% of the
fair market value of the Common Stock of the Company; (iv) the adoption of any
plan for the liquidation or dissolution of the Company proposed by or on behalf
of any Interested Stockholder or Affiliate thereof; and (v) any reclassification
of securities, recapitalization, merger or consolidation of the Company which
has the effect of increasing the proportionate share of Common Stock or any
class of equity or convertible securities of the Company owned directly or
indirectly by an Interested Stockholder or Affiliate thereof. The directors and
executive officers of the Association are purchasing in the aggregate
approximately 4.48% of the shares of the Common Stock to be issued in the
Conversion, including shares to be issued to the Foundation, at the maximum of
the Estimated Price Range. In addition, the ESOP intends to purchase 8% of the
Common Stock issued in connection with the Conversion, including shares issued
to the Foundation. Additionally, if at a meeting of stockholders following the
Conversion stockholder approval of the proposed Stock-Based Incentive Plan is
received, the Company expects to acquire 4% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation, on
behalf of the Stock-Based Incentive Plan and expects to issue options to
purchase up to 10% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation, under the Stock-Based Incentive Plan
to directors and executive officers. As a result, at the maximum of the
Estimated Price Range, assuming the Stock-Based Incentive Plan is approved by
Stockholders, directors, executive officers and employees have the potential to
control the voting of approximately 26.48% of the Company's Common Stock, if the
shares held by the Foundation and the ESOP are aggregated with the shares
purchased in the Conversion by management and acquired for award under the
Stock-Based Incentive Plan (without giving effect to any exercise of options
granted under the Stock-Based Incentive Plan), thereby enabling them to prevent
the approval of the transactions requiring the approval of at least 80% of the
Company's outstanding shares of voting stock described hereinabove.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein) to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity, or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Association and the stockholders of the
Company, give due consideration to all relevant factors, including, without
limitation, the social and economic effects of acceptance of such offer on the
Company's customers and the Association's present and future account holders,
borrowers and employees; on the communities in which the Company and the
Association operate or are located; and on the ability of the Company to fulfill
its corporate objectives as a savings and loan holding company and on the
ability of the Association to fulfill the objectives of a federally-chartered
stock savings association under applicable statutes and regulations. By having
these standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then market
price of any equity security of the Company.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Certificate of Incorporation, including the provision limiting voting rights,
the provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Certificate of Incorporation. The Company's Bylaws may be amended by its Board
of Directors, or by a vote of 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder
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and the stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a director must provide the
Company with certain information concerning the nominee and the proposing
stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, CIC Agreements, Employee Severance
Compensation Plan, Stock Program or Stock Option Plan to be established may
also discourage takeover attempts by increasing the costs to be incurred by the
Association and the Company in the event of a takeover. See "Management of the
Association--Employment Agreements."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
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RESTRICTIONS IN THE ASSOCIATION'S NEW ARTICLES OF INCORPORATION AND BYLAWS
Although the Board of Directors of the Association is not aware of any
effort that might be made to obtain control of the Association after the
Conversion, the Board of Directors believes that it is appropriate to adopt
certain provisions permitted by federal regulations to protect the interests of
the converted Association and its stockholders from any hostile takeover. Such
provisions may, indirectly, inhibit a change in control of the Company, as the
Association's sole stockholder. See "Risk Factors--Certain Anti-Takeover
Provisions."
The Association's Stock Articles of Incorporation contain a provision
whereby shareholders will not be permitted to call a special meeting of
shareholders relating to a change of control of the Association or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
the staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and continuity
of management of the Association in the years immediately following the
Conversion.
Although the Association has no arrangements, understandings or plans at
the present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of undesignated
Preferred Stock proposed to be authorized, the Board of Directors believes that
the availability of such shares will provide the Association with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other corporate needs which may arise. In the event of a proposed
merger, tender offer or other attempt to gain control of the Association of
which management does not approve, it might be possible for the Board of
Directors to authorize the issuance of one or more series of Preferred Stock
with rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board of Directors
does not intend to issue any Preferred Stock except on terms which the Board
deems to be in the best interest of the Association and its then existing
stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of
the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Association
or the Company; or (iii) offers which are not opposed by the Board of Directors
of the Association and which receive the prior approval of the OTS. Such
prohibition is also applicable to the acquisition of the stock of the Company.
Such acquisition may be disapproved by the OTS if it is found, among other
things, that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the conversion; (d) would be
likely to result in injury to the savings institution; (e) would not be
consistent with economical home financing; (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the savings
institution's conversion proceeds. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matters submitted to a vote of stockholders. Ownership of more than 10% of a
class of stock for purposes of this prohibition extends to persons holding a
combination of stock and revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations.
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In addition, any acquisition, direct or indirect, of more than 10% of any
class of equity security of the Company by a person or group of persons acting
in concert may require prior notice to and non-objection by the OTS under the
Change in Bank Control Act and/or the approval of the OTS under the Savings and
Loan Holding Company Act, as an acquisition of control. Any company that
acquires control of a savings association or a savings and loan holding company
under the standards set forth in OTS regulations becomes a "savings and loan
holding company" subject to registration, examination, and regulation by the
OTS. Pursuant to OTS regulations, "control" of a savings association or a
savings and loan holding company, subject to the requirements of the Change in
Bank Control Act and/or the savings and Loan Holding Company Act, 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 company or
irrevocable proxies representing more than 25% of any class of voting stock of
the company or the ability to control the election of a majority of the
directors. The regulations also establish a rebuttable presumption of "control"
upon the acquisition of more than 10% of any class of voting stock, or of more
than 25% of any class of stock, of a savings and loan holding company, where
certain enumerated "control factors" are also present in the acquisition. The
OTS may prohibit an acquisition by a person of "control" if (i) it would result
in a monopoly or substantially lessen competition, (ii) the financial condition
of the acquiring person might jeopardize the financial stability of the
institution, or (iii) the competence, experience, or integrity of the acquiring
person indicates that it would not be in the interest of the depositors or the
public to permit the acquisition of control by such person or (iv) the proposed
acquisition would have an adverse effect on the deposit insurance funds.
Applications by a company to acquire "control" of a savings and loan holding
company are evaluated by OTS based upon factors such as the financial and
managerial resources and future prospects of the acquirer and the institution
involved, competitive factors and the convenience and needs of the community
involved. The foregoing restrictions do not apply to the acquisition of the
Company's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25% of any class of equity security of the Company.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 5,000,000 shares of Common Stock
having a par value of $.01 per share and 1,000,000 shares of preferred stock
having a par value of $.01 per share (the "Preferred Stock"). Based on the sale
of Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock in an amount equal to 5.0% of the Common stock sold in the
Conversion, the Company currently expects to issue up to 1,690,500 shares of
Common Stock (or 1,944,075 in the event of an increase of 15% in the Estimated
Price Range) and no shares of Preferred Stock in the Conversion. Except as
discussed above in "Restriction on Acquisition of the Company and the
Association," each share of the Company's Common Stock will have the same
relative rights as, and will be identical in all respects with, each other share
of Common Stock. Upon payment of the Purchase Price for the Common Stock, in
accordance with the Plan, all such stock will be duly authorized, fully paid and
non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
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VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Association," each holder of Common Stock will be entitled to one vote per share
and will not have any right to cumulate votes in the election of directors. If
the Company issues Preferred Stock, holders of the Preferred Stock may also
possess voting rights. Certain matters require an 80% shareholder vote. See
"Restrictions on Acquisition of the Company and the Association."
As a Pennsylvania-chartered mutual savings and loan association,
corporate powers and control of the Association are vested in its Board of
Directors, who elect the officers of the Association and who fill any vacancies
on the Board of Directors as it exists upon Conversion. Subsequent to
Conversion, voting rights will be vested exclusively in the owners of the shares
of capital stock of the Association, which will be the Company, and voted at the
direction of the Company's Board of Directors. Consequently, the holders of the
Common Stock will not have direct control of the Association.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of the Association, the Company, as holder of the Association's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Association (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "The Conversion--Liquidation Rights"), all assets of the
Association available for distribution. In the event of liquidation, dissolution
or winding up of the Company, the holders of its Common Stock would be entitled
to receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Company available for distribution. If
Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE ASSOCIATION
GENERAL
The Stock Articles of Incorporation of the Association, to be effective
upon the Conversion, authorizes the issuance of capital stock consisting of
5,000,000 shares of Common Stock, par value $1.00 per share, and 1,000,000
shares of preferred stock, par value $1.00 per share, which preferred stock may
be issued in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common Stock
of the Association will have the same relative rights as, and will be identical
in all respects with, each other share of Common Stock. After the Conversion,
the Board of Directors will be authorized to approve the issuance of Common
Stock up to the amount authorized by the Stock Articles of Incorporation without
the approval of the Association's stockholders. Assuming that the holding
company form of organization is utilized, all of the issued and outstanding
Common Stock of the Association will be held by the Company as the Association's
sole stockholder. THE CAPITAL STOCK OF THE ASSOCIATION WILL REPRESENT
NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL
NOT BE INSURED BY THE FDIC.
109
114
COMMON STOCK
DIVIDENDS. The holders of the Association's Common Stock will be entitled
to receive and to share equally in such dividends as may be declared by the
Board of Directors of the Association out of funds legally available therefor.
See "Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation--Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the
Association's Common Stock will possess exclusive voting rights in the
Association. Each holder of shares of Common Stock will be entitled to one vote
for each share held, subject to the right of shareholders to cumulate their
votes for the election of directors. During the five-year period after the
effective date of the Conversion, cumulation of votes will not be permitted. See
"Restrictions on Acquisition of the Company and the Association--Anti-Takeover
Effects of the Company's Certificate of Incorporation and Bylaws and Management
Remuneration Adopted in Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding up
of the Association, the holders of Common Stock will be entitled to receive,
after payment of all debts and liabilities of the Association (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Association available for
distribution in cash or in kind. If preferred stock is issued subsequent to the
Conversion, the holders thereof may also have priority over the holders of
Common Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the Common Stock of the
Association will not be entitled to preemptive rights with respect to any shares
of the Association which may be issued. The Common Stock will not be subject to
redemption. Upon receipt by the Association of the full specified purchase price
therefor, the Common Stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is _______________.
EXPERTS
The financial statements of the Association as of June 30, 1998 and 1997
and for the years ended June 30, 1998, 1997 and 1996 have been included in this
Prospectus in reliance upon the report of Parente, Randolph, Orlando, Carey &
Associates, independent auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its
report to the Association and Company setting forth its opinion as to the
estimated pro forma market value of the Common Stock upon Conversion and its
valuation 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 the Association and the Company by
Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the Association
and the Company. Muldoon, Murphy & Faucette will rely as to certain matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnel. The Commonwealth
of Pennsylvania income tax consequences of the Conversion and certain matters
related to the Foundation will be passed upon for the Association and the
Company by Parente, Randolph, Orlando, Carey & Associates. Certain legal matters
will be passed upon for Sandler O'Neill by Elias, Matz, Tiernan and Herrick
L.L.P.
110
115
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information 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. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
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 the Company. This
Prospectus contains a description of the material terms and features of all
material contracts, reports or exhibits to the Registration Statement required
to be described. 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.
The Association has filed an application for conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 10 Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
The Association will file articles of conversion with the Pennsylvania
Department with respect to the Conversion following the Special Meeting. The
application may be examined at the principal office of the Pennsylvania
Department, Department of State, Corporation Bureau, 308 North Office Building,
Harrisburg, Pennsylvania 17120-0029.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(b) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Association amends the Plan to eliminate the concurrent
formation of the Company as part of the Conversion, the Association will
register its stock with the OTS under Section 12(b) of the Exchange Act and,
upon such registration, the Association and the holders of its stock will become
subject to the same obligations and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the Company
and the Stock Articles of Incorporation and Bylaws of the Association and the
Certificate of Incorporation and Bylaws of the Foundation are available without
charge from the Association.
111
116
SECURITY SAVINGS ASSOCIATION OF HAZLETON
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................ F-2
Balance Sheet as of June 30, 1998 and 1997.............................. F-3
Statements of Income for the Years Ended
June 30, 1998, 1997 and 1996.......................................... 29
Statements of Changes in Equity for the Years Ended
June 30, 1998, 1997 and 1996.......................................... F-4
Statements of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996.......................................... F-5 - F-6
Notes to Financial Statements........................................... F-7 - F-30
All schedules are omitted because they are not required or applicable, or
the required information is shown in the financial statements or notes thereto.
The financial statements of Security of Pennsylvania Financial Corp. have
been omitted because Security of Pennsylvania Financial Corp. has not yet issued
any stock, has no assets and no liabilities, and has not conducted any business
other than of an organizational nature.
F-1
117
[PARENTE - RANDOLPH - ORLANDO-
CAREY & ASSOCIATES LOGO]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Security Savings Association of Hazleton
Hazleton, Pennsylvania
We have audited the accompanying balance sheet of Security Savings
Association of Hazleton (the "Association") as of June 30, 1998 and 1997, and
the related statements of income, changes in equity, and cash flows for each of
the three years in the period ended June 30, 1998. These financial statements
are the responsibility of the Association's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Security Savings
Association of Hazleton as of June 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
/s/ PARENTE RANDOLPH ORLANDO CAREY & ASSOCIATES
--------------------------------------------
Hazleton, Pennsylvania
July 24, 1998
- F-2 -
118
SECURITY SAVINGS ASSOCIATION OF HAZLETON
BALANCE SHEET
JUNE 30, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
======
Cash and due from banks $ 3,272,263 $ 2,867,171
Interest-bearing deposits with banks 8,585,785 6,166,551
Held-to-maturity securities (fair value of $20,806,552
in 1998 and $24,810,869 in 1997) 20,782,740 24,841,688
Available-for-sale securities 7,900,600 4,247,778
Loans receivable (net of allowance for loan losses
of $451,856 in 1998 and $428,857 in 1997) 69,211,264 66,737,536
Office premises and equipment, net 1,364,352 1,178,504
Accrued interest receivable 618,656 665,002
Foreclosed real estate (net of $12,000 allowance
in 1998 and $24,852 in 1997) 220,889 530,919
Other assets 33,948 211,687
------------- -------------
TOTAL ASSETS $ 111,990,497 $ 107,446,836
============= =============
LIABILITIES AND EQUITY
======================
Deposits $ 102,603,545 $ 98,464,717
Advances from borrowers for taxes and
insurance 34,468 130,914
Accrued interest payable and other liabilities 121,614 267,766
------------- -------------
Total liabilities 102,759,627 98,863,397
------------- -------------
Retained earnings - substantially restricted 9,362,089 8,744,865
Net unrealized holding losses on
available-for-sale securities (131,219) (161,426)
------------- -------------
Equity, net 9,230,870 8,583,439
------------- -------------
TOTAL LIABILITIES
AND EQUITY $ 111,990,497 $ 107,446,836
============= =============
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
- F-3 -
119
SECURITY SAVINGS ASSOCIATION OF HAZLETON
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- ---------------------------------------------------------------------------------------------
UNREALIZED
HOLDING LOSSES
ON AVAILABLE-
RETAINED FOR-SALE EQUITY,
EARNINGS SECURITIES NET
- ---------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 $ 7,938,309 $ (196,901) $ 7,741,408
INCREASE IN UNREALIZED
HOLDING LOSSES ON
AVAILABLE-FOR-SALE
SECURITIES (13,772) (13,772)
NET INCOME 597,005 597,005
----------- ---------- -----------
BALANCE, JUNE 30, 1996 8,535,314 (210,673) 8,324,641
DECREASE IN UNREALIZED
HOLDING LOSSES ON
AVAILABLE-FOR-SALE
SECURITIES 49,247 49,247
NET INCOME 209,551 209,551
----------- ---------- -----------
BALANCE, JUNE 30, 1997 8,744,865 (161,426) 8,583,439
DECREASE IN UNREALIZED
HOLDING LOSSES ON
AVAILABLE-FOR-SALE
SECURITIES 30,207 30,207
NET INCOME 617,224 617,224
----------- ---------- -----------
BALANCE, JUNE 30, 1998 $ 9,362,089 $ (131,219) $ 9,230,870
=========== ========== ===========
- ---------------------------------------------------------------------------------------------
See Notes to Financial Statements
- F-4 -
120
SECURITY SAVINGS ASSOCIATION OF HAZLETON
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 617,224 $ 209,551 $ 597,005
------------ ------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and foreclosed
real estate losses 197,626 94,336 101,997
Amortization and accretion on
investment securities (186) 10,532 28,988
Depreciation and amortization 98,071 82,109 112,629
Deferred income taxes 46,160 148,892 23,665
(Gain) loss on sale of foreclosed real estate 47,894 62,985 (1,293)
Net realized gain on sales of securities (701) (16,776) -
Changes in assets and liabilities:
Accrued interest receivable 46,346 39,421 (77,978)
Other assets 162,399 225,285 (84,567)
Accrued interest payable and other
liabilities (192,312) (96,869) 63,359
------------ ------------ ------------
Net cash provided by operating
activities 405,297 549,915 166,800
------------ ------------ ------------
INVESTMENT ACTIVITIES:
Purchases of held-to-maturity securities (13,221,443) (13,447,016) (15,100,592)
Purchases of securities available-for-sale (3,948,894) (24,900) (40,200)
Proceeds from maturities of held-to-maturity
securities 16,270,943 11,565,915 11,646,490
Proceeds from the call of held-to-maturity securities 204,758 - -
Proceeds from maturities and principal paydowns
on available-for-sale securities 340,561 1,075,920 505,417
Proceeds from principal paydowns of
held-to-maturity securities 806,635 1,106,292 1,848,163
Proceeds from the sale of available-for-sale
securities - 1,038,300 -
Loans made to customers, net of principal collected (3,128,008) (2,459,676) (1,411,992)
Acquisition of office premises and equipment (283,919) (155,210) (36,532)
Proceeds from sale of foreclosed real estate 718,790 276,144 11,783
Decrease in interest-bearing deposits with banks (2,419,234) 2,028,989 (766,724)
------------ ------------ ------------
Net cash (used in) provided by
investing activities (4,659,811) 1,004,758 (3,344,187)
------------ ------------ ------------
- F-5 -
121
SECURITY SAVINGS ASSOCIATION OF HAZLETON
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net change in deposit accounts $ 4,138,828 $ (883,425) $ 2,949,870
Net (decrease) increase in advances
from borrowers for taxes
and insurance (96,446) 76,095 (2,598)
----------- ----------- -----------
Net cash provided
by (used in)
financing activities 4,042,382 (807,330) 2,947,272
----------- ----------- -----------
INCREASE IN CASH AND DUE
FROM BANKS 405,092 956,894 366,890
CASH AND DUE FROM BANKS,
BEGINNING OF YEAR 2,867,171 1,910,277 1,543,387
----------- ----------- -----------
CASH AND DUE FROM BANKS,
END OF YEAR $ 3,272,263 $ 2,867,171 $ 1,910,277
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest paid on deposits $ 4,207,744 $ 4,007,074 $ 4,188,942
Income taxes paid $ 422,408 $ 139,732 $ 376,569
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
The Association foreclosed on mortgage loans and transferred
$717,928, $517,672 and $245,340 from loans to foreclosed real estate
during the years ended June 30, 1998, 1997 and 1996, respectively.
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
- F-6 -
122
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Security Savings Association of Hazleton (the "Association") provides a
variety of financial services to individual and corporate customers
through four offices in Hazleton, Weatherly and Butler Township,
Pennsylvania. These communities have diversified economies. The primary
deposit products are regular savings accounts, certificates of deposit,
and checking accounts. Its primary lending products are single-family
residential loans and secured consumer loans. The Association is subject
to competition from other financial institutions and other companies that
provide financial services. The Association is subject to the regulations
of certain federal and state agencies and undergoes periodic examinations
by those regulatory authorities.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Association encounters two
significant types of risk: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk, and market
risk. The Association is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice at different speeds,
or on different bases from its interest-earning assets. The Association's
primary credit risk is the risk of default on the Association's loan
portfolio that results from the borrowers inability or unwillingness to
make contractually required payments. The Association's lending
activities are concentrated in Pennsylvania. The largest concentration of
the Association's loan portfolio is located in Northeastern Pennsylvania.
The ability of the Association's borrowers to repay amounts owed is
dependent on several factors, including the economic conditions in the
borrower's geographic region and the borrower's financial condition.
Market risk reflects changes in the value of collateral underlying loans
and valuation of real estate held by the Association.
The Association is subject to the regulations of various government
agencies. These regulations can and do change significantly from period
to period. The Association also undergoes periodic examinations by the
regulatory agencies which may subject it to further changes with respect
to asset valuations, amounts of required loss allowances, and operating
restrictions resulting from the regulators' judgements based on
information available to them at the time of their examination.
- F-7 -
123
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Association has an ongoing program designed to ensure that its
operational and financial systems will not be adversely affected by year
2000 software failures due to processing errors arising from calculations
using the year 2000 date. While the Association believes it is acting
prudently to assure year 2000 compliance, it is to some extent dependent
upon vendor cooperation. The Association is requiring its computer
systems and software vendors to represent that the products provided are
or will be year 2000 compliant and has planned a program of testing for
compliance. It is recognized that any year 2000 compliance failures,
either internal or on the part of the Association's customers, could
result in additional expense or loss to the Association.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination for the allowance for loan losses and
the valuation of property acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of allowances
for loan losses and foreclosed assets, management obtains independent
appraisals for significant properties.
A majority of the Association's loan portfolio consist of single-family
residential loans in the Hazleton, Weatherly and Butler Township areas.
Although these local economies are diversified and fairly stable, a
substantial portion of its debtor's ability to honor their contracts is
dependent on the economic sector in which the Association operates.
While management uses available information to recognize losses on loans
and foreclosed assets, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowances for losses on loans and
foreclosed assets. Such agencies may require the Association to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Association
management has no reason to believe that the allowances for loan losses
and foreclosed assets will change materially in the near term.
- F-8 -
124
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include cash on hand and amounts due from banks.
DEBT AND EQUITY SECURITIES
The Association classifies each of its investments in debt and equity
securities into one of two categories:
Held-To-Maturity Securities - Securities that the institution has the
positive intent and ability to hold to maturity.
Available-For-Sale Securities - Securities that are not eligible for
classification as held-to-maturity.
Held-to-Maturity Securities are carried at amortized cost. Those
securities classified as Available-For-Sale are carried at fair value.
The change in net unrealized holding gain or loss on available-for-sale
securities, net of taxes is included in a separate component of equity.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by
unamortized loan fees and an allowance for loan losses. Interest on loans
is calculated by using the simple interest method on daily balances of
the principal amount outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses 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 impaired
loans, and current economic conditions and trends that may affect the
borrowers' ability to pay.
Loans are deemed to be "impaired" if management's assessment of the
relevant facts and circumstances, it is probable that the bank will be
unable to collect all proceeds due according to the contractual terms of
the loan agreement. For purposes of applying the measurement criteria for
impaired loans, the Association excludes large groups of smaller balance
homogeneous loans, primarily consisting of residential real estate and
consumer loans.
- F-9 -
125
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Accrual of interest on impaired loans is discontinued when payments are
past due ninety days or more when collateral is inadequate to cover
principal and interest or immediately if management believes, after
considering economic and business conditions and collection efforts, that
the borrowers' financial condition is such that collection is doubtful.
Nonrefundable loan origination fees and certain direct loan origination
costs for loans are recognized over the life of the related loans as an
adjustment of yield. Prior to 1988, such fees and costs were recognized
when received or incurred.
FORECLOSED REAL ESTATE
Foreclosed real estate comprised of property acquired in the settlement
of loans, is recorded at the lower of the related principal balance and
accrued interest upon foreclosure or its fair value. Costs of developing
and improving such properties are capitalized. Expenses related to
holding such real estate, net of rental and other income, are charged
against income as incurred.
OFFICE PREMISES AND EQUIPMENT
AND DEPRECIATION
Office premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using straight-line and
accelerated methods over the estimated useful lives of the assets.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
ADVERTISING COSTS
The Association follows the policy of charging the production costs of
advertising to expense as incurred.
- F-10 -
126
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DERIVATIVES
The Association has no derivative financial instruments requiring
disclosure under Statement of Financial Accounting Standards ("SFAS")
No. 119.
RECLASSIFICATIONS
Certain items in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 financial statement presentation
format. These reclassifications had no effect on net income.
2. DEBT AND EQUITY SECURITIES
Held-to-maturity securities at June 30, 1998 and 1997 were as follows:
1998
-----------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U. S. government agency
securities $ 2,801,355 $ 9,127 $ 2,810,482
Certificates of deposit 15,456,963 15,456,963
Corporate obligations 79,012 79,012
Mortgage-backed
securities 2,281,088 16,893 $ 649 2,297,332
State and political
subdivisions 164,322 1,559 162,763
----------- ------- -------- -----------
Total $20,782,740 $26,020 $ 2,208 $20,806,552
=========== ======= ======== ===========
1997
-----------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U. S. government agency
securities $ 7,425,322 $ 8,056 $ 37,709 $ 7,395,669
Certificates of deposit 12,594,699 12,594,699
Corporate obligations 115,915 2,010 113,905
Mortgage-backed
securities 4,705,752 17,741 16,897 4,706,596
----------- -------- -------- -----------
Total $24,841,688 $ 25,797 $ 56,616 $24,810,869
=========== ======== ======== ===========
- F-11 -
127
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Available-for-sale securities at June 30, 1998 and 1997 were as follows:
1998
-----------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
U. S. Government agency
securities $3,547,627 $ 2,293 $ 2,313 $3,547,607
Mortgage-backed securities 1,317,978 34,546 1,352,524
State and political
subdivisions 373,558 3,767 369,791
Mutual funds 2,187,598 151,520 2,036,078
Federal Home Loan Bank
of Pittsburgh stock 594,600 594,600
----------- -------- -------- -----------
Total $8,021,361 $36,839 $157,600 $7,900,600
=========== ======== ======== ===========
1997
-------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
GNMA certificates $ 981,752 $34,228 $1,015,980
FNMA certificates 393,488 $ 19,026 374,462
FNMA balloon 284,748 3,471 281,277
Mutual funds 2,187,598 178,039 2,009,559
Federal Home Loan Bank
of Pittsburgh stock 566,500 566,500
----------- -------- -------- -----------
Total $4,414,086 $34,228 $200,536 $4,247,778
=========== ======== ======== ===========
Unamortized premiums on mortgage-backed securities held-to-maturity were
$2,868 and $9,956 at June 30, 1998 and 1997, respectively. Unaccreted
discounts on mortgage-backed securities held-to-maturity were $11,089
and $10,106 at June 30, 1998 and 1997, respectively.
- F-12 -
128
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and fair value of held-to-maturity and
available-for-sale securities at June 30, 1998, by contractual maturity,
are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
------------------------------ ------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
Due in one year or less $12,417,691 $12,417,504 $2,782,198 $2,630,678
Due after one year through
five years 4,889,685 4,894,016 1,028,564 1,031,382
Due after five years
through ten years 2,008,276 2,018,945 2,499,545 2,499,772
Due after ten years 1,467,088 1,476,087 1,711,054 1,738,768
----------- ----------- ---------- ----------
Total $20,782,740 $20,806,552 $8,021,361 $7,900,600
=========== =========== ========== ==========
Gross gains of $701 were realized on the call of a held-to-maturity
security in 1998.
Gross gains of $47,038 and gross losses of $30,262 were realized on the
sale of available-for-sale securities in 1997.
Securities with an amortized cost of $1,057,559 and $1,342,997 at June
30, 1998 and 1997, respectively were pledged as collateral on public
deposits and for other purposes as required or permitted by law.
- F-13 -
129
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE
Loans receivable at June 30, 1998 and 1997 were as follows:
1998 1997
---- ----
Real estate $56,056,778 $54,658,451
Commercial real estate 3,945,708 2,484,206
Consumer 9,934,736 10,307,977
----------- -----------
69,937,222 67,450,634
Less:
Net deferred loan-origination fees (274,102) (284,241)
Allowance for loan losses (451,856) (428,857)
----------- -----------
Loans receivable, net $69,211,264 $66,737,536
=========== ===========
The recorded investment in impaired loans, not requiring an allowance for
loan losses, was $1,572,855 and $1,410,742 at June 30, 1998 and 1997,
respectively. The recorded investment in impaired loans requiring an
allowance for loan losses was $291,027 and $175,258 at June 30, 1998 and
1997, respectively. At June 30, 1998 and 1997, the related allowance
associated with those loans was $35,000 and $60,000, respectively. For
the years ended June 30, 1998 and 1997, the average recorded investment
in these impaired loans was approximately $1,864,000 and $1,612,000,
respectively. There was no interest income recognized on impaired loans
in 1998 or 1997. Interest income that would have been recognized on
impaired loans would have approximated $102,000 and $134,000 in 1998 and
1997, respectively. The Association has no commitments to lend additional
funds to borrowers whose loans were classified as nonperforming or
troubled debt restructuring.
- F-14 -
130
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
An analysis of the allowance for loan losses for the years ended June 30,
1998, 1997 and 1996 is summarized as follows:
1998 1997 1996
---- ---- ----
Balance, beginning $428,857 $447,000 $401,000
Provision for loan losses 175,626 34,450 101,997
Loans charged off (177,505) (41,763) (23,823)
Transfers to allowance for foreclosed
real estate - (20,000) (44,000)
Recoveries of loans charged off 24,878 9,170 11,826
-------- -------- --------
Balance, ending $451,856 $428,857 $447,000
======== ======== ========
At June 30, 1998 and 1997, the Association serviced loans for others of
$140,000 and $162,000, respectively.
An analysis of the activity in loans to directors and executive officers
for the year ended June 30, 1998, follows:
Balance, beginning of year $219,364
New loans 51,972
Repayments (41,700)
Loan balance of new executive officer 43,626
--------
Balance, end of year $273,262
========
- F-15 -
131
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30, 1998 and 1997 were as follows:
1998 1997
---- ----
Land and building $ 938,870 $ 915,120
Improvements 848,784 693,690
Furniture and equipment 883,490 778,173
---------- ----------
Total 2,671,144 2,386,983
Less accumulated depreciation and
amortization 1,306,792 1,208,479
---------- ----------
Office premises and equipment, net $1,364,352 $1,178,504
========== ==========
5. FORECLOSED REAL ESTATE
An analysis of the allowance for foreclosed real estate for the years
ended June 30, 1998, 1997 and 1996 is summarized as follows:
1998 1997 1996
---- ---- ----
Balance, beginning $24,852 $44,000 $ -
Provision for foreclosed real estate losses 22,000 59,886 -
Writedowns (63,546) (99,034) -
Recoveries 28,694 - -
Transfer from allowance for loan losses - 20,000 44,000
------- ------- -------
Balance, ending $12,000 $24,852 $44,000
======= ======= =======
- F-16 -
132
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. DEPOSITS
Deposits at June 30, 1998 and 1997 were as follows:
1998
-----------------------------------------------------
WEIGHTED
AVERAGE
AMOUNT PERCENT RATE
------ ------- ----
Passbook and statement savings $ 29,052,601 28.32% 2.61%
Variable rate money market 2,083,512 2.03 2.56%
Negotiable order of withdrawal 10,983,296 10.70 1.74%
Certificates of deposit 60,484,136 58.95 5.59%
------------ -----
Total $102,603,545 100.0%
============ =====
1997
-----------------------------------------------------
WEIGHTED
AVERAGE
AMOUNT PERCENT RATE
------ ------- ----
Passbook and statement savings $ 30,240,180 30.71% 2.61%
Variable rate money market 2,181,747 2.22 2.56%
Negotiable order of withdrawal 8,758,384 8.89 1.75%
Certificates of deposit 57,284,406 58.18 5.53%
------------- -----
Total $ 98,464,717 100.0%
============= =====
Scheduled maturities of certificates of deposits at June 30, 1998 are as
follows:
YEAR ENDED JUNE 30:
-------------------
1999 $38,806,970
2000 9,556,810
2001 4,372,052
2002 2,596,145
2003 3,566,569
Thereafter 1,585,590
-----------
Total $60,484,136
===========
- F-17 -
133
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Certificates of deposit in denominations of $100,000 or more amounted to
$13,552,029 and $12,235,268 at June 30, 1998 and 1997, respectively.
Interest expense on deposits for the years ended June 30, 1998 and 1997
is summarized as follows:
1998 1997 1996
---- ---- ----
Certificates of deposit $3,260,039 $3,007,740 $3,035,503
Passbook savings 795,011 826,597 930,815
Money market 53,142 59,527 73,710
NOW 151,766 135,109 189,624
---------- ---------- ----------
Total $4,259,958 $4,028,973 $4,229,652
========== ========== ==========
- F-18 -
134
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. INCOME TAXES
The Small Business Job Protection Act of 1996, enacted August 20, 1996,
provided for the repeal of the tax bad debt deduction computed under the
percentage of taxable income method. The repeal of the use of this method
was effective for tax years beginning after December 31, 1995. Prior to
the change in law, the Association had qualified under the provisions of
the Internal Revenue Service Code which permitted it to deduct from
taxable income an allowance for bad debts based on 8% of taxable income.
The Association is required to recapture into income, over a six year
period, the portion of its tax bad debt reserves that exceed its base
year reserves (i.e., tax reserves for tax years beginning before 1988).
The base year tax reserves, which may be subject to recapture if the
Association ceases to qualify as a Association for federal income tax
purposes, are restricted with respect to certain distributions. The
Association's total tax bad debt reserves at June 30, 1998, are
approximately $2.3 million, of which $1.9 million represents the base
year amount and $400,000 is subject to recapture. The Association has
previously recorded a deferred tax liability for the amount to be
recaptured; therefore, this recapture will not impact the statement of
income.
The provision for income taxes is comprised of the following:
1998 1997 1996
---- ---- ----
Currently payable $460,140 $195,089 $338,635
Deferred 46,160 148,892 23,665
-------- -------- --------
Total provision $506,300 $343,981 $362,300
======== ======== ========
- F-19 -
135
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The effective income tax rate for the years ended June 30, 1998, 1997 and
1996 was 45.1%, 62.1% and 37.8%, respectively. A reconciliation between
the expected statutory income tax rate and the effective income tax rate
on income before taxes follows (in thousands):
1998 1997 1996
----------------------- --------------------------- --------------------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
Provision at
statutory
rate $382 34.0% $188 34.0% $326 34.0%
State income
tax, net
of federal 118 10.5 17 3.1 51 5.3
benefit
Other, primarily
bad debt
deduction 6 .6 139 25.0 (15) (1.5)
---- ---- ---- ---- ---- ----
Total $506 45.1% $344 62.1% $362 37.8%
==== ==== ==== ==== ==== ====
The components of the net deferred tax (liability) asset are as follows
at June 30:
1998 1997
---- ----
Deferred tax asset:
Deferred loan fees, net $ 60,959 $ 95,072
Deferred tax liabilities:
Allowance for loan losses (141,052) (135,981)
Depreciation (17,993) (11,017)
Unrealized holding gains (losses) (10,458) (4,881)
--------- --------
Total $(108,544) $(56,807)
========= ========
The deferred tax (liability) asset is included in other (liabilities)
assets on the balance sheet.
- F-20 -
136
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows for the years
ended June 30, 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Outside service fees $210,924 $200,053 $192,320
Advertising and promotion 50,725 44,014 39,491
All other expenses 247,789 254,109 272,071
-------- -------- --------
Total $509,438 $498,176 $503,882
======== ======== ========
9. PENSION PLAN
The Association participates in a contributory defined benefit
multi-employer pension plan administered through Pentegra. The
Association makes annual contributions to the Plan equal to amounts
accrued for pension expense. Total pension expense for the years ended
June 30, 1998, 1997 and 1996 was $3,581, $29,364 and $67,851,
respectively. The relative position of the Association regarding the
accumulated plan benefits and net assets of the Plan is not readily
determinable by the Association.
10. FEDERAL DEPOSIT INSURANCE CORPORATION
(FDIC) SPECIAL ASSESSMENT
On September 30, 1996, legislation was enacted to bring the funding level
of the Savings Association Insurance Fund (of which the Association is a
member) of the FDIC to the same level as the Bank Insurance Fund of the
FDIC. As a result of that legislation, the Association paid a single
premium payment of $619,763 for the year ended June 30, 1997. The impact
of this single premium payment, net of estimated federal and state taxes
on 1997 net income tax was approximately $372,000. The single premium
payment was assessed at 65.7 basis points of the March 31, 1995 deposit
base of the Association. With the enactment of the legislation, the
regular assessment rate for the fourth quarter, October 1 to December 31,
1996, was lowered retroactively from 57.5 to 16.25 basis points.
Beginning January 1, 1997, annual premium assessments further decreased
to an annual premium level of 15.75 basis points.
- F-21 -
137
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
The Association retains a law firm, in which a member of the
Association's Board of Directors also is a member, that provides general
legal counsel to the Association. The Association paid $25,513, $25,874
and $43,330, in legal fees to this firm for the years ended June 30,
1998, 1997 and 1996, respectively.
12. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
The Association is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments are
commitments to extend credit. These commitments involve, to varying
degrees, elements of credit, interest rate or liquidity risk in excess of
the amount recognized in the balance sheet. The contract or notional
amounts of these commitments express the extent of involvement the
Association has in particular classes of financial instruments.
The Association's exposure to credit loss from nonperformance by the
other party to the financial instruments for commitments to extend credit
is represented by the contractual amount of those instruments. The
Association uses the same credit policies in making commitments as it
does for on-balance-sheet instruments.
The Association's contract amounts of commitments to extend credit which
represent credit risk at June 30, 1998 and 1997 were $2,011,917 and
$1,977,048, respectively. These amounts exclude undisbursed portions of
loans in process amounting to $1,109,499 and $1,431,532 at June 30, 1998
and 1997, respectively.
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity
requirements. The Association evaluates each customer's credit-worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Association on extension of credit, is based on
management's credit assessment of the counterparty.
- F-22 -
138
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Association's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must
meet specific capital guidelines that involve quantitative measures of
the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Association's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to total assets (as defined). Management believes,
as of June 30, 1998, that the Association meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision categorized the Association as well capitalized under
the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes
have changed the Association's category.
- F-23 -
139
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
To be categorized as well capitalized the Association must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the following table. The Association's actual capital
amounts and ratios are presented in the following table. No deductions
were made in either year from capital for interest-rate risk.
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PROMPT CORRECTIVE
PURPOSES ACTION PROVISIONS
------------------------- ------------------------- ------------------------
JUNE 30, 1998 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- ------ ----- ------ ----- ------ -----
Total Capital (to Risk Weighted
Assets) (risk-based capital ratio) $9,814 16.9% $4,641 >_8.0% $5,801 >_10.0%
Tier I Capital (to Risk Weighted
Assets) $9,362 16.1% $2,321 >_4.0% $3,481 >_6.0%
Tier I Capital (to Total Assets)
(core capital ratio) $9,362 8.4% $4,485 >_4.0% $5,606 >_5.0%
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PROMPT CORRECTIVE
PURPOSES ACTION PROVISIONS
------------------------- ------------------------- ------------------------
JUNE 30, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- ------ ----- ------ ----- ------ -----
Total Capital (to Risk Weighted
Assets) (risk-based capital ratio) $9,173 21.7% $3,382 >_8.0% $4,228 >_10.0%
Tier I Capital (to Risk Weighted
Assets) $8,744 20.7% $1,691 >_4.0% $2,537 >_6.0%
Tier I Capital (to Total Assets)
(core capital ratio) $8,744 8.1% $4,298 >_4.0% $5,372 >_5.0%
- F-24 -
140
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires that the Association disclose estimated fair values for its
financial instruments. Fair value estimates are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Association's entire holdings of a particular financial instrument. Also,
it is the Association's general practice and intention to hold most of
its financial instruments to maturity and not to engage in trading or
sales activities. Because no market exists for a significant portion of
the Association's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions can significantly
affect the estimates.
Estimated fair values have been determined by the Association using
historical data, as generally provided in the Association's regulatory
reports, and an estimation methodology suitable for each category of
financial instruments. The estimated fair value of the Association's
investment securities is described in Note 2. The Association's fair
value estimates, methods and assumptions are set forth below for the
Association's other financial instruments.
Cash and due from banks and interest-bearing deposits with banks:
The carrying amounts for cash and due from banks and interest-bearing
deposits with banks approximate fair value because they mature in 90
days or less and do not present unanticipated credit concerns.
- F-25 -
141
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Loans:
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, credit card
and other consumer. Each loan category is further segmented into
fixed and adjustable rate interest terms and by performing and
nonperforming categories.
The fair value of performing loans, except residential mortgage is
calculated by discounting schedules cash flows through the estimated
maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the Association's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions.
For performing residential mortgage loans, fair value is estimated
using discounted rates based on secondary market sources adjusted to
reflect differences in servicing and credit costs.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discounted rates are judgmentally
determined using available market information and specific borrower
information.
Deposits:
The fair value of deposits with no stated maturity, such as
noninterest bearing demand deposits, savings and NOW accounts, and
money market and checking accounts, is equal to the amount payable on
demand as of the valuation date. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates above do not include the benefit that
results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market, commonly
referred to as the core deposit intangible.
- F-26 -
142
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Accrued Interest:
The carrying amounts of accrued interest approximate their fair values.
The estimated fair values of the Association's financial instruments are
as follows at June 30 (in thousands):
1998 1997
------------------------------ -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Cash and due from
banks $ 3,272 $ 3,272 $ 2,868 $ 2,868
Interest-bearing deposits
with banks 8,586 8,586 6,167 6,167
Held-to-maturity
securities 20,783 20,807 24,842 24,811
Available-for-sale
securities 7,901 7,901 4,414 4,248
Loans, net of allowance 69,211 70,123 66,738 67,021
Accrued interest
receivable 619 619 665 665
Financial liabilities:
Deposits 102,604 102,672 98,465 98,133
Accrued interest payable 206 206 154 154
- F-27 -
143
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. RECENT ACCOUNTING PRONOUNCEMENTS
In September 1997, the Financial Accounting Standard Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The statement does not require a specific format
for that financial statement but requires that an enterprise display an
amount representing total comprehensive income for the period in that
financial statement. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. The Association will make the appropriate
disclosures in the applicable financial statements, as required.
In September 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December
15, 1997. Management has not yet determined the impact, if any, of this
statement on the Association.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS No. 133 is effective for
financial statements for periods beginning after June 15, 1999. In
connection with the implementation of SFAS No. 133, the Association may
transfer debt securities classified as held-to-maturity to the
available-for-sale category. Such a transfer will not call into question
the Association's intention to hold other debt to maturity in the future.
Management has not yet determined the impact, if any, of this statement
on the Association.
- F-28 -
144
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. PLAN OF CONVERSION
On June 26, 1998, the Board of Directors of the Association adopted a
plan of conversion (the "Plan") pursuant to which the Association will
convert from a state chartered mutual savings and loan association to a
state chartered stock capital savings association. All of the outstanding
common stock of the Association will be acquired in exchange for a
portion of the net conversion proceeds (the "Conversion") by a holding
company formed expressly for such purpose (the "Company"). All of the
stock to be issued in the Conversion is being offered to eligible account
holders as of March 31, 1997.
The Association plans to establish an ESOP for the benefit of eligible
employees, to become effective upon the conversion. The ESOP intends to
purchase up to 8% of the common stock issued in the conversion utilizing
proceeds of a loan from a wholly-owned subsidiary of the company or a
third party lender. The loan will be repaid over a period of 12 years and
the collateral for the loan will be the common stock purchased by the
ESOP.
Pursuant to the Plan, the Company intends to establish a charitable
foundation ("Foundation") in connection the conversion. The Plan provides
that the Association and the Company will create the Foundation and
donate an amount of the Company's common stock equal to 5% of the common
stock to be sold in the conversion. The Foundation will be dedicated to
charitable purposes within the communities in which the Association
operates and to complement the Association's existing community
activities. Establishment of the Foundation is subject to the approval of
the Association's members at the special meeting being held to vote upon
the Conversion.
The Foundation will submit a request to the Internal Revenue Service to
be recognized as a tax-exempt organization and would likely be classified
as a private foundation. A contribution of common stock to the Foundation
by the Company would be tax deductible, subject to a limitation based on
10 percent of the Company's taxable income. The Company, however, would
be able to carry forward any unused portion of the deduction for five
years following the contribution. Upon funding the Foundation, the
Company will recognize an expense in the full amount of the contribution,
offset in part by the corresponding benefit for the tax deduction, during
the quarter in which the contribution is made.
- F-29 -
145
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Association may provide support services to the Foundation including,
but not limited to, employee time, office space and accounting support.
The Association expects to provide these services without compensation,
however, expenses incurred on behalf of the Foundation are not expected
to be significant to the operations of the Association.
At the time of Conversion, the Association will establish a liquidation
account in an amount equal to its equity as reflected in the latest
balance sheet used in the final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible account holders
and supplemental eligible account holders who continue to maintain their
accounts at the Association after the conversion. The liquidation account
will be reduced annually to the extent that eligible account holders and
supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not
restore an eligible account holder's or supplemental account holder's
interest in the liquidation account. In the event of a completed
liquidation of the Association, each eligible account holder and
supplemental eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to
the current adjusted qualifying balances for accounts then held.
The costs associated with Conversion will be deferred and will be
deducted from the proceeds upon the sale and issuance of stock. In the
event the Conversion is not consummated, costs incurred will be charged
to expense. At June 30, 1998 deferred conversion costs totaled $20,000.
After the conversion, the Association may not declare or pay dividends on
its stock if such declaration and payment would violate statutory or
regulatory requirements.
- --------------------------------------------------------------------------------
- F-30 -
146
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY SECURITY OF PENNSYLVANIA FINANCIAL CORP., THE ASSOCIATION OR
SANDLER O'NEILL & PARTNERS, L.P. 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 SECURITY OF PENNSYLVANIA
FINANCIAL CORP. OR THE ASSOCIATION SINCE ANY OF THE DATES AS OF WHICH
INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
Page
----
Summary
Selected Consolidated Financial and.....................................
Other Data of the Association.......................................
Risk Factors............................................................
Security of Pennsylvania Financial Corp.................................
Security Savings Association of Hazleton................................
Regulatory Capital Compliance...........................................
Use of Proceeds.........................................................
Dividend Policy.........................................................
Market for the Common Stock.............................................
Capitalization..........................................................
Pro Forma Data..........................................................
Comparison of Valuation and Pro Forma Information.......................
With No Foundation...................................................
Security Savings Association of Hazleton Statements.....................
of Income.............................................................
Management's Discussion and Analysis of Financial.......................
Condition and Results of Operations.................................
Business of the Association.............................................
Federal and State Taxation..............................................
Regulation..............................................................
Management of the Company...............................................
Management of the Association...........................................
The Conversion..........................................................
Restrictions on Acquisition of the Company..............................
and the Association.................................................
Description of Capital Stock of the Company.............................
Description of Capital Stock of the Association.........................
Transfer Agent and Registrar............................................
Experts.................................................................
Legal and Tax Opinions..................................................
Additional Information..................................................
Index of Financial Statements...........................................
------------------------------
UNTIL __________, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE COMMUNITY OFFERING
AND/OR SYNDICATED COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER 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.
================================================================================
1,851,500 Shares
SECURITY OF PENNSYLVANIA
FINANCIAL CORP.
(Proposed Holding Company for
Security Savings Association of Hazleton)
COMMON STOCK
______________
PROSPECTUS
______________
_____________, 1998
Sandler O'Neill & Partners, L.P.
================================================================================
147
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
Registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party to
or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, services to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an
148
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses under this Article TENTH, or otherwise shall be on the
Corporation.
D. The rights to indemnification and to the advancement of expenses conferred in
this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself and
any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of expenses
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH:
A Director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability: (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
149
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC filing(1)......................................................................................................$ 5,735
OTS filing fee.......................................................................................................14,400
Pennsylvania filing fees..............................................................................................2,052
NASD filing fee(1)....................................................................................................2,445
Stock Market listing fee(1)..........................................................................................15,000
Printing, postage and mailing.......................................................................................150,000
Legal fees and expenses (including underwriter's
counsel)..........................................................................................................200,000
Accounting fees and expenses.........................................................................................65,000
Appraisers' fees and expenses (including
business plan).....................................................................................................28,000
Marketing fees and selling commissions..............................................................................324,972
Underwriter's expenses...............................................................................................10,000
Conversion agent fees and expenses...................................................................................20,000
Transfer agent fees and expenses.....................................................................................10,000
Certificate printing..................................................................................................5,000
Telephone, temporary help and other equipment........................................................................10,000
Miscellaneous.................................................................................................... 32,368
--------
TOTAL............................................................................................................ $894,972
========
- ---------------------------
(1) Unless otherwise noted, based upon the registration and issuance of
1,944,075 shares at $10.00 per share.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
150
ITEM 27. EXHIBITS.
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Security Savings Association of Hazleton and Sandler O'Neill & Partners, L.P.
1.2 Draft Form of Agency Agreement*
2.1 Amended Plan of Conversion (including the Stock Articles of Incorporation and Bylaws of Security Savings Association
of Hazleton)
3.1 Certificate of Incorporation of Security of Pennsylvania Financial Corp.
3.2 Bylaws of Security of Pennsylvania Financial Corp.
3.3 Stock Articles of Incorporation and Bylaws of Security Savings Association of Hazleton
(See Exhibit 2.1 hereto)
4.0 Draft Stock Certificate of Security of Pennsylvania Financial Corp.
5.0 Draft Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Draft Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Draft Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Draft Opinion of Parente, Randolph, Orlando, Carey & Associates re: State Tax Matters
10.1 Form of Security Savings Association of Hazleton Trust Agreement
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.3 Form of Security Savings Association of Hazleton Employment Agreement
10.4 Form of Security of Pennsylvania Financial Corp. Employment Agreement
10.5 Form of Security Savings Association of Hazleton Change in Control Agreement
10.6 Form of Security Savings Association of Hazleton Supplemental Executive Retirement Plan
10.7 Form of Security Savings Association of Hazleton Employee Severance Compensation Plan
23.1 Consent of Parente, Randolph, Orlando, Carey & Associates
23.2 Consent of Muldoon, Murphy & Faucette
23.3 Consent of Morris, Nichols, Arsht & Tunnell
23.4 Consent and Subscription Rights Opinion of Keller & Company, Inc.
24.1 Powers of Attorney
27.0 Financial Data Schedule
99.1 Appraisal Report of Keller & Company, Inc.(P)
99.2 Form of Security Savings Charitable Foundation Gift Instrument
- --------------------
*To be filed by amendment
(P) Filed pursuant to Rule 202 of Regulation S-T.
151
ITEM 28. UNDERTAKINGS.
The small business issuer will:
(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer 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 small business
issuer 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.
152
CONFORMED
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Hazleton, Commonwealth of Pennsylvania, on September 11, 1998.
Security of Pennsylvania Financial Corp.
By: /s/ Richard C. Laubach
--------------------------
Richard C. Laubach
President, Chief Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
Name Title Date
---- ----- ----
/s/ Richard C. Laubach President, Chief Executive September 11, 1998
- ------------------------------ Officer and Director
Richard C. Laubach (principal executive
officer)
/s/ David P. Marchetti, Sr. Chief Financial Officer September 11, 1998
- ------------------------------ and Treasurer
David P. Marchetti, Sr. (principal accounting and
financial officer)
/s/ Vincent L. Marusak Director September 11, 1998
- ------------------------------
Vincent L. Marusak
/s/ Frederick L. Barletta Director September 11, 1998
- --------------------------------
Frederick L. Barletta
/s/ Peter B. Deisroth Director September 11, 1998
- ---------------------------------
Peter B. Deisroth
/s/ George J. Hayden Director September 11, 1998
- -------------------------------
George J. Hayden
/s/ Joseph E. Lundy Director September 11, 1998
- --------------------------------
Joseph E. Lundy
/s/ John J. Raynock Director September 11, 1998
- ---------------------------------
John J. Raynock
/s/ Anthony P. Sidari Director September 11, 1998
- --------------------------------
Anthony P. Sidari
153
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Security Savings Association of Hazleton and Sandler O'Neill & Partners, L.P.
1.2 Draft Form of Agency Agreement*
2.1 Amended Plan of Conversion (including the Stock Articles of Incorporation and Bylaws of Security Savings
Association of Hazleton)
3.1 Certificate of Incorporation of Security of Pennsylvania Financial Corp.
3.2 Bylaws of Security of Pennsylvania Financial Corp.
3.3 Stock Articles of Incorporation and Bylaws of Security Savings Association of Hazleton
(See Exhibit 2.1 hereto)
4.0 Draft Stock Certificate of Security of Pennsylvania Financial Corp.
5.0 Draft Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Draft Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Draft Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Draft Opinion of Parente, Randolph, Orlando, Carey & Associates re: State Tax Matters
10.1 Form of Security Savings Association of Hazleton Trust Agreement
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.3 Form of Security Savings Association of Hazleton Employment Agreement
10.4 Form of Security of Pennsylvania Financial Corp. Employment Agreement
10.5 Form of Security Savings Association of Hazleton Change in Control Agreement
10.6 Form of Security Savings Association of Hazleton Supplemental Executive Retirement Plan
10.7 Form of Security Savings Association of Hazleton Employee Severance Compensation Plan
23.1 Consent of Parente, Randolph, Orlando, Carey & Associates
23.2 Consent of Muldoon, Murphy & Faucette
23.3 Consent of Morris, Nichols, Arsht & Tunnell
23.4 Consent and Subscription Rights Opinion of Keller & Company, Inc.
24.1 Powers of Attorney
27.0 Financial Data Schedule
99.1 Appraisal Report of Keller & Company, Inc.(P)
99.2 Form of Security Savings Charitable Foundation Gift Instrument
- ------------------
*To be filed by amendment
(P) Filed pursuant to Rule 202 of Regulation S-T.