<PAGE> 1
PROSPECTUS
PRESTIGE BANCORP, INC.
(Proposed Holding Company for Prestige Bank, A Federal Savings Bank)
1,150,000 Shares (Anticipated Maximum) of Common Stock
$10.00 per share
Prestige Bancorp, Inc. (the "Company"), a Pennsylvania corporation, is
offering up to 1,150,000 shares of its common stock, par value $1.00 per share
(the "Common Stock"), in connection with the conversion of Prestige Bank, A
Federal Savings Bank from a Federally chartered mutual savings bank to a
Federally chartered stock savings bank (in its mutual or stock form, as
applicable, "Prestige Bank" or the "Savings Bank") pursuant to the Savings
Bank's plan of conversion (the "Plan" or "Plan of Conversion"). Under certain
circumstances, the Company may increase the Common Stock offered hereby to
1,322,500 shares. The simultaneous conversion of the Savings Bank to stock form,
the issuance of the Savings Bank's stock to the Company and the offer and sale
of the Common Stock by the Company are referred to herein as the "Conversion".
(continued)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS", ON PAGE 14 HEREOF.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER FEDERAL OR STATE AGENCY OR STATE SECURITIES
COMMISSION, NOR HAS SUCH COMMISSION, OFFICE, CORPORATION OR OTHER AGENCY OR
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
ESTIMATED CONVERSION ESTIMATED
PURCHASE PRICE(1) EXPENSES AND FEES(2) NET PROCEEDS(3)
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Minimum Per Share................................................ $ 10.00 $ .56 $ 9.44
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Midpoint Per Share............................................... $ 10.00 $ .50 $ 9.50
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Maximum Per Share................................................ $ 10.00 $ .46 $ 9.54
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Total Minimum(1)................................................. $ 8,500,000 $475,000 $ 8,025,000
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Total Midpoint(1)................................................ $10,000,000 $499,000 $ 9,501,000
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Total Maximum(1)................................................. $11,500,000 $524,000 $10,976,000
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Total Maximum, as adjusted(4).................................... $13,225,000 $551,000 $12,674,000
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</TABLE>
(1) Determined in accordance with an independent appraisal prepared by FinPro
Financial Services, Inc. ("FinPro"), dated March 5, 1996, which states that
the estimated pro forma market value of the Common Stock ranged from $8.5
million to $11.5 million (the "Estimated Valuation Range"), or between
850,000 and 1,150,000 shares of Common Stock at the $10.00 price per share
("Purchase Price"). See "The Conversion-- Stock Pricing and Number of Shares
to be Issued".
(2) Consists of the estimated costs to the Savings Bank and the Company arising
from the Conversion, including estimated fixed expenses of $350,000 plus
marketing fees to be paid to Ryan, Beck in connection with the Subscription
and Community Offerings, which fees are estimated to be $125,000 and
$174,000 at the minimum and the maximum of the Estimated Valuation Range,
respectively. Such marketing fees paid to Ryan, Beck may be deemed to be
underwriting commissions. In the event of a Syndicated Community Offering is
necessary, the marketing fees of Ryan, Beck and the other broker-dealers
involving in the syndication will be calculated on a basis different from
the basis used for a Subscription Offering or a Community Offering. See "The
Conversion--Marketing and Underwriting Arrangements". The actual marketing
fees and expenses may vary from the estimates. See "Pro Forma Data". Ryan,
Beck will also be reimbursed for certain out of pocket expenses and will be
indemnified by the Company and the Savings Bank for certain liabilities,
including liabilities under the Securities Act of 1933, as amended, in
connection with the Offerings.
(3) Actual net proceeds may vary substantially from estimated amounts depending
on the number of shares sold in the Offerings and other factors. Includes
the purchase of shares of Common Stock by the ESOP funded by a loan from the
Company to the ESOP, which initially will be deducted from the Company's
stockholders' equity. For the effect of such purchases, see "Capitalization"
and "Pro Forma Data". The dollar amount paid and number of shares of Common
Stock purchased by the ESOP at the minimum, midpoint, maximum and maximum
adjusted are (i) $680,000 and 68,000 shares, (ii) $800,000 and 80,000
shares, (iii) $920,000 and 92,000 shares, and (iv) $1,058,000 and 105,800
shares, respectively. The ESOP will finance the purchase of the shares with
a loan from the Company of proceeds from the sale of Common Stock retained
by the Company. This loan will be repaid with the proceeds of pension
contributions made by the Company and the Savings Bank to the ESOP and
dividends, if any, paid on the Common Stock held by the ESOP.
(4) Gives effect to an increase in the number of shares of Common Stock which
may be sold in the Conversion at the Purchase Price, without resolicitation
of subscribers or any right of cancellation, due to a 15% increase in the
Estimated Valuation Range to reflect changes in market and economic
conditions prior to completion of the Conversion or to fill in part or in
whole the order of the ESOP. See "The Conversion--Stock Pricing and Number
of Shares to be Issued" and "--Limitations on Common Stock Purchases".
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LOGO
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The date of this Prospectus is May 13, 1996
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Nontransferable rights to subscribe for the Common Stock have been granted,
in order of priority, to (i) depositors of the Savings Bank with savings account
balances of $50.00 or more as of December 31, 1994 ("Eligible Account Holders"),
(ii) the Company's and the Savings Bank's Employee Stock Ownership Plan, a
tax-qualified employee benefit plan (the "ESOP"), (iii) depositors of the
Savings Bank with saving account balances of $50.00 or more as of March 31, 1996
("Supplemental Eligible Account Holders"), (iv) all other depositors of the
Savings Bank as of April 30, 1996, and borrowers of the Savings Bank as of March
1, 1991, who continued as borrowers as of April 30, 1996 (the other such
depositors and such borrowers, collectively the "Other Members"), of the Savings
Bank, and (v) directors, officers and employees of the Savings Bank as of April
30, 1996 (the "Directors, Officers and Employees"), subject to the limitations
described herein (the "Subscription Offering"). SUBSCRIPTION RIGHTS ARE
NONTRANSFERABLE AND PERSONS FOUND TO BE ATTEMPTING TO TRANSFER SUBSCRIPTION
RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER
SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION (THE "OTS").
Commencing concurrently with the Subscription Offering, and subject to the prior
rights of holders of subscription rights, the Company's right to reject such
orders in whole or in part and the other limitations described herein, the
Company is offering the shares of Common Stock not subscribed for in the
Subscription Offering, if any, for sale in a community offering (the "Community
Offering") to certain members of the general public to whom a copy of this
Prospectus is delivered, with preference given to natural persons residing in
the Pennsylvania Counties of Allegheny, Washington, Westmoreland and Butler
(collectively, the "Local Community"). It is anticipated that shares of Common
Stock not subscribed for in the Subscription and Community Offerings, if any,
will be offered by the Company to certain members of the general public in a
syndicated community offering (the "Syndicated Community Offering") (the
Subscription Offering, Community Offering and Syndicated Community Offering are
referred to collectively as the "Offerings"). The Offerings are contingent on
the approval of the Conversion by the members of the Savings Bank eligible to
vote at a meeting of the members of the Savings Bank, the sale of the minimum
shares of Common Stock and the agreement of the Board of Directors of the
Company and the Savings Bank to accept the offers to purchase the shares of
Common Stock.
With the exception of the ESOP, which intends to purchase up to 8% of the
total number of shares of Common Stock issued in the Conversion, no person or
entity may purchase in each of the Subscription Offering, the Community Offering
or the Syndicated Community Offering more than $50,000 of the aggregate value of
the shares of Common Stock offered in the Conversion, and no person, together
with associates of and persons acting in concert with such person, may purchase
more than $150,000 of the aggregate value of shares of Common Stock offered in
the Conversion; provided, however, that the maximum overall purchase limitation
may be increased or decreased and the amount permitted to be subscribed for may
be increased or decreased in the sole discretion of the Company. Shares sold
above the maximum of the Estimated Valuation Range (as hereinafter defined) may
be sold to the ESOP to fill its subscription order, however, the ESOP may
acquire some or all of its shares in the open market after the Conversion. The
minimum purchase is 25 shares. See "The Conversion--Subscription Offering and
Subscription Rights," "--Community Offering" and "--Limitations on Common Stock
Purchases".
The Savings Bank has engaged Ryan, Beck & Co., Inc. ("Ryan, Beck"), a
registered broker-dealer, to consult with and advise the Company and the Savings
Bank in the Offerings, and Ryan, Beck has agreed to use its best efforts to
solicit subscriptions and purchase orders for shares of Common Stock in the
Offerings. Ryan, Beck is not obligated to take or purchase any shares of Common
Stock in the Offerings. See "The Conversion--Marketing and Underwriting
Arrangements".
THE SUBSCRIPTION OFFERING WILL TERMINATE AT 12:00 NOON, EASTERN TIME, ON
JUNE 17, 1996 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE SAVINGS BANK AND
THE COMPANY, WITH APPROVAL OF THE OTS, IF NECESSARY. The Community Offering or
any Syndicated Community Offering must be completed within 45 days after the
close of the Subscription Offering, unless extended by the Savings Bank and the
Company with the approval of the OTS, if necessary. Such extensions may not go
beyond June 19, 1998.
The Company has received conditional approval from the National Association
of Securities Dealers to have its Common Stock quoted on the Nasdaq Stock Market
under the symbol "PRBC". Prior to the Offerings there has not been a public
market for the Common Stock, and there can be no assurance that an active and
liquid trading market for the Common Stock will develop or that the Common Stock
will trade at or above the Purchase Price (as hereinafter set forth) in the
Offerings.
The Company presently intends to submit to its shareholders for approval at
a meeting of the shareholders to be held no earlier than six months following
the Conversion, a management recognition and retention plan and trust (the
"Recognition Plan") and a stock option plan (the "Stock Option Plan"). The
Recognition Plan is expected to acquire shares of Common Stock in an amount
equal to 4% of the Common Stock issued in the Conversion. The Stock Option Plan
is expected to acquire shares of Common Stock in an amount equal to 10% of the
Common Stock issued in the Conversion.
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<PAGE> 3
PRESTIGE BANK, A FEDERAL SAVINGS BANK
GREATER PITTSBURGH MARKET AREA
Map of Allegheny County highlighting the following areas: Pittsburgh, Mount
Oliver, Baldwin, Bethel Park, South Park, Jefferson, Pleasant Hills and West
Mifflin.
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<PAGE> 4
SUMMARY
This summary is qualified in its entirety by the more detailed information
and the Financial Statements of the Savings Bank appearing elsewhere in this
Prospectus.
PRESTIGE BANCORP, INC.
Prestige Bancorp, Inc. is a Pennsylvania corporation organized in March,
1996 by the Savings Bank for the purpose of acquiring all of the capital stock
of the Savings Bank to be issued in the Conversion. Immediately following the
Conversion, the only significant assets of the Company will be the capital stock
of the Savings Bank, the Company's loan to the ESOP, and the balance of the net
Conversion proceeds retained by the Company. The business of the Company
initially will consist of the business of the Savings Bank and the investment of
the net Conversion proceeds retained by the Company. See "Use of Proceeds,"
"Business of the Savings Bank" and "Regulation--The Company".
PRESTIGE BANK, A FEDERAL SAVINGS BANK
The Savings Bank is a Federally chartered mutual savings bank which
conducts business from offices located in Allegheny County, Pennsylvania. The
Savings Bank's operations date back to 1935 with the incorporation of First
Federal Savings and Loan Association of Mt. Oliver in Allegheny County,
Pennsylvania which, in March, 1991, converted its charter from a Federal mutual
savings and loan association to a Federal mutual savings bank and took the name
Prestige Bank, A Federal Savings Bank. The Savings Bank's deposits are insured
by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC") to the maximum extent permitted by law. At
December 31, 1995, the Savings Bank had $91.8 million in total assets, $80.7
million in total deposits and $7.2 million in total equity.
The Savings Bank is a community oriented savings institution providing
mortgage loans and other traditional services to its local community. The
Savings Bank is primarily engaged in attracting deposits from the general public
through its offices and using those and other available sources of funds to
originate loans secured by one-to-four family residences primarily located in
Allegheny, Washington and Westmoreland Counties, and to a lesser extent, Butler
and Greene Counties, all of which counties are located in Western Pennsylvania.
Loans secured by one-to-four family residences were $55.4 million or 89.7% of
the total loan portfolio at December 31, 1995. To a lesser extent, the Savings
Bank originates other loans secured by commercial real estate and consumer
loans, home equity loans and commercial loans which, in the aggregate, amounted
to $6.4 million or 10.3% of the total loan portfolio at December 31, 1995. The
Savings Bank also has a securities portfolio primarily consisting of U.S.
Treasury and Federal government agency obligations and mortgage-backed
securities. These securities in the aggregate amounted to $22.6 million or 24.6%
of the Savings Bank's total assets at December 31, 1995. In addition, as of the
same date, cash and cash equivalents totaled $4.4 million or 4.8% of total
assets.
The emphasis of the Savings Bank on one-to-four residential mortgages has
contributed to the reduction in the interest rate spread experienced by the
Savings Bank. Fixed rate mortgages, which at December 31, 1995 amounted to $25.5
million of the Savings Bank's one-to-four residential mortgages, are priced once
and are not match funded. Therefore, increases in interest rates and the amount
paid by the Savings Bank to attract certificates of deposit and to borrow funds
from the FHLB of Pittsburgh will increase cutting into, or eliminating, the
profit on some or all of the fixed rate mortgages. Adjustable rate mortgages,
which at December 31, 1995 amounted to $29.9 million of the Savings Bank's
one-to-four mortgages reprice periodically but there can be no assurance that
the index used to readjust interest rates on mortgages will reflect the rate of
any increase in yields on certificates of deposit or in rates charged by the
FHLB of Pittsburgh. In periods of declining interest rates, adjustable rate
mortgages may adjust more quickly than the certificates of deposit previously
issued by the Savings Bank, which was the case during 1995.
The decision of management to seek out opportunities to originate
commercial and consumer loans has been made in an effort to improve the interest
rate margins of the Savings Bank. The Management of the Savings Bank has also
determined to offer a variety of fixed rate mortgage products such as ten year
mortgages and five, seven and ten-year balloon mortgages. Through the
Conversion, the board of directors seeks to raise
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<PAGE> 5
additional capital which will enable the Savings Bank to explore other lines of
banking business which focus on fee income for services rather than the heavy
reliance on interest income to generate net income of the Savings Bank.
Increased capital will also support the Savings Bank's efforts to grow the
commercial and consumer loan portfolio.
The Savings Bank generally has sought to enhance its financial stability
and preserve its equity by, among other things, focusing on residential lending
and maintaining its asset quality. This has enabled the Savings Bank to exceed
its regulatory capital requirements and to report net income during each of the
last five years ended December 31, 1995.
The Savings Bank's market area is primarily located in the southern portion
of the Pittsburgh metropolitan area. The largest employers in the Pittsburgh
area include the U.S. Government, the Pennsylvania State Government, USAir
Group, Inc., the University of Pittsburgh Medical Center, Westinghouse Electric
Corp., the University of Pittsburgh and Mellon Bank Corp.
Financial characteristics of the Savings Bank include:
- - Capital. The Savings Bank currently exceeds all minimum regulatory capital
requirements of the OTS. At December 31, 1995, it had tangible, core, and
risk-based capital ratios of 7.87%, 7.87% and 19.39%, respectively. Assuming
the sale of Common Stock at the midpoint of the Estimated Valuation Range and
the net proceeds assumptions set forth herein under the Pro Forma Data, the
Savings Bank will have tangible, core, and risk-based capital ratios of
11.29%, 11.29% and 27.29%, respectively.
- - Asset Quality. Management of the Savings Bank believes that high asset
quality is the key to long-term financial strength. As a result, the Savings
Bank's loans and investments are intended to maintain asset quality and
control credit risk. At December 31, 1995, one-to-four family residential
loans comprised $55.4 million, 89.7%, of the Savings Bank's total loan
portfolio, and total nonperforming assets were .38% of total assets.
- - Retail Deposit Base. The Savings Bank has three branch offices located in
Allegheny County, Pennsylvania. It provides a full range of deposit products
and other services to its customers through this branch network. At December
31, 1995, $34.9 million, 43.2%, of the Savings Bank's deposit base of $80.7
million, consisted of core deposits, which include passbook, money market, NOW
accounts and non-interest bearing checking accounts.
- - Declining Profitability Trends. The Savings Bank has been profitable each
year since 1981. Net income totalled $161,000, $548,000, and $685,000 for the
fiscal years ended December 31, 1995, 1994 and 1993, respectively. The Savings
Bank's net income is primarily the result of net interest income which was
$2.3 million, $2.7 million and $2.8 million for the years December 31, 1995,
1994 and 1993, respectively. The 20.0% decline in net income from 1993 to 1994
and 70.6% decline from 1994 to 1995 was primarily as a result of the Savings
Bank's decline in net interest income, interest rate spread and interest rate
margin. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Results of Operations." These net income figures
resulted in (i) return on average assets for the years ending December 31,
1995, 1994 and 1993 of .18%, .64% and .85% respectively, and (ii) return on
average equity for years ending December 31, 1995, 1994 and 1993 of 2.26%,
8.08% and 11.11%. See "Selected Financial and Other Data". See "Risk
Factors--Business Strategy and Additional Business Lines" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Operating Strategy."
The Savings Bank is subject to examination and comprehensive regulation by
the OTS which is the Savings Bank's chartering authority. The Savings Bank is
also regulated by the FDIC, the administrator of the SAIF. The Savings Bank is
subject to certain reserve requirements established by the Board of Governors of
the Federal Reserve System ("FRB") and is a member of the FHLB of Pittsburgh,
which is one of the 12 regional banks comprising the Federal Home Loan Bank
System (the "FHLB System").
5
<PAGE> 6
THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
On February 14, 1996, the Board of Directors of the Savings Bank adopted
the Plan of Conversion pursuant to which the Savings Bank is converting from a
Federally chartered mutual savings bank to a Federally chartered stock savings
bank, all the common stock of which will be acquired by the Company in exchange
for 50% of the net Conversion proceeds. The other 50% of the net Conversion
proceeds will be retained by the Company. The Conversion and the Offerings are
subject to OTS approval, which has been received and are subject to approval of
the Savings Bank's members at a special meeting to be called for this purpose on
June 19, 1996. See "Use of Proceeds" and "The Conversion--General". The Savings
Bank is converting to increase its capital and structure itself in a form used
by many other thrift institutions and all commercial banks and most other
business entities. The Conversion will enhance the Savings Bank's ability to
access capital markets and diversify into other financial services to the extent
allowable by applicable law and regulation. See "The Conversion--Purposes of
Conversion". The existence of the Savings Bank as a stock charted institution
also affords the Savings Bank the opportunity to use an ESOP, stock grants and
stock options as tools to attract and retain employees and directors.
Common Stock is being offered in the Subscription Offering with
non-transferable subscription rights being granted, in the following order of
priority, to: (i) Eligible Account Holders; (ii) the ESOP; (iii) Supplemental
Eligible Account Holders; (iv) Other Members, and (v) Directors, Officers and
Employees. SUBSCRIPTION RIGHTS WILL EXPIRE IF NOT EXERCISED BY 12:00 NOON,
EASTERN TIME, ON JUNE 17, 1996, UNLESS EXTENDED. Subject to the prior rights of
holders of subscription rights, Common Stock not subscribed for in the
Subscription Offering is being offered in the Community Offering to certain
members of the general public to whom a copy of this Prospectus is delivered,
with preference given to natural persons residing in the Local Community. It is
anticipated that shares not subscribed for in the Subscription and Community
Offerings will be offered to certain members of the general public in the
Syndicated Community Offering. The Company reserves the absolute right to reject
or accept any orders in the Community Offering or the Syndicated Community
Offering, in whole or in part, either at the time of receipt of an order or as
soon as practicable following the Expiration Date.
Payments for subscriptions made by cash, check, bank draft or money order
will be placed in a segregated account at the Savings Bank and will earn
interest at the Savings Bank's stated rate on passbook accounts from the date of
receipt until the Conversion is completed or terminated. Payments authorized by
withdrawal from deposit accounts at the Savings Bank will continue to earn
interest at the contractual rate until the Conversion is completed or
terminated; these funds will be otherwise unavailable to the depositor until
such time. Early withdrawal penalties will be waived for stock purchases in the
Conversion. ORDERS SUBMITTED ARE IRREVOCABLE UNTIL THE COMPLETION OF THE
CONVERSION; PROVIDED THAT, IF THE CONVERSION IS NOT COMPLETED WITHIN THE 45 DAY
PERIOD REFERRED TO ABOVE, UNLESS SUCH PERIOD HAS BEEN EXTENDED WITH THE CONSENT
OF THE OTS, IF NECESSARY, ALL SUBSCRIBERS WILL HAVE THEIR FUNDS RETURNED
PROMPTLY WITH INTEREST, AND ALL WITHDRAWAL AUTHORIZATIONS WILL BE CANCELLED. IF
AN EXTENSION OF TIME HAS BEEN GRANTED, ALL SUBSCRIBERS WILL BE NOTIFIED IN
WRITING OF SUCH EXTENSION, AND OF ANY RIGHTS TO CONFIRM THEIR SUBSCRIPTIONS, OR
TO MODIFY OR RESCIND THEIR SUBSCRIPTIONS AND HAVE THEIR FUNDS RETURNED PROMPTLY
WITH INTEREST. If a subscriber does not notify the Savings Bank and the Company
during the resolicitation, his or her order will be rescinded and all funds will
be promptly returned with interest.
The Savings Bank and the Company have retained Ryan, Beck as consultant and
advisor in connection with the Offerings and to assist in soliciting
subscriptions in the Offerings. Ryan, Beck may also manage a selling group of
broker-dealers in the Syndicated Community Offering to facilitate the Offering.
See "The Conversion--Subscription Offering and Subscription Rights,"
"--Community Offering" and "--Marketing and Underwriting Agreements".
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, no person may transfer or enter
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. Each person exercising
subscription rights will
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<PAGE> 7
be required to certify that a purchase of Common Stock is solely for the
purchaser's own account and that there is no agreement or understanding
regarding the sale or transfer of such shares. SUBSCRIPTION RIGHTS ARE
NONTRANSFERABLE AND PERSONS FOUND TO BE ATTEMPTING TO TRANSFER SUBSCRIPTION
RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER
SANCTIONS AND PENALTIES IMPOSED BY THE REGULATORY AUTHORITIES. The Company
reserves the right to cancel the subscription rights of, or to rescind any
purchase by, any individual or entity attempting to transfer subscription rights
to a third party or to report such party to the OTS for possible legal
enforcement by the OTS. Following the Conversion, there generally will be no
restrictions on the transfer or sale of shares by purchasers other than
affiliates of the Company and the Savings Bank and members, and their
associates, of the National Association of Securities Dealers, Inc. ("NASD").
See "The Conversion--Restrictions on Transfer of Subscription Rights and
Shares".
The Company and the Savings Bank will pursue any and all legal and
equitable remedies in the event they become aware of the transfer of
subscription rights and will not honor orders believed by them to involve the
transfer of such rights.
PURCHASE LIMITATIONS
The minimum purchase is 25 shares. With the exception of the ESOP, which
intends to purchase up to an aggregate of 8% of the number of shares of Common
Stock issued in the Conversion (which amount includes any increase in the event
of an increase in the Estimated Valuation Range of up to 15%), no person or
entity (including any Eligible Account Holder, Supplemental Eligible Account
Holder, Other Member or Director, Officer or Employee) may purchase in each of
the Subscription Offering, the Community Offering or the Syndicated Community
Offering more than $50,000 of aggregate value of shares of Common Stock (which
amount generally shall not be increased in the event of an increase in the
Estimated Valuation Range of up to 15%); no person, together with associates of
and persons acting in concert with such person, may purchase in the Conversion,
in the aggregate, more than $150,000 of the aggregate value of shares of Common
Stock offered in the Conversion (which amount generally shall not be increased
in the event of an increase in the Estimated Valuation Range of up to 15%).
At any time during the Offerings, and without further approval by the
Savings Bank's members, the Company and the Savings Bank may in their sole
discretion decrease the maximum purchase limitation below the $50,000 and
$150,000 amounts permitted to be purchased in the Subscription Offering and the
Community Offering. Additionally, at any time during the Offerings, the Company
and the Savings Bank may in their sole discretion increase any of the purchase
limitations up to 5% of the shares offered. In the event of an increase in a
purchase limitation, the Company and the Savings Bank shall permit any person
who subscribed for the maximum number of shares of Common Stock to purchase
additional shares up to the new limit established, subject to the rights and
preferences of any person who has priority subscription rights. Under such
circumstances, the Savings Bank may also permit other persons who placed
significant orders to increase their subscription levels. See "The
Conversion--Limitations on Common Stock Purchases". In the event of an
oversubscription, shares will be allocated in accordance with the Plan as
described in "The Conversion--Subscription Offering and Subscription Rights" and
"Community Offering". Increases in the purchase limits could occur in the
situation where interest in the Common Stock is not broad enough and management
seeks to increase the amount of the Common Stock sold. Decreases in the purchase
limits could occur if there is substantial interest in the Common Stock and the
Company seeks a wider distribution of the Common Stock.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Applicable regulations require the aggregate purchase price of the Common
Stock to be issued in the Conversion to be consistent with an independent
appraisal of the estimated pro forma market value of the Common Stock following
the Conversion. FinPro, an independent appraiser, has advised the Savings Bank
that in its opinion, dated March 5, 1996, the Estimated Valuation Range ranged
from $8.5 million to $11.5 million with a midpoint of $10 million. In the
process of appraising the Savings Bank, the appraisal included, but was not
limited to, consideration that the Savings Bank was less competitive to other
publicly traded thrifts, that were considered its peers, in various financial
areas including balance sheet data, balance
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<PAGE> 8
sheet growth, asset quality and profitability. A copy of the Conversion
Valuation Appraisal Report of FinPro may be obtained without charge by calling
the Savings Bank at (412) 655-1190. THIS APPRAISAL OF THE COMMON STOCK IS NOT
INTENDED AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE
ADVISABILITY OF PURCHASING SUCH STOCK NOR CAN ANY ASSURANCE BE GIVEN THAT
PURCHASERS OF THE COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH
SHARES AFTER THE CONVERSION AT OR ABOVE THE PURCHASE PRICE. See "Additional
Information".
All shares of Common Stock issued in the Conversion will be sold at the
Purchase Price, as determined by the Savings Bank and approved by the Company.
The actual number of shares to be issued in the Conversion will be determined by
the Company and the Savings Bank based upon the final updated valuation of the
estimated pro forma market value of the Common Stock, giving effect to the
Conversion, at the completion of the Offerings. The number of shares to be
issued is expected to range from a minimum of 850,000 shares to a maximum of
1,150,000 shares. Subject to approval of the OTS, the Estimated Valuation Range
may be increased or decreased to reflect market and economic conditions prior to
the completion of the Conversion or to fill the subscription request of the
ESOP, and under such circumstances the Company may increase or decrease the
number of shares of Common Stock to be issued in the Conversion. No
resolicitation of subscribers will be made and subscribers will not be permitted
to modify or cancel their subscriptions unless the gross proceeds from the sale
of the Common Stock are less than the minimum or more than 15% above the maximum
of the current Estimated Valuation Range. An affirmative response to any
resolicitation must be received by the Savings Bank in order to confirm
subscriptions. In connection with a resolicitation, to the extent that
subscriptions are cancelled, rescinded or reduced, all funds delivered to the
Company or the Savings Bank will be returned with interest earned from the date
of receipt, and withdrawal authorizations will be reduced or cancelled. See "Pro
Forma Data," "Risk Factors--Possible Increase in Number of Shares Issued" and
"The Conversion--Stock Pricing and Number of Shares to be Issued".
POTENTIAL BENEFITS OF CONVERSION TO OFFICERS AND DIRECTORS
GENERAL. In connection with the Conversion the directors and officers of
the Company and the Savings Bank will directly purchase shares of Common Stock
and the officers of the Company and the Savings Bank will benefit as
participants in the ESOP. In addition, the Company presently intends to adopt a
Management Recognition and Retention Plan and Trust (the "Recognition Plan") and
a stock option plan (the "Stock Option Plan") within a one-year period following
the Conversion. The first annual meeting of the shareholders of the Company is
anticipated to be April, 1997. The Company and the Savings Bank also intend to
enter into employment agreements with its key management personnel. See "Risk
Factors--Possible Dilutive Effect of Stock Programs and Stock Options."
OFFICERS AND DIRECTORS. In connection with the Conversion, the Company's
directors and executive officers as a group (8 persons) have proposed to
purchase 66,500 shares of Common Stock, or 7.8% and 5.8% of the Common Stock at
the minimum and maximum of the Estimated Valuation Range, respectively. See
"Management of the Savings Bank--Subscriptions by Directors and Executive
Officers" for more details, including the number of shares that each such
director and executive officer desires to purchase.
THE ESOP. In connection with the Conversion, the Company and the Savings
Bank intend to adopt the ESOP, a tax-qualified benefit plan for officers and
employees of the Company and the Savings Bank, which intends to purchase 8% of
the shares of Common Stock offered in the Conversion, or 68,000 shares and
92,000 shares at the minimum and maximum of the Estimated Valuation Range,
respectively. See "Management of the Savings Bank--Benefits--Employee Stock
Ownership Plan and Trust".
STOCK OPTION PLAN. At a meeting of stockholders to be held not earlier
than six months following the Conversion, the Company intends to seek
stockholder approval of the Stock Option Plan for the benefit of the directors,
officers and employees of the Company and the Savings Bank. If the Stock Option
Plan is approved by stockholders, an amount equal to 10% of the Common Stock
issued in the Conversion, or 85,000 and 115,000 shares at the minimum and
maximum of the Estimated Valuation Range, respectively, will be reserved for
future issuance pursuant to stock options granted under the Stock Option Plan to
officers, directors and employees of the Company and the Savings Bank. Although
no specific award determinations
8
<PAGE> 9
have been made, the Company anticipates that, if stockholder approval is
obtained, it will provide formula awards to its non-employee directors and
discretionary awards to officers and employees to the extent permitted by
applicable regulation. The option price for shares of Common Stock to be granted
under the Stock Option Plan will be no less than the fair market value of the
Common Stock on the date of the grant, which cannot be predicted at this time.
See "Management of the Savings Bank--Benefits--Stock Option Plan".
RECOGNITION PLAN. In addition, at a meeting of stockholders to be held not
earlier than six months following the Conversion, the Company intends to seek
stockholder approval of the Recognition Plan, which is a non-tax-qualified
restricted stock plan the Company intends to adopt for the benefit of directors,
officers and key employees of the Company and the Savings Bank. It is expected
that the Recognition Plan will be submitted to stockholders for approval at the
same time as the Stock Option Plan. Upon the receipt of such approval, the
Recognition Plan is expected to acquire Common Stock either from the authorized
but unissued shares of the Company or in the open market in an amount equal to
4% of the Common Stock issued in the Conversion, or 34,000 shares and 46,000
shares at the minimum and maximum of the Estimated Valuation Range,
respectively. Although no specific award determinations have been made, the
Company anticipates that, if stockholder approval is obtained, it will provide
formula awards to its non-employee directors and discretionary awards to its
officers and employees to the extent permitted by applicable regulation. These
shares will be awarded at no cost to the recipient as a form of incentive
compensation. See "Management of the Savings Bank--Benefits--Recognition and
Retention Plan and Trust".
EMPLOYMENT AGREEMENTS. The Company and the Savings Bank intend to enter
into employment agreements with Mr. Robert S. Zyla, President of the Company and
President, Treasurer and Chief Executive Officer of the Savings Bank, Ms.
Patricia A. White, Secretary and Treasurer of the Company and Executive Vice
President and Secretary of the Savings Bank, and Mr. James M. Hein, Controller
of the Company and Chief Financial Officer of the Savings Bank. Each of the
agreements will be for a term of two years, and will be extended annually for an
additional one-year term unless a determination not to extend the agreements is
made by either the Company, the Savings Bank or the employee, or unless the
employee's employment has been previously terminated. The employment agreements
are terminable with or without cause by the Company or the Savings Bank. All of
the agreements provide for severance benefits in the event that, among other
things, the employee's employment is terminated by the employers without cause,
the employee terminates employment due to the failure of the employers to comply
with any material provision of the agreement or, under certain circumstances,
the employee voluntarily terminates employment following a change in control of
the Company. See "Management of the Savings Bank--Benefits--Employment
Agreements".
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
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, as amended (the "Exchange Act"), no Prospectus will be mailed any
later than five days prior to such date or hand delivered any later than two
days prior to such date. Execution of the order form will confirm receipt or
delivery of the Prospectus in accordance with Rule 15c2-8. Order forms will only
be distributed with a Prospectus. The Savings Bank will accept for processing
only orders submitted on original order forms. Executed copies of order forms
will not be accepted nor will order forms unaccompanied by an executed
acknowledgment form. Payment by check, money order, bank draft, cash or debit
authorization to an existing account at the Savings Bank must accompany the
order form. No wire transfers will be accepted.
There are two exceptions to the immediate payment requirement set forth
above. In the event that the ESOP subscribes to Common Stock during the
Subscription offering, the ESOP will not be required to pay for the shares at
the time its subscribes but rather may pay for such Common Stock upon
consummation of the Conversion. In addition, the Company shall have the right,
in its sole discretion, to permit institutional investors to submit
contractually irrevocable orders in the Community or Syndicated Community
Offering and to thereafter submit payment for the Common Stock for which they
are purchasing in the Community or Syndicated Community Offering at any time
prior the completion of the Conversion.
9
<PAGE> 10
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 close of business on the Eligibility
Record Date (December 31, 1994), and March 31, 1996 (the "Supplemental
Eligibility Record Date") and the Voting Record Date (April 30, 1996), must list
all accounts on the stock order form, giving all names on each account and the
account numbers. See "The Conversion--Procedure for Purchasing Shares in
Subscription and Community Offerings".
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock are estimated to be between
$8.0 million and $11.0 million, depending on the number of shares sold and the
expenses of the Conversion. See "Pro Forma Data". The Company will purchase all
of the capital stock of the Savings Bank to be issued upon Conversion in
exchange for 50% of the net Conversion proceeds. The other 50% of the net
Conversion proceeds will be retained by the Company. Funds retained by the
Company will be used for general business activities, including a loan by the
Company directly to the ESOP. Based on the sale of 8% of the Common Stock to the
ESOP in the Conversion, the Company expects to loan the ESOP between $680,000
and $920,000 to acquire such shares at the minimum and maximum of the Estimated
Valuation Range, respectively. See "Pro Forma Data" and "Management of the
Savings Bank--Benefits--Employee Stock Ownership Plan and Trust". Subject to
applicable limitations, such funds may also be used in the future for the
payment of dividends and repurchases of Common Stock. See "Dividend Policy".
Such funds may also be used to expand related financial services activities
through additional subsidiaries possibly in the areas of a trust company and a
title insurance company. Funds held at the Company level may also be invested in
securities permitted by law to be held by a savings association holding company.
Funds received by the Savings Bank from the Company's purchase of its capital
stock will be used for general business purposes. The Savings Bank may also use
such funds to expand operations through acquisitions of additional branch
offices or other financial institutions or other financial services companies.
Neither the Savings Bank nor the Company has any pending agreements or
understandings regarding acquisitions of any specific financial services
institutions or companies nor have criteria been established to identify
potential candidates for acquisition. It is expected that the net proceeds will
initially be invested in short-term investment securities and, subsequently, in
investments that are qualifying thrift investments. See "Use of Proceeds".
DIVIDENDS
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to declare dividends on the Common Stock, subject to
statutory and regulatory requirements. The Board of Directors does not presently
intend to declare dividends on the Common Stock. The Board of Directors intends
to review on a quarterly basis a policy of paying cash dividends on the Common
Stock. However, no decision has been made as to the amount or timing of such
dividends, if any. Declarations of dividends by the Board of Directors will
depend upon a number of factors, including investment opportunities available to
the Company or the Savings Bank, capital requirements, regulatory limitations,
the Company's or the Savings Bank's financial condition and results of
operations, tax consideration and general economic conditions. The Company
intends to retain 50% of the net Conversion proceeds, which would be available
for future payment of dividends, if any. No assurance can be made that the
Company will make any such distribution to the stockholders of a dividend. See
"Dividend Policy".
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
the factors described under the heading "Risk Factors" set forth below in this
Prospectus, as well as other information set forth in this Prospectus.
10
<PAGE> 11
SELECTED FINANCIAL AND OTHER DATA
The selected financial and other data of the Savings Bank set forth below
does not purport to be complete and should be read in conjunction with, and is
qualified in its entirety by, the more detailed information, including the
Financial Statements and related Notes, appearing elsewhere herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets............................................... $91,841 $87,745 $82,522 $78,269 $78,239
Investment securities...................................... 6,720 5,653 5,161 6,048 3,499
Loans receivable, net...................................... 61,408 60,635 55,067 54,691 58,648
Mortgage-backed securities................................. 15,845 16,632 17,792 11,109 9,836
Cash and cash equivalents.................................. 4,394 1,540 2,045 3,704 3,487
Deposits................................................... 80,731 75,313 74,727 71,549 72,479
FHLB of Pittsburgh advances................................ 2,977 4,261 461 0 0
Equity..................................................... 7,178 7,049 6,521 5,823 4,986
Nonperforming assets (1)................................... 348 391 351 334 397
SELECTED OPERATING DATA:
Interest income............................................ 5,719 5,314 5,410 6,162 7,397
Interest expense........................................... 3,406 2,620 2,634 3,191 4,889
------- ------- ------- ------- -------
Net interest income........................................ 2,313 2,694 2,776 2,971 2,508
Provision for loan losses.................................. 36 36 36 44 102
------- ------- ------- ------- -------
Net interest income after provision for loan losses........ 2,277 2,658 2,740 2,927 2,406
Other income............................................... 222 294 310 307 337
Other expenses............................................. 2,255 2,058 1,913 1,849 1,940
------- ------- ------- ------- -------
Income before income tax expense........................... 244 894 1,137 1,385 803
Income tax expense......................................... 83 346 452 520 323
------- ------- ------- ------- -------
Net income................................................. $ 161 $ 548 $ 685 $ 865 $ 480
======= ======= ======= ======= =======
SELECTED OPERATING RATIOS (2):
Return on average assets................................... .18% .64% .85% 1.12% .59%
Return on average equity................................... 2.26 8.08 11.11 15.96 10.11
Average yield earned on interest-earning assets............ 6.66 6.41 6.88 8.19 9.42
Average rate paid on interest-bearing liabilities.......... 4.22 3.38 3.58 4.50 6.46
Average interest rate spread (3)........................... 2.44 3.03 3.30 3.69 2.96
Net interest margin (3).................................... 2.69 3.25 3.53 3.95 3.20
Interest-earning assets to interest-bearing liabilities.... 106.34 107.03 106.75 105.95 103.64
Operating expenses as a percent of average assets.......... 2.54 2.41 2.37 2.39 2.39
Average equity to average assets........................... 8.02 7.97 7.63 7.00 5.84
ASSET QUALITY RATIOS (2):
Nonperforming loans as a percent of total loans............ .50 .64 .63 .52 .67
Nonperforming assets as a percent of total assets.......... .38 .45 .43 .43 .51
Allowance for loan losses as a percent of total loans...... .46 .49 .48 .42 .36
Charge-offs to average loans receivable outstanding during
the period............................................... .09 .00 .01 .04 .00
CAPITAL RATIOS (2):
Tangible capital........................................... 7.87 8.03 7.90 7.40 6.40
Core capital............................................... 7.87 8.03 7.90 7.40 6.40
Risk-based capital......................................... 19.39 19.70 20.30 18.20 15.20
NUMBER OF OFFICES:
Full-service offices at period end......................... 3 3 3 3 3
</TABLE>
- ---------
(1) Nonperforming assets consist of nonperforming loans and real estate owned
("REO"). Nonperforming loans consist of non-accrual loans, while REO
consists of real estate acquired through foreclosure and real estate
acquired by acceptance of a deed-in-lieu of foreclosure.
(2) Asset Quality Ratios and Capital Ratios are end of period ratios, except for
charge-offs to average loans. With the exception of end of period ratios,
all ratios are based on average monthly balances during the indicated
periods and are annualized where appropriate.
(3) 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, and net interest margin represents net
interest income as a percent of average interest-earning assets.
11
<PAGE> 12
SUMMARY OF RECENT DEVELOPMENTS
The selected financial and other data of the Savings Bank summarized forth
below should be read in conjunction with, and is qualified in its entirety by,
the more detailed information, including the Financial Statements and related
Notes, appearing elsewhere herein. In the opinion of management, financial
information at March 31, 1996 and 1995 and for the three months ended March 31,
1996 and 1995 reflect all adjustments (consisting only of normal recurring
accruals) which are necessary to present fairly the results for such periods.
Results for the three month period ended March 31, 1996 may not be indicative of
operations of the Savings Bank on an annualized basis.
<TABLE>
<CAPTION>
AT MARCH 31, 1996 AT DECEMBER 31, 1995
------------------ ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL CONDITION AND OTHER DATA:
Total assets..................................................... $ 93,712 $91,841
Investment securities (1)........................................ 10,076 6,720
Loans receivable, net............................................ 62,397 61,408
Mortgage-backed securities(1).................................... 15,178 15,845
Cash and cash equivalents........................................ 2,368 4,394
Deposits......................................................... 81,839 80,731
FHLB of Pittsburgh Advances...................................... 2,977 2,977
Equity........................................................... 7,085 7,178
Nonperforming assets............................................. 309 348
Full-service offices at end of period............................ 3 3
<CAPTION>
AS OF OR FOR THE
THREE MONTHS ENDED MARCH 31,
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income.................................................. $ 1,534 $ 1,377
Interest expense................................................. 906 779
------- -------
Net interest income.............................................. 628 598
Provision for loan losses........................................ 9 9
------- -------
Net interest income after provision for loan losses.............. 619 589
Other income..................................................... 70 30
Other expenses................................................... 595 567
------- -------
Income before income tax expense................................. 94 52
Income tax expense............................................... 36 18
------- -------
Net income....................................................... $ 58 $ 34
======= =======
SELECTED OPERATING RATIOS(2):
Return on average assets......................................... .25% .15%
Return on average equity......................................... 3.23 1.91
Average yield earned on interest-earning assets.................. 6.85 6.48
Average rate paid on interest-bearing liabilities................ 4.30 3.91
Average interest rate spread..................................... 2.55 2.57
Net interest margin.............................................. 2.80 2.82
Interest-earning assets to interest-bearing liabilities.......... 106.38 106.51
Operating expenses as a percent of average assets................ 2.57 2.58
Average equity to average assets................................. 7.75 8.12
ASSET QUALITY RATIOS:
Nonperforming loans as a percent of total loans.................. .43 .41
Nonperforming assets as a percent of total assets................ .33 .29
Allowance for loan losses as a percent of total loans............ .47 .49
Allowance for loan losses as a percent of non-performing loans... 110.04 119.29
CAPITAL RATIOS:
Tangible capital................................................. 7.76 8.01
Core capital..................................................... 7.76 8.01
Risk-based capital............................................... 18.93 19.50
</TABLE>
- ---------
(1) $6.3 million of investment securities and $4.0 million of mortgage-backed
securities have been classified as available for sale as of March 31, 1996.
$1.2 million of investment securities have been classified as available for
sale as of March 31, 1995.
(2) The ratios during the three months ended March 31, 1996 and 1995 are based
on average monthly balances. The ratios are annualized where appropriate.
12
<PAGE> 13
GENERAL. At March 31, 1996, the Savings Bank's total assets amounted to $93.7
million compared with $91.8 million at December 31, 1995. The $1.9 million or
2.1% increase was primarily due to an increase of $1.0 million, or 1.6% in loans
receivable and an increase of $3.4 million, or 49.9%, in investment securities.
Such increases were offset in part by a $667,000, or 4.2%, decrease in
mortgage-backed securities, and a $2.0 million, or 46.1%, decrease in cash and
cash equivalents. Such increase in assets was funded through an increase in
deposits of $1.1 million, or 1.4%, to $81.8 million at March 31, 1996. Equity
amounted to $7.1 million, or 7.6% of total assets, at March 31, 1996 compared to
$7.2 million, or 7.8% of total assets at December 31, 1995. The decrease in
equity during the three month period was due to the change in market value of
securities held available for sale and was decreased by approximately $150,000
as a result of an increase in interest rates in general. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Recent
Accounting Pronouncements" for a discussion of SFAS No. 115.
The Savings Bank's non-performing assets decreased by $39,000, or 11.2%, to
$309,000 at March 31, 1996 compared to $348,000 at December 31, 1995. Such
decrease was primarily due to collections and pay offs received by the Savings
Bank.
The Savings Bank had net income of $58,000 for the three months ended March
31, 1996 compared to $34,000 for the same period in 1995. The Savings Bank
reported interest income of $1.53 million for the three months ended March 31,
1996 compared to $1.38 million for the same period in 1995. Net interest income
increased $30,000 or 5.0% to $628,000 for the three months ended March 31, 1996
compared with the same period in 1995. Such increase was due to an increase of
$157,000, or 11.4%, in interest income, which was only partially offset by an
increase of $127,000, or 16.3%, in interest expense. The increase in interest
income was primarily due to an increase in interest income on loans, as a result
of increased origination activity and increased pricing on adjustable rate
loans, as well as an increase in the average yield earned on interest-earning
assets, primarily investment securities and mortgage-backed securities, from
6.48% for the three months ended March 31, 1995 to 6.85% for the three months
ended March 31, 1996.
The increase in interest expense was due to an increase in deposits and the
increase in the average cost of interest-bearing liabilities, from 3.91% for the
three months ended March 31, 1995 to 4.30% for the three months ended March 31,
1996. Such increase was primarily due to an increase in rates offered by the
Savings Bank on certain deposit products to respond to rates offered by other
financial institutions in its market area. In addition, a portion of the Savings
Bank's deposit base shifted from core deposit accounts to higher
interest-bearing certificates of deposits. At March 31, 1996, core deposit
accounts and certificates of deposit accounted for approximately 43.6% and 56.4%
of total deposits, respectively, compared to 47.2% and 52.8% of total deposits,
respectively, at March 31, 1995. The 39 basis point increase in the average rate
paid on interest-bearing liabilities more than offset the 37 basis point
increase in average yield earned on interest-earning assets for the three months
ended March 31, 1996 compared to the three months ended March 31, 1995,
resulting in a decrease in the average interest rate spread from 2.57% for the
three months ended March 31, 1995 to 2.55% for the comparable 1996 period.
During the three months ended March 31, 1996 and 1995, the Savings Bank
recorded a provision for losses on loans of $9,000 and $9,000, respectively. The
Savings Bank recorded such provisions to adjust the Savings Bank's allowance for
loan losses to a level deemed appropriate based upon an assessment of the volume
and type of lending presently being conducted by the Savings Bank, industry
standards, and economic conditions in the Savings Bank's market area.
Other income increased to $70,000 for the three months ended March 31, 1996
compared to $30,000 for the three months ended March 31, 1995. Such increase was
primarily due to additional mortgage applications and conversely during the
first quarter of 1995 the Savings Bank recognized a loss of $28,000 on the sale
of its previous Mt. Oliver branch building.
Other expenses increased $28,000, or 4.9%, to $595,000 for the three months
ended March 31, 1996 compared to $567,000 for the same period in 1995. Such
increase was primarily due to the expenses related to increased employees,
increases in salary and increases in benefit costs.
The Savings Bank incurred a provision for income taxes of $36,000 and
$18,000 for the three months ended March 31, 1996 and 1995. Such increase was
primarily due to increased income.
PRO FORMA DATA. Based upon the assumptions set forth in "Pro Forma Data" and
the information presented above, the pro forma net income per share for the
three months ended March 31, 1996 would be $.12, $.11, $.11 and $.10 and the pro
forma stockholders' equity per share would be $16.58, $15.39, $14.51 and $13.75,
respectively, at a price of $10.00 per share. The annualized offering price to
pro forma net income per share and offering price to pro forma stockholders'
equity per share would be 22.7x and 65.0%, respectively, assuming the sale of
1,000,000 shares in the Offerings.
13
<PAGE> 14
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock offered hereby.
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES
The operations of the Savings Bank are substantially dependent on its net
interest income, which is the difference between the interest income received
from its interest-earning assets and the interest expense incurred in connection
with its interest-bearing liabilities. Like most savings institutions, the
Savings Bank's earnings are affected by changes in market interest rates and
other economic factors beyond its control. If an institution's interest-earning
assets have longer effective maturities than its interest-bearing liabilities,
the yield on the institution's interest-earning assets generally will adjust
more slowly than the cost of its interest-bearing liabilities and, as a result,
the institution's net interest income generally would be adversely affected by
material and prolonged increases in interest rates and positively affected by
comparable declines in interest rates. At December 31, 1995, the Savings Bank's
interest-earning assets which were estimated to mature or reprice within one
year exceeded the Savings Bank's interest-bearing liabilities with the same
characteristics by $5.9 million or 6.4% of the Savings Bank's total assets.
Although consumer and commercial loans are currently a relatively small
percentage of the Savings Bank's total assets, the Savings Bank has undertaken a
program to enhance the origination of consumer and commercial loans in an effort
to maintain or improve its interest rate margins. Consumer loans and commercial
loans entail more risk than one-to-four family residential mortgage loans. While
implementing this strategy the Savings Bank intends to keep new deposits and
repayments in liquid investments pending loan origination, which will result in
lower earning yields to the Savings Bank. Management may also be unsuccessful in
originating additional qualified consumer loans or commercial loans and in that
case will resort to the purchase of investment securities with lower yield or
the origination of residential mortgage loans with lower yields. The failure to
reprice maturing assets at equal or greater yield could result in lower interest
rate margins and lower net income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Operating Strategy," "--Asset and
Liability Management" and "--Liquidity and Capital Resources".
In addition to affecting interest income and expense, changes in interest
rates also can affect the market value of the Savings Bank's interest-earning
assets, which are comprised of fixed and adjustable-rate instruments. Generally,
the market value of fixed-rate instruments fluctuates inversely with changes in
interest rates. Changes in interest rates also can affect the average life of
loans and mortgage-related securities. Decreases in interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-related
securities, as borrowers refinanced to reduce borrowing costs. Under these
circumstances, the Savings Bank is subject to reinvestment risk to the extent
that it is not able to reinvest such prepayments at rates which are comparable
to the rates on the maturing loans or securities. Prepayments in response to
decreases in interest rates in recent periods have resulted in decreases in the
amount of both the Savings Bank's total loans receivable portfolio and
mortgage-backed securities portfolio. The Savings Bank's total loans receivable
portfolio averaged on an aggregate basis $61.6 million, $58.5 million and $54.9
million during the years ended December 31, 1995, 1994 and 1993, respectively.
The Savings Bank's mortgage-backed securities portfolio averaged on an aggregate
basis $16.4 million, $17.5 million and $15.0 million during the years ended
December 31, 1995, 1994 and 1993, respectively. See "Business of the Savings
Bank--Lending Activities" and "--Investment Activities".
Increases in the level of interest rates also may adversely affect the
value of the Savings Bank's investment and mortgage-backed securities portfolio.
At December 31, 1995, the Savings Bank's investment and mortgage-backed
securities had an estimated fair market value of $22.7 million, which was equal
to the amortized cost of $22.7 million of such securities. As of December 31,
1995, $15.2 million of the Savings Bank's investment and mortgage-backed
securities are classified as held to maturity and $7.5 million of the Savings
Bank's investment and mortgage-backed securities are held available-for-sale.
Changes in the market value of securities held as available-for-sale will affect
the total equity of the Savings Bank. Any declines in
14
<PAGE> 15
the value of securities classified as held-to-maturity or available-for-sale
which are more than temporary require charges against current income. The
Savings Bank sold no investment securities in 1995 or 1994. Of the Savings
Bank's $6.8 million in investment securities, $2.8 million had a contractual
maturity of one year or less, and $4.0 million had a contractual maturity of
between one and five years at December 31, 1995. See Notes 1 and 2 to the
Financial Statements.
A significant increase in the level of interest rates may have an adverse
effect on the ability of certain of the Savings Bank's borrowers to repay their
loans.
BUSINESS STRATEGY AND ADDITIONAL BUSINESS LINES
The Savings Bank is a community oriented savings bank which has
traditionally offered a wide range of savings products to its retail customers
while concentrating its lending activities primarily on real estate loans
secured by one-to-four family residential properties. The Savings Bank's main
lending focus has been concentrated in its market area consisting of the
southern and southwestern portions of Allegheny County and, to a lesser extent,
Washington, Westmoreland, Butler and Greene Counties.
As part of the Savings Bank's business strategy, the Savings Bank intends
to widen its range of lending activities. The Savings Bank's lending goals
include maintaining its focus as a one-to-four family mortgage lender while
expanding its portfolio of small business commercial loans, commercial real
estate loans and other consumer loans. Management believes that such lending
opportunities are not being currently fulfilled by other financial institutions
in its market area.
Commercial lending entails different and significant risks when compared to
residential real estate lending because such loans typically involve larger loan
balances to single borrowers than residential loans and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. Commercial real estate lending can also
be significantly affected by supply and demand conditions in the loan market for
office buildings, apartment complexes, or other commercial space.
MARKET FOR COMMON STOCK
The Company and the Savings Bank have never issued capital stock and,
consequently, there is no existing market for the Common Stock. The Company
expects that following the Conversion, the Common Stock will be traded in the
over-the-counter market. The Company has received conditional approval to have
its Common Stock quoted on the Nasdaq Stock Market under the symbol "PRBC" upon
completion of the Conversion and will seek to encourage and assist at least two
market makers to make a market in its Common Stock. Although it is under no
obligation to do so, Ryan, Beck & Co., Inc. ("Ryan, Beck") has advised the
Savings Bank that, upon completion of the Offerings, it intends to make a market
in the Common Stock.
Making a market in securities involves maintaining bid and ask quotations
and being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. The development of a public trading market depends upon the
existence of willing buyers and sellers, the presence of which is not within the
control of the Company, the Savings Bank, or any market maker. Accordingly,
there can be no assurance that an active and liquid trading market for the
Common Stock will develop, or once developed, will continue, nor any assurances
that purchasers of the Common Stock will be able to sell their shares at or
above the Purchase Price. See "Market for the Common Stock". The absence of an
active trading market may have an adverse effect on the price of the Common
Stock.
MARKET AREA OF THE SAVINGS BANK AND COMPETITION
The economy in the Pittsburgh area experienced a significant restructuring
during the early 1980's from a heavy manufacturing and industrial base (notably
steel) to a more diversified, service-oriented economy. During this period, many
of the area's industrial plants reduced their operations and staff or were
closed. Although the economy in the Pittsburgh area has improved in recent
periods, there can be no assurance that the economy will continue to improve.
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<PAGE> 16
The Savings Bank experiences significant competition in its local market
area in both originating loans and attracting deposits. Its most direct
competition comes from commercial banks, thrift institutions and mortgage
banking companies many with a state-wide or regional presence and, in some
cases, a national presence. Commercial banks and thrift institutions have
recently experienced increasing consolidation. In the event of a downturn in the
economy or competitive pressures resulting from increasing consolidation, the
Savings Bank may experience reduced demand for mortgage loans. The Savings Bank
may also have difficulty attracting deposits under such circumstances.
REDUCED MORTGAGE LOAN DEMAND
The recent economic conditions in the Savings Bank's market area and the
reduction in population in the greater Pittsburgh metropolitan area in the last
ten years has resulted in, among other things, a reduction in the demand for
mortgage loans which meet the underwriting criteria of the Savings Bank. This
has led to lower levels of loan originations by the Savings Bank. As a result,
the Savings Bank has increased its investment in investment securities and cash
and cash equivalents to use its excess funding that would otherwise have been
utilized for investment in loans secured by residential real estate in the
Savings Bank's market area. The Savings Bank's investment portfolio and cash and
equivalents generally bear yields which are below the yields on residential
mortgage loans. The reduced mortgage loan demand has contributed to the Savings
Bank's weighted average yield on net interest-earning assets declining to 2.69%
for the year ended December 31, 1995 from 3.25% for the year ended December 31,
1994.
CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S GOVERNING INSTRUMENTS. Certain provisions of
the Company's articles of incorporation and Bylaws are designed to assist the
Company in maintaining its status as an independent publicly owned corporation.
Provisions in the Company's articles of incorporation and Bylaws provide for,
among other things, supermajority voting on certain matters, a staggered board
of directors, noncumulative voting for directors, limits on the calling of
special meetings and limits on voting shares in excess of 10% of the outstanding
shares. The corporate laws of Pennsylvania also establish uniform price
provisions for certain business combinations and require stockholders to receive
the fair value of their shares of stock from a controlling person or group
following a control transaction. These provisions in the Company's governing
instruments and Pennsylvania law 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 current management. See "Restrictions on Acquisition of the Company
and the Savings Bank".
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and executive officers
of the Company and Savings Bank expect to purchase approximately 7.8% or 5.8% of
the shares of Common Stock outstanding based upon the minimum and the maximum of
the Estimated Valuation Range, respectively. In addition, such officers may
acquire beneficial ownership of additional shares of Common Stock through future
ESOP allocations. Under the terms of the ESOP, after an allocation has been
made, the ESOP trustees must vote all allocated shares held in the ESOP as
directed by participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP trustees
generally in the same proportion as the allocated shares are voted by the ESOP
participants.
The Company intends to seek stockholder approval of the Recognition Plan at
a meeting to be held no sooner than six months after the Conversion. Assuming
the receipt of stockholder approval, the Company expects to acquire Common Stock
on behalf of the Recognition Plan in an amount equal to 4% of the Common Stock
issued in the Conversion, or 34,000 shares and 46,000 shares at the minimum and
maximum of the Estimated Valuation Range, respectively. These shares will be
acquired either through open market purchases or from authorized but unissued
Common Stock. In addition, if approved by stockholders following the Conversion,
the Company intends to reserve for future issuance pursuant to the Stock Option
Plan a number of authorized shares of Common Stock equal to an aggregate of 10%
of the Common Stock issued in the Conversion, or 85,000 shares and 115,000
shares at the minimum and maximum of the Estimated Valuation Range,
respectively. See "Management of the Savings Bank--Benefits".
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<PAGE> 17
The proposed purchases of the Common Stock by the Company's and Savings
Bank's Board of Directors, management, and the ESOP, as well as the potential
purchase of the Common Stock through the Stock Option Plan and the Recognition
Plan, could render it more difficult to obtain majority support for stockholder
proposals opposed by the Company's Board of Directors and management. In
addition, this potential voting control could, together with additional
stockholder support, defeat stockholder proposals, preclude or make more
difficult takeover attempts that certain stockholders deem to be in their best
interest and may tend to perpetuate existing management.
Depositor and borrower members of the Savings Bank will have no voting
rights in the converted Savings Bank and Company and will be unable to elect
directors of the Company or Savings Bank or to otherwise participate in the
conduct of the affairs of the Company or Savings Bank unless they purchase
Common Stock. See "The Conversion--Effects of Conversion--Effect on Voting
Rights of Members".
PROVISIONS OF REMUNERATION PLANS AND EMPLOYMENT AGREEMENTS. The Company
and the Savings Bank intend to enter into employment agreements with certain
management officials. Such employment agreements will provide for benefits and
cash payments in the event of a change in control of the Company. 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 Savings
Bank. See "Restrictions on Acquisition of the Company and the Savings
Bank--Restrictions in the Company's Articles of Incorporation and Bylaws,"
"Management of the Savings Bank--Employment Agreements".
EFFECT OF ANTI-TAKEOVER PROVISIONS. Despite the belief of the directors of
the Savings Bank and the Company as to the benefits of these anti-takeover
provisions to stockholders, these provisions may also have the effect of
discouraging a future takeover attempt which would not be approved by the
Company's Board, but pursuant to which stockholders might receive a substantial
premium for their shares over then-current market prices. As a result,
stockholders who might desire to participate in such a transaction might not
have any opportunity to do so. Such provisions will also render the removal of
the Company's Board of Directors and of management more difficult. The Boards of
Directors of the Savings Bank and the Company, however, have concluded that the
potential benefits outweigh the possible disadvantages, because they believe
that such provisions encourage potential acquirors to negotiate directly with
the Board of Directors, which it believes is in the best position to act on
behalf of all stockholders. See "Restrictions on Acquisition of the Company and
the Savings Bank".
RECENT LEGISLATIVE PROPOSALS
RECAPITALIZATION OF SAIF. The deposits of the Savings Bank are currently
insured by the Savings Association Insurance Fund ("SAIF") of the FDIC. Both the
SAIF and the Bank Insurance Fund ("BIF"), the federal deposit insurance fund
that covers commercial bank deposits, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF has
achieved a fully funded status in contrast to the SAIF and, therefore, as
discussed below, the FDIC recently substantially reduced the average deposit
insurance premium paid by commercial banks while maintaining the existing level
of premiums paid by savings institutions. SAIF reserves have not grown as
quickly as the BIF reserves due to a number of factors, including the fact that
a significant portion of SAIF premiums have been and are currently being used to
make payments on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation.
In November 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
Accordingly, in the absence of further legislative action, SAIF members such as
the Savings Bank will be competitively disadvantaged as compared to commercial
banks by the resulting premium differential.
The House of Representatives and the Senate of the United States provided
for a resolution of the recapitalization of the SAIF in the Balanced Budget Act
of 1995 (the "Reconciliation Bill") which was
17
<PAGE> 18
vetoed by the President in December 1995 for reasons unrelated to the
recapitalization of the SAIF. The Reconciliation Bill provided that all SAIF
member institutions would pay a special one-time assessment to recapitalize the
SAIF, deposits. Based on the level of reserves maintained by the SAIF Fund it
was anticipated that the amount of the special assessment required to
recapitalize the SAIF was to be approximately 80 to 85 basis points of the
SAIF-assessable deposits. The special assessment was to be payable based on the
amount of SAIF deposits on March 31, 1995. The final outcome of the budget
debate and reconciliation process cannot be predicted. However, it is likely
that some kind of legislative or regulatory action will be undertaken that will
impact the Savings Bank's insured deposits. A one-time special assessment of 80
to 85 basis points would result in the Savings Bank paying approximately
$420,000 to $446,000, net of related tax benefits, if any, based on the deposit
base at December 31, 1995. In addition, the enactment of such legislation may
have the effect of immediately reducing the capital of SAIF-member institutions
by the amount of the special assessment. It is anticipated that after the
recapitalization of the SAIF, that premiums of SAIF-insured institutions would
be reduced comparable to those currently being assessed BIF-insured commercial
banks.
The Reconciliation Bill also provided for the merger of the BIF and SAIF on
January 1, 1998, with such merger being conditioned upon the prior elimination
of the thrift charter. The banking Committees of the House of Representatives
and the Senate in adopting the Reconciliation Bill agreed that Congress should
consider and act upon separate legislation as early as possible in 1996 to
eliminate the thrift charter. If adopted, such legislation would require that
the Savings Bank, as a federal savings bank, to convert to a commercial bank
charter. Such a requirement to convert to a commercial bank charter could cause
savings institutions to lose favorable tax treatment for its bad debt reserves
that they currently enjoy under Section 593 of the Internal Revenue Code of
1986, as amended ("Code"), as discussed below.
In light of the President's veto of the Reconciliation Bill and the
different proposals currently under consideration and the uncertainty of the
legislative process generally, management cannot predict whether legislation
reducing SAIF premiums and/or imposing a special one-time assessment will be
adopted, or, if adopted, the amount of the assessment, if any, that would be
imposed on the Savings Bank. The 1995-1996 budget bill has been enacted in law
and did not include provisions concerning the merger of the BIF and the SAIF or
address any special assessment or premiums for the SAIF. The 1995-1996 budget
bill did not change the bad debt reserve treatment for savings associations.
TAXATION AND BAD DEBT RESERVES. Under Section 593 of the Code, thrift
institutions such as the Savings Bank, which meet certain definitional tests
primarily relating to their assets and the nature of their business, are
permitted to establish a tax reserve for bad debts and to make annual additions
thereto, which additions may, within specified limitations, be deducted in
arriving at their taxable income. The Savings Bank's deduction with respect to
"qualifying loans," which are generally loans secured by certain interests in
real property, may currently be computed using an amount based on the Savings
Bank's actual loss experience (the "experience method"), or a percentage equal
to 8.0% of the Savings Bank's taxable income (the "percentage of taxable income
method"), computed without regard to this deduction and with additional
modifications and reduced by the amount of any permitted addition to the
non-qualifying reserve. See "Federal and State Taxation--Bad Debt Reserves".
Under pending tax legislative proposals to become effective for tax years
beginning after 1995 which were approved by the House Ways and Means Committee
and was part of the Reconciliation Bill, a small thrift institution (one with an
adjusted basis of assets of less than $500 million), such as the Savings Bank,
would no longer be permitted to make additions to its tax bad debt reserve under
the percentage of taxable income method. Such institutions would be permitted to
use the experience method in lieu of deducting bad debts only as they occur. If
enacted into law, such legislation could require the Savings Bank to realize
increased tax liability over a period of at least six years, beginning in 1996.
Specifically, the proposal would require a small thrift institution to recapture
(i.e., take into income) over a multi-year period the balance of its bad debt
reserve in excess of the lesser of (i) the balance of such reserves as of the
end of its last taxable year ending before 1988 or (ii) an amount that would
have been the balance of such reserves had the institution always computed its
additions to its reserves using the experience method. The recapture requirement
would be suspended in any taxable year in which the Savings Bank originates an
amount of certain kinds of residential
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<PAGE> 19
loans which in the aggregate are equal to or greater than the average of the
principal amounts of such loans made by the Savings Bank during its six taxable
years preceding 1996. In the opinion of management the tax legislation as
proposed will not have a material adverse effect on the financial condition or
prospects of the Savings Bank. The 1995-1996 budget bill has been enacted into
law but did not include any change to the method which a savings association can
recognize bad debt expenses.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Company and the Savings Bank have received an opinion of FinPro that
subscription rights granted to Eligible Account Holders, Supplemental Eligible
Account Holders, Other Members and Directors, Officers and Employees have no
value. However, this opinion is not binding on the Internal Revenue Service
("IRS"). If the subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders, Other Members and the Directors, Officers
and Employees are deemed to have an ascertainable value, receipt of such rights
would be taxable probably only to those Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members and the Directors, Officers and
Employees who exercise the subscription rights (either as capital gain or
ordinary income) in an amount equal to such value. Additionally, the Savings
Bank could recognize a gain for tax purposes on such distribution. Whether
subscription rights are considered to have ascertainable value is an inherently
factual determination. See "The Conversion--Effects of Conversion" and "--Tax
Aspects".
POSSIBLE INCREASE IN NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Valuation Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Offerings or to fill the subscription order of the ESOP. In the event that the
Estimated Valuation Range is so increased, it is expected that the Company will
issue up to 1,322,500 shares of Common Stock at the Purchase Price for an
aggregate price of up to $13.2 million. The ESOP shall have the first priority
to purchase shares in the event of an increase in the Estimated Valuation Range.
An increase in the number of shares will decrease a subscriber's pro forma net
income per share and stockholders' equity per share and will increase the
Company's consolidated stockholders' equity and net income. Such an increase
will also increase the Purchase Price as a percentage of pro forma stockholders'
equity per share and net income per share. See "Pro Forma Data" and "The
Conversion--Stock Pricing and Number of Shares to be Issued".
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAMS AND STOCK OPTIONS
Following the Conversion, the Stock Programs, if approved by the
stockholders of the Company, will acquire an amount of shares equal to 4% of the
shares of Common Stock issued in the Conversion, either through open market
purchases or the issuance of authorized but unissued shares of Common Stock from
the Company. If the Stock Programs are funded by the issuance of authorized but
unissued shares, the voting interests of existing shareholders will be diluted
by 3.8%. Also following the Conversion, directors, officers and employees will
be granted options, if the Stock Option Plans are approved by the stockholders
of the Company. Although no specific determinations have been made, the Company
expects that executive officers and directors will be granted options to
purchase authorized but unissued shares in an amount equal to 10% of the Common
Stock issued in the Conversion. If all of the options were to be exercised using
authorized but unissued shares, the voting interests of the existing
stockholders would be diluted 9.09%.
FINANCIAL INSTITUTION REGULATION
The Savings Bank is subject to extensive regulation, supervision, and
examination by the OTS as its chartering authority and primary Federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
As the savings and loan holding company of the Savings Bank, the Company is also
subject to regulation and oversight by the OTS. Such regulation and supervision
governs the activities in which an institution can engage and is intended
primarily for the protection of the FDIC insurance fund and depositors.
Regulatory authorities have been granted extensive discretion in connection with
their supervisory and enforcement activities. See "Risk Factors--Recent
Legislative Proposals"; "Regulation". Further, from time
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<PAGE> 20
to time, bills are introduced in Congress to consolidate the Federal banking
regulatory agencies. The Savings Bank cannot predict what effect regulatory
consolidation could have on its operations. However, all thrift institutions
could be adversely affected in the event regulatory consolidation resulted in
thrift institutions being required to convert to a bank thus triggering the
recapture (for tax purposes) of certain bad debt reserve.
RISK OF DELAY
The Offerings will expire at 12:00 Noon, Eastern time, on June 17, 1996,
unless extended. Subscription funds may be held by the Savings Bank for up to 45
days after the last day of the Subscription Offering in order to consummate the
Conversion and thus, unless waived by the Savings Bank or the Company, all
orders will be irrevocable until June 17, 1996. In addition, the Conversion may
not be consummated until the Savings Bank receives approval from the OTS.
Consummation of the Conversion will be delayed, and resolicitation will be
required, in the event the OTS does not issue a letter of approval within 45
days after the last day of the Subscription Offering, or in the event the OTS
requires a material change to the Subscription and Community Offerings prior to
the issuance of its approval. Thus, in the event the Conversion is not
consummated by July 22, 1996, subscribers will have the right to modify or
rescind their subscriptions and to have their subscription funds returned with
interest.
PRESTIGE BANCORP, INC.
The Company was organized in March, 1996 at the direction of the Board of
Directors of the Savings Bank for the purpose of acquiring all of the capital
stock to be issued by the Savings Bank in the Conversion. The Company has
received the approval of the OTS to become a savings and loan holding company
and as such will be subject to regulation by the OTS. See "The
Conversion--General". After completion of the Conversion, the Company will
conduct business initially as a unitary savings and loan holding company. See
"Regulation--The Company". Upon consummation of the Conversion, the Company will
have no significant assets other than the shares of the Savings Bank's common
stock acquired in the Conversion, the loan receivable from the ESOP and the
balance of the net proceeds of the Conversion retained by the Company, and will
have no significant liabilities. See "Use of Proceeds". 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 Savings Bank. At the present time, the Company
does not intend to employ any persons other than officers who are also officers
of the Savings Bank and will also utilize the support staff of the Savings Bank
from time to time. Additional employees will be hired as appropriate to the
extent the Company expands or changes its business in the future.
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 or mergers with other financial institutions and financial
services related companies. Although there are no current arrangements,
understandings or agreements, written or oral, regarding any such opportunities
or transactions, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Company are anticipated to be funded by the
proceeds to be retained by the Company and earnings thereon or, alternatively,
through dividends from the Savings Bank. See "Dividend Policy".
The Company's executive office is located at the home office of the Savings
Bank at 710 Old Clairton Road, Pleasant Hills, Pennsylvania 15236, and its
telephone number is (412) 655-1190.
PRESTIGE BANK, A FEDERAL SAVINGS BANK
The Savings Bank is a Federally chartered, SAIF-insured mutual savings bank
conducting business from its executive offices located in Pleasant Hills,
Pennsylvania and 3 full-service offices located in Allegheny County,
Pennsylvania. At December 31, 1995, the Savings Bank had total assets of $91.8
million, total deposits of $80.7 million and total equity of $7.2 million. For
additional information with respect to the
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<PAGE> 21
business and operations of the Savings Bank, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business of the
Savings Bank".
The Savings Bank's principal executive offices are located at 710 Old
Clairton Road, Pleasant Hills, Pennsylvania 15236 and its telephone number is
(412) 655-1190.
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 $8.0
million and $11.0 million ($12.7 million, assuming an increase in the Estimated
Valuation Range by 15%). See "Pro Forma Data" and "The Conversion--Stock Pricing
and Number of Shares to be Issued" as to the assumptions used to arrive at such
amounts.
The Company will purchase all of the capital stock of the Savings Bank to
be issued upon Conversion in exchange for 50% of the net Conversion proceeds.
The Company will retain the other 50% of the net Conversion proceeds. Based on
the minimum point, the midpoint, the maximum and the adjusted maximum, each of
the Company and the Savings Bank would receive $3.5 million, $4.2 million, $4.8
million and $5.5 million, respectively of the net proceeds of the Offerings.
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 up to 8% of the Common Stock
in the Conversion. Based upon the issuance of 850,000 shares or 1.15 million
shares at the minimum and maximum of the Estimated Valuation Range,
respectively, the loan to the ESOP would be $680,000 or $920,000, respectively.
See "Management of the Savings Bank-- Benefits--Employee Stock Ownership Plan
and Trust". The remaining net proceeds retained by the Company will be initially
used to invest primarily in investment grade, short-term marketable securities.
The net proceeds retained by the Company may also be used to support the
future expansion of operations or diversification into other banking related
businesses and for other business or investment purposes, including possibly the
payment of dividends and the repurchase of the Company's Common Stock as
permitted by the OTS, if applicable. Any portion of the net proceeds in excess
of the amount retained by the Company will be added to the Savings Bank's
general funds to be used for general corporate purposes. The Savings Bank may
also use such funds to expand operations through acquisitions of additional
branch offices or other financial institutions or other financial services
companies. Neither the Savings Bank nor the Company has any pending agreements
or understandings regarding acquisitions of any specific financial services
institutions or companies nor have criteria been established to identify
potential candidates for acquisition. It is expected that net proceeds will
initially be invested in short-term investment securities and, subsequently, in
qualified thrift investments.
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. The Company does not presently intend to declare
dividends. The Board of Directors intends to review on a quarterly basis a
policy of paying cash dividends on the Common Stock. However, no decision has
been made as to the amount or timing of such dividends. Declarations of
dividends by the Board of Directors, if any, will depend upon a number of
factors, including investment opportunities available to the Company or the
Savings Bank, capital requirements, regulatory limitations, the Company's and
the Savings Bank's results of operations and financial and tax considerations
and general economic conditions. The Company intends to retain 50% of the net
conversion proceeds, which would be available for future payment of dividends,
if any. No assurances can be given, however, that dividends, once commenced,
will continue to be paid.
Dividends from the Company will depend primarily upon receipt of dividends
from the Savings Bank because the Company initially will have no source of
income other than dividends from the Savings Bank, earnings from the investment
of proceeds from the sale of Common Stock retained by the Company and principal
and interest payments with respect to the Company's loan to the ESOP. A
regulation of the OTS imposes limitations on "capital distributions" by savings
associations, including cash dividends, payments by a
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<PAGE> 22
savings association to repurchase or otherwise acquire its stock, payments to
stockholders of another savings association in a cash-out merger and other
distributions charged against capital. The regulation establishes a three-tiered
system, with the greatest flexibility being afforded to well-capitalized or Tier
1 savings associations and the least flexibility being afforded to
under-capitalized or Tier 3 savings associations. The Savings Bank currently is
a Tier 1 institution for purposes of this regulation. See "Regulation--The
Savings Bank--Limitation on Capital Distributions".
In addition to the foregoing, earnings of the Savings Bank allocated to bad
debt reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by the Savings Bank on the amount of
earnings deemed to be removed from the reserves for such distribution. See
"Federal and State Taxation-- Bad Debt Reserves". The Savings Bank intends to
make full use of this favorable tax treatment and does not contemplate any
distribution by the Savings Bank in a manner that would limit its bad debt
deduction or create current Federal tax liability.
Unlike the Savings Bank, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders,
although the source of such dividends will be, in part, dependent upon dividends
from the Savings Bank. The Company is subject, however, to the requirements of
Pennsylvania law, which generally limits the payment of dividends if, after
giving effect thereto, the Company would be unable to pay its debts as they
become due in the usual course of its business, or the Company's total assets
would be less than its total liabilities plus the amount which would be needed,
under certain circumstances, to satisfy any preferential rights of shareholders.
MARKET FOR THE COMMON STOCK
The Company and the Savings Bank have never issued capital stock, and,
consequently, there is no established market for the Common Stock at this time.
The Company expects that following the Conversion, the Common Stock will be
traded in the over-the-counter market. The Company has received conditional
approval to have its Common Stock quoted on the Nasdaq Stock Market under the
symbol "PRBC" and will seek to encourage and assist at least two market makers
to make a market in the Common Stock. The failure to maintain two market makers
for ten consecutive days will lead to a notice from NASDAQ to obtain two market
makers within 30 days or suffer delisting.
Making a market involves maintaining bid and ask quotations and being able,
as principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
Although it is under no obligation to do so, Ryan, Beck has advised the Company
that it intends to make a market in the Common Stock following completion of the
Conversion. The Company will attempt to obtain commitments from other
broker-dealers to act as market makers, there can be no assurance there will be
two or more market makers for the Common Stock. However, the Company believes
that two market makers will be found before the completion of the Offering.
Additionally, the development of a liquid public market depends on the existence
of willing buyers and sellers, the presence of which is not within the control
of the Company, the Savings Bank or any market maker. There can be no assurance
that an active and liquid trading market for the Common Stock will develop or
that, if developed, it will continue, nor is there any assurance that persons
purchasing shares of Common Stock will be able to sell them at or above the
Purchase Price.
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CAPITALIZATION
The following table presents the historical capitalization of the Savings
Bank at December 31, 1995, and the pro forma capitalization of the Company after
giving effect to the Conversion, based upon the sale of the number of shares
shown below and the other assumptions set forth under "Pro Forma Data".
<TABLE>
<CAPTION>
COMPANY--PRO FORMA
BASED UPON SALE AT $10.00 PER SHARE
--------------------------------------------------------------------------------------------
THE SAVINGS BANK 850,000 SHARES 1,000,000 SHARES 1,150,000 SHARES 1,322,500 SHARES(1)
HISTORICAL AS OF (MINIMUM OF (MID-POINT OF (MAXIMUM OF (15% ABOVE MAXIMUM
DECEMBER 31, 1995 RANGE) RANGE) RANGE) OF RANGE)
----------------- ----- ----- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total deposits(2)................... $80,731 $80,731 $80,731 $80,731 $80,731
FHLB of Pittsburgh advances......... 2,977 2,977 2,977 2,977 2,977
------- ------- ------- ------- -------
Total deposits and borrowed funds
(2)............................... $83,708 $83,708 $83,708 $83,708 $83,708
======= ======= ======= ======= =======
Stockholders' equity:
Common stock, $1.00 par value,
10,000,000 shares authorized;
shares to be issued as
reflected(3)(4)................. $ N/A $ 850 $ 1,000 $ 1,150 $ 1,323
Preferred stock, $1.00 par value,
5,000,000 shares authorized;
no shares issued................ N/A 0 0 0 0
Additional paid-in capital(3)..... N/A 7,175 8,501 9,826 11,351
Retained earnings(5).............. 7,245 7,245 7,245 7,245 7,245
Net unrealized holding gains
(losses) on available-for-sale
securities........................ (67) (67) (67) (67) (67)
Less:
Common Stock acquired by the
ESOP(6)....................... N/A (680) (800) (920) (1,058)
Common stock acquired by
recognition plan(4)........... N/A (340) (400) (460) (529)
------- ------- ------- ------- -------
Total stockholders' equity........ $ 7,178 $14,183 $15,479 $16,774 $18,265
======= ======= ======= ======= =======
</TABLE>
- ---------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to 15%
to reflect changes in market and financial conditions prior to completion of
the Conversion or to fill in part or in whole the subscription order of the
ESOP.
(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 pursuant to the Stock Option Plan expected to be adopted by the
Company and presented for stockholder approval at a meeting of stockholders
to be held not earlier than six months following the Conversion. If the plan
is approved by stockholders, an amount equal to 10% of the shares of Common
Stock issued in the Conversion will be reserved for issuance upon the
exercise of options to be granted under the Stock Option Plan, or 85,000,
100,000, 115,000 and 132,250 shares at the minimum, mid-point, maximum and
15% above the maximum of the Estimated Valuation Range. See "Management of
the Savings Bank--Benefits--Stock Option Plan".
(4) Gives effect to the Recognition Plan which is expected to be adopted by the
Company following the Conversion and presented to stockholders for approval
at a meeting of stockholders to be held not earlier than six months
following the Conversion. If the Recognition Plan is approved by
stockholders, the Recognition Plan intends to acquire an amount of Common
Stock equal to 4% of the shares of Common Stock issued in the Conversion, or
34,000, 40,000, 46,000 and 52,900 shares at the minimum, mid-point, maximum
and 15% above the maximum of the Estimated Valuation Range. The table
assumes that stockholder approval has been obtained, that such shares are
purchased by the Recognition Plan on the open market at the Purchase Price.
No effect has been given to reflect (i) the Savings Bank's results of
operation after the Conversion, (ii) changing market prices of shares of
Common Stock after the Conversion, or (iii) a smaller than 4% purchase by
the Recognition Plan. The Common Stock so acquired by the Recognition Plan
is reflected as a reduction in stockholders' equity. If the shares are
purchased at prices higher or lower than the Purchase Price, such purchases
would have a greater or lesser impact, respectively, on stockholder's
equity. See "Management of the Savings Bank--Benefits--Recognition and
Retention Plan and Trust" and Footnote 3 to the table set forth under "Pro
Forma Data."
(5) The retained earning of the Savings Bank will be substantially restricted
after the Conversion. See "The Conversion-- Liquidation Rights".
(6) Assumes that 8% of the shares sold in the Conversion will be purchased by
the ESOP. The Common Stock acquired by the ESOP is reflected as a reduction
of stockholders' equity. Assumes the funds used to acquire the ESOP shares
will be borrowed from the Company. See Footnote 2 to the table set forth
under "Pro Forma Data" and "Management of the Savings Bank--
Benefits--Employee Stock Ownership Plan and Trust".
23
<PAGE> 24
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 $8.0 million and $11.0 million (or $12.7
million in the event the Estimated Valuation Range is increased by 15%) based
upon the following assumptions: (i) Ryan, Beck will receive fees of 1.75% of the
aggregate Purchase Price for assisting in marketing the Common Stock in the
Subscription Offering, excluding the sale of shares to the ESOP, and to
Officers, Directors and Employees and members of their immediate families; and
(ii) Conversion expenses, excluding the marketing fees paid to Ryan, Beck, will
be approximately $499,000 at the midpoint. See "The Conversion--Marketing and
Underwriting Arrangements".
Pro forma net earnings and stockholders' equity have been calculated for
the year ended December 31, 1995 as if the Common Stock to be issued in the
Offerings had been sold at the beginning of the 1995 calendar year and the net
proceeds had been invested at 5.07%, which represents the yield on one year U.S.
Government securities at March 1, 1996. OTS regulations specify that for
purposes of determining pro forma data, an assumption of a yield representing
the arithmetic average of the average yield on the Savings Bank's
interest-earning assets and the average cost of deposits be used in calculating
the pro forma data. The Savings Bank did not use this assumption in calculating
its pro forma data because management believes that the rates shown more
accurately reflect reinvestment rates than the arithmetic average method. The
effect of withdrawals from deposit accounts for the purchase of Common Stock has
not been reflected. A combined effective Federal and state income tax rate of
35% has been assumed for the period, resulting in an after-tax yield of 3.3%
during the year ended December 31, 1995. Historical and pro forma per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock, as adjusted to give effect to the
shares purchased by the ESOP and the annual release of shares from the suspense
account to participants in the ESOP, with respect to the net income per share
calculations. As discussed under "Use of Proceeds," the Company intends to
retain 50% of the net Conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of the Company computed in
accordance with generally accepted accounting principles. The pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be different than amounts that would be available for
distribution to stockholders in the event of liquidation.
The following tables summarize historical data of the Savings Bank and pro
forma consolidated data of the Company at or for the year ended December 31,
1995 based on assumptions set forth above and in the tables and should not be
used as a basis for projections of market value of the Common Stock following
the Conversion. Book value does not give any effect to the liquidation account
to be established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders or the bad debt reserve in liquidation. See "The
Conversion--Liquidation Rights". No effect has been given in the tables to the
possible issuance of additional shares equal to 10% of the Common Stock to be
reserved for future issuance pursuant to the Stock Option Plan, assuming that
following the Conversion such Stock Option Plan is adopted by the Board of
Directors of the Company and approved by the stockholders. The table below gives
effect to the Recognition Plan, which is expected to be adopted (together with
the Stock Option Plan) by the Company following the Conversion. If the
Recognition Plan is approved by stockholders, the Recognition Plan intends to
acquire an amount of Common Stock equal to 4% of the shares of Common Stock
issued in the Conversion, either through open market purchases or from
authorized but unissued shares of Common Stock. The table below assumes that
stockholder approval has been obtained, that such shares are purchased in the
open market by the Recognition Plan at the Purchase Price. No effect has been
given to reflect (i) the Savings Bank's results of operation after the
Conversion, (ii) changing market prices of shares of Common Stock after the
24
<PAGE> 25
Conversion, or (iii) a smaller than 4% purchase by the Recognition Plan. See
"Management of the Savings Bank--Benefits--Recognition and Retention Plan and
Trust".
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------
850,000 SHARES 1,150,000 SHARES 1,322,500 SHARES
SOLD AT $10.00 1,000,000 SHARES SOLD AT $10.00 SOLD AT $10.00
PER SHARE SOLD AT $10.00 PER SHARE PER SHARE (15%
(MINIMUM OF PER SHARE (MID- (MAXIMUM OF ABOVE MAXIMUM OF
RANGE) POINT OF RANGE) RANGE) RANGE)(6)
----- -------------- ----- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............................... $ 8,500 $10,000 $11,500 $13,225
Less offering expenses and commissions....... 475 499 524 551
------- ------- ------- -------
Estimated net conversion proceeds.......... 8,025 9,501 10,976 12,674
Less: Common Stock acquired by ESOP.......... (680) (800) (920) (1,058)
Common Stock to be acquired by the
Recognition Plan....................... (340) (400) (460) (529)
------- ------- ------- -------
Estimated adjusted net proceeds(1)......... $ 7,005 $ 8,301 $ 9,596 $11,087
======= ======= ======= =======
Net income:
Historical................................. $ 161 $ 161 $ 161 $ 161
Pro forma income on net proceeds........... 231 274 316 365
Pro forma ESOP adjustment(2)............... (29) (35) (40) (46)
Pro forma Recognition Plan adjustment(3)... (44) (52) (60) (69)
------- ------- ------- -------
Pro forma net earnings(4).................. $ 319 $ 348 $ 377 $ 411
======= ======= ======= =======
Per share net income:(7)
Historical................................. $ .20 $ .17 $ .15 $ .13
Pro forma income on net proceeds........... .30 .30 .30 .30
Pro forma ESOP adjustment(2)............... (.04) (.04) (.04) (.04)
Pro forma Recognition Plan adjustment(3)... (.06) (.06) (.06) (.06)
------- ------- ------- -------
Pro forma net income per share(4).......... $ .40 $ .38 $ .35 $ .33
======= ======= ======= =======
Stockholders' equity:
Historical................................. $ 7,178 $ 7,178 $ 7,178 $ 7,178
Estimated net proceeds..................... 8,025 9,501 10,976 12,674
Less: Common Stock acquired by ESOP(2)..... (680) (800) (920) (1,058)
Less: Common Stock acquired by the
Recognition Plan(3)...................... (340) (400) (460) (529)
------- ------- ------- -------
Pro forma stockholders' equity(3)(4)(5).... $14,183 $15,479 $16,774 $18,265
======= ======= ======= =======
Stockholders' equity per share:
Historical................................. $ 8.44 $ 7.18 $ 6.24 $ 5.43
Estimated net proceeds..................... 9.44 9.50 9.54 9.58
Less: Common Stock acquired by ESOP(2)..... (.80) (.80) (.80) (.80)
Less: Common Stock acquired by the
Recognition Plan(3)...................... (.40) (.40) (.40) (.40)
------- ------- ------- -------
Pro forma stockholders' equity per
share(3)(4)(5)........................... $ 16.68 $ 15.48 $ 14.58 $ 13.81
======= ======= ======= =======
Offering price as a percentage of pro forma
stockholders' equity per share(3).......... 59.9% 64.6% 68.5% 72.4%
======= ======= ======= =======
Offering price to pro forma net income per
share(3)................................... 25.0x 26.3x 28.6x 29.4x
======= ======= ======= =======
</TABLE>
- ---------
(1) Estimated adjusted net proceeds consist of the estimated net Conversion
proceeds, minus (i) the proceeds attributable to the purchase by the ESOP
and (ii) the value of the shares to be purchased by the Recognition Plan,
subject to stockholder approval, after the Conversion at an assumed price of
$10.00 per share.
(2) It is assumed that 8% of the shares of Common Stock sold in the Conversion
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
25
<PAGE> 26
the Company. No reinvestment is assumed on the proceeds contributed to fund
the ESOP. The Savings Bank intends to make annual contributions to the ESOP
in an amount at least equal to the principal and interest requirement of the
debt. The Savings Bank's total annual payments of the ESOP debt is based
upon 15 equal annual installments of principal. For purposes of the
foregoing table only the annual principal stated payment on a
straight-line-basis is assumed in the calculation of "Pro forma ESOP
adjustments". The amount borrowed is reflected as a reduction of
stockholders' equity of the Company. The pro forma net income assumes: (i)
that the Savings Bank's contribution to the ESOP is equivalent to the
principal payment of the debt service on a straight line basis for the year
ended December 31, 1995, and was made at the end of the period; (ii) that
4,533, 5,333, 6,133 and 7,053 shares at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively, were
committed to be released during the year ended December 31, 1995 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 income per
share calculations. The effect of any interest payment due on the ESOP loan
is not reflected in the foregoing table. It is anticipated that the ESOP
loan will incur interest at a rate not to exceed a fair market value
interest rate for similar loans. Further, the amortization of the debt
service on the ESOP loan may require equal annual payments of principal and
interest. Under such circumstances, the shares released from the ESOP
suspense account and the pro forma data would differ from that reflected in
the foregoing table. SOP 93-6, entitled "Employers' Accounting for Employee
Stock Ownership Plans," of the American Institute of Certified Public
Accountants ("AICPA"), requires that an employer record compensation expense
in an amount equal to the fair value of the shares committed to be released
to employees from the ESOP. If the shares of Common Stock were to appreciate
in value over time, the compensation expense relative to the ESOP will
likely increase. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Accounting Pronouncements" and
"Management of the Savings Bank--Benefits--Employee Stock Ownership Plan and
Trust".
(3) The adjustment is based upon the assumed additional issuance of 34,000,
40,000, 46,000 and 52,900 shares at the minimum, mid-point, maximum and 15%
above the maximum of the Estimated Valuation Range. In calculating the pro
forma effect of the Recognition Plan, it is assumed that (i) stockholder
approval of the Recognition Plan has been received; (ii) the shares were
acquired by the Recognition Plan at the beginning of the period presented in
open market purchases at the Purchase Price; and (iii) the amortized expense
during the year ended December 31, 1995 was 20% of the amount contributed.
The issuance of authorized but unissued shares of the Company's Common
Stock, instead of open market purchases, would dilute the interests of
existing stockholders by approximately 3.8%, and pro forma net income per
share for the year ended December 31, 1995 would be $.39, $.36, $.34 and
$.32, and pro forma stockholders' equity per share at December 31, 1995
would be $16.04, $14.88, $14.03 and $13.28, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. There can be no assurance that stockholder approval of the
Recognition Plan will be obtained, or that the actual purchase price of the
shares will be equal to the Purchase Price. See "Management of the Savings
Bank--Benefits-- Recognition and Retention Plan and Trust".
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan. If the Stock Option Plan is
approved by stockholders, an amount equal to 10% of the Common Stock issued
in the Conversion, or 85,000, 100,000, 115,000 and 132,250 shares at the
minimum, mid-point, maximum and 15% above the maximum of the Estimated
Valuation Range, will be reserved for future issuance upon the exercise of
options to be granted under the Stock Option Plan. The issuance of Common
Stock pursuant to the exercise of options under such plan will result in the
dilution of existing stockholders' interests. Assuming stockholder approval
of the Stock Option Plan, that all the options were exercised at the end of
the period at an exercise price of $10.00 per share, pro forma net income
per share for the year ended December 31, 1995 would be $.37, $.34, $.32 and
$.30, and pro forma stockholders' equity per share at December 31, 1995
would be $16.08, $14.98, $14.17 and $13.46, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. See "Management of the Savings Bank--Benefits--Stock Option
Plan", and See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Recent Accounting Pronouncements" for discussion
of the impact of SFAS No. 123 "Accounting for Stock-Based Compensation" on
disclosure of compensation costs starting in fiscal year 1996.
(5) The retained earnings of the Savings Bank will be substantially restricted
after the Conversion. See "Dividend Policy" and "The Conversion--Liquidation
Rights".
(6) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to 15%
to reflect changes in market and financial conditions prior to the
completion of the Conversion or to fill in part, or in whole, the
subscription order of the ESOP.
(7) Net income per share computations are determined by taking the number of
shares assumed to be sold in the Conversion and, in accordance with SOP
93-6, subtracting the ESOP shares which have not been committed for release
during the respective period. See Footnote 2 above.
26
<PAGE> 27
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions are required to maintain minimum
levels of regulatory capital. Pursuant to Federal regulations, the OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis. For information concerning the capital requirements
applicable to the Savings Bank, see "Regulation--The Savings Bank--Capital
Requirements".
At December 31, 1995, the Savings Bank exceeded all of the capital
requirements applicable to it. Set forth below is a summary of the Savings
Bank's compliance with the applicable capital standards as of December 31, 1995
on a historical basis and the compliance with applicable capital standards on a
pro forma basis assuming (1) the indicated number of shares were sold by the
Company as of such date and, (2) the Company purchased all of the capital stock
of the Savings Bank issued in the Conversion in exchange for 50% of the net
Conversion proceeds at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Valuation Range, respectively. The remaining proceeds, net of
the amount expected to be borrowed by the ESOP and net of the cost of shares
expected to be acquired by the Recognition and Retention Plans, will be retained
by the Company. For purposes of the table below, the amount expected to be
borrowed by the ESOP and the cost of the shares expected to be acquired by the
Recognition Plans, are deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1995
--------------------------------------------------------------------------------------------
13,225,000 SHARES
HISTORICAL AT 850,000 SHARES 1,000,000 SHARES 1,150,000 SHARES (15% ABOVE MAXIMUM
DECEMBER 31, 1995 (MINIMUM OF RANGE) (MID-POINT OF RANGE) (MAXIMUM OF RANGE) OF RANGE)(1)
----------------- ------------------ ------------------- ------------------ -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ ---------- ------- --------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible
capital:
(2)
Requirement... $1,378 1.50% $ 1,423 1.50% $ 1,432 1.50% $ 1,440 1.50% $ 1,450 1.50%
Actual ....... 7,228 7.87 10,221 10.77 10,779 11.29 11,336 11.81 11,978 12.39
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess........ $5,850 6.37% $ 8,798 9.27% $ 9,347 9.79% $ 9,896 10.31% $10,528 9.39%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital:
(2)
Requirement
(3)......... $2,757 3.00% $ 2,847 3.00% $ 2,863 3.00% $ 2,880 3.00% $ 2,899 3.00%
Actual........ 7,228 7.87 10,221 10.77 10,779 11.29 11,336 11.81 11,978 12.39
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess........ $4,471 4.87% $ 7,374 7.77% $ 7,916 8.29% $ 8,456 8.81% $ 9,079 9.39%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-based
capital:(2)
Requirement
(6).... $3,101 8.00% $ 3,221 8.00% $ 3,243 8.00% $ 3,266 8.00% $ 3,291 8.00%
Actual
(4, 5)....... 7,515 19.39 10,508 26.10 11,066 27.29 11,623 28.47 12,265 29.81
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess........ $4,414 11.39% $ 7,287 18.10% $ 7,823 19.29% $ 8,357 20.47% $ 8,974 21.81%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ---------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% to reflect
changes in market and/or financial conditions prior to the completion of the
Conversion or to fill in part, or in whole, the subscription order of the
ESOP.
(2) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of adjusted assets. Risk-based
capital levels are shown as a percentage of risk-weighted assets. The
difference between capital under generally accepted accounting principles
("GAAP") and regulatory tangible and core capital is attributable to $50,000
for the Savings Bank's net unrealized holding gains (losses) on
available-for-sale securities to arrive at regulatory tangible and core
capital of $7,228,000.
(3) To be "adequately capitalized" for purposes of the OTS' Prompt Corrective
Action regulations, core capital generally must be at least 4.0%. See
"Regulation--Capital Requirements" and "Regulation--Prompt Corrective
Regulatory Action".
(4) Assumes proceeds to the Savings Bank are invested in assets that carry a 50%
average risk weighting.
(5) The difference between capital under generally accepted accounting
principles and regulatory risk-based capital is attributable to an addition
to generally accepted accounting principles capital of $287,000 for the
allowance for loan loss and $50,000 for the Savings Bank's net unrealized
holding gains (losses) on available-for-sale securities to arrive at
regulatory risk-based capital of $7,515,000.
(6) Calculated based on the OTS requirement of 8.0% of risk-weighted assets.
27
<PAGE> 28
PRESTIGE BANK, A FEDERAL SAVINGS BANK
STATEMENTS OF INCOME
The following Statements of Income of the Savings Bank for each of the three
years in the period ended December 31, 1995, have been audited by Arthur
Andersen LLP, independent certified public accountants, whose report thereon
appears elsewhere herein. The Statements of Income should be read in conjunction
with the Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans...................................... $4,289 $3,980 $4,097
Interest on mortgage-backed securities.......................... 1,015 1,023 889
Interest and dividends on other investment securities........... 335 290 316
Interest on deposits in other financial institutions............ 80 21 108
------ ------ ------
Total interest income........................................ 5,719 5,314 5,410
INTEREST EXPENSE:
Interest on deposits............................................ 3,214 2,464 2,631
Advances from Federal Home Loan Bank............................ 192 156 3
------ ------ ------
Total interest expense....................................... 3,406 2,620 2,634
------ ------ ------
NET INTEREST INCOME............................................... 2,313 2,694 2,776
PROVISION FOR LOAN LOSSES......................................... 36 36 36
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............... 2,277 2,658 2,740
OTHER INCOME:
Fees and service charges........................................ 218 219 249
Losses on sale of mutual fund shares............................ 0 0 (14)
Other income, net............................................... 4 75 75
------ ------ ------
Total Other Income........................................... 222 294 310
OTHER EXPENSES:
Salaries and employee benefits.................................. 1,016 934 816
Premises and occupancy costs.................................... 315 261 276
Federal deposit insurance premiums.............................. 174 171 149
Data processing costs........................................... 154 133 130
Advertising costs............................................... 94 102 113
Federal Home Loan Bank deposit and demand account charges....... 141 129 115
ATM transaction fees............................................ 86 69 56
Other expenses.................................................. 275 259 258
------ ------ ------
Total Other Expenses......................................... 2,255 2,058 1,913
------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE.................................. 244 894 1,137
INCOME TAX EXPENSE................................................ 83 346 452
------ ------ ------
NET INCOME........................................................ $ 161 $ 548 $ 685
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 29
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 operating results of the Savings Bank depend primarily upon
its net interest income, which is determined by the difference between interest
and dividend income on interest-earning assets, principally investment
securities and other investments, mortgage-backed securities and loans, and
interest expense on interest-bearing liabilities, which consist of deposits and
advances from the FHLB of Pittsburgh. The Savings Bank's net income also is
affected by its provision for loan losses, as well as the level of its other
income, including late charges, and its other expenses, such as salaries and
employee benefits, net occupancy and equipment expense, Federal deposit
insurance and miscellaneous other expenses, and income taxes.
CHANGES IN FINANCIAL CONDITION
The Savings Bank's assets increased by $4.1 million or 4.7% from $87.7
million at December 31, 1994 to $91.8 million at December 31, 1995. The increase
in total assets was primarily attributable to an increase in consumer loan
originations, and an increase in cash and cash equivalents held by the Savings
Bank. The Savings Bank's total loans receivable increased by $515,000 or .84%
from $61.2 million at December 31, 1994 to $61.7 million at December 31, 1995,
attributable to consumer loans, which increased $1.1 million or 24.3%, as the
Savings Bank expanded its efforts to attract consumer loans. Cash and cash
equivalents increased by $2.9 million or 185.3% between December 31, 1994 and
1995, attributable to repayments of loans and investments and increased
deposits. The increase in deposits during fiscal 1995 was primarily as a result
of competitive rates offered by the Savings Bank. The Savings Bank's total
deposits increased $5.4 million or 7.2% from $75.3 million at December 31, 1994
to $80.7 million at December 31, 1995. Total equity increased $129,000 or 1.8%
to $7.2 million at December 31, 1995, as a result of the Savings Bank's net
income for fiscal 1995 less the impact of the valuation of available-for-sale
securities pursuant to SFAS No. 115.
The Savings Bank's assets increased by $5.2 million or 6.3% from $82.5
million at December 31, 1993 to $87.7 million at December 31, 1994. The increase
was primarily attributable to a $5.5 million or 9.9% increase in total loans
receivable. Funding of these loans was in part from FHLB of Pittsburgh advances,
which increased from $461,000 at December 31, 1993 to $4.3 million at December
31, 1994. Total equity increased $528,000 or 8.1% to $7.0 million at December,
1994, as a result of the Savings Bank's net income in fiscal 1994, less the
impact of the valuation of available-for-sale securities, pursuant to SFAS No.
115. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Accounting Pronouncements."
OPERATING STRATEGY
The Savings Bank has experienced a decline in net income since 1992
primarily as a result of general economic conditions and increased competition.
Although the Savings Bank's capital ratios have increased over this period, the
decrease in net income resulted in lower return on average assets and return on
average equity ratios.
As described in greater detail below, the Savings Bank intends to continue
its emphasis on residential mortgage loans. However, as part of its business
strategy whereby management intends to increase profitability, the Savings Bank
intends to widen its range of lending activities to include small business
commercial loans, commercial real estate loans and consumer loans. Although such
lending activities entail greater risk than residential mortgage lending,
management is willing to accept such risks because of its belief that there are
lending opportunities in its market area which are not being currently fulfilled
by other financial institutions. In addition, the Savings Bank elected to
convert to the stock form whereby the capital raised will be used to fund growth
opportunities and to strengthen the capital position of the Savings Bank.
The Savings Bank experienced increased competition from mortgage brokers
and other financial entities for its one-to-four family residential real estate
lending activities in the early 1990s. The Savings Bank's total
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<PAGE> 30
loans receivable attributable to one-to-four family residential loans, which
amounted to $55.1 million or 70.5% of assets at December 31, 1991, was $55.4
million at December 31, 1995 but had declined as a percentage of assets to
60.3%. During the same period, the Savings Bank's total loans receivable
attributable to commercial, real estate, construction and consumer loans, which
amounted to $3.9 million or 5.0% of assets at December 31, 1991, had increased
to $6.4 million at December 31, 1995 or 6.9% of assets. At the same time,
mortgage-backed securities, which amounted to $9.8 million or 12.6% of assets at
December 31, 1991, had increased to $15.8 million or 17.3% of assets at December
31, 1995. Management attributes this shift in asset composition to an increase
in deposits over the same period (from $72.5 million at December 31, 1991 to
$80.7 million at December 31, 1995) and the need to invest such funds in
interest-bearing assets. In addition, management desires to increase the Savings
Bank's commercial and consumer loans and mortgage-backed securities to reduce
its exposure to interest rate risk. Also, the increase in competition for
residential mortgage loans affected the number of loan originations of this
type.
The Savings Bank has recently reduced the percentage of adjustable rate
mortgages in its mortgage portfolio. As of December 31, 1995, adjustable rate
mortgages constituted 54.0% of the Savings Bank's one-to-four family residential
mortgage portfolio and fixed rate mortgages constituted the remaining portion of
the Savings Bank's one-to-four family residential mortgage portfolio. Management
presently intends to continue to reduce its emphasis on adjustable rate
mortgages by providing a broad range of mortgage products with varying
maturities. Management may sell some or all of its longer term mortgages in
order to reduce interest rate risk.
The Savings Bank strives to maintain deposits as its primary source of
funds to meet loan demand and to maintain outstanding loan balances. Investment
securities and mortgage-backed securities are acquired when the Savings Bank has
excess cash and when management believes the yields and the maturities are
attractive. Excess cash (cash in excess of vault cash and other operating cash
needs) is deposited in an interest bearing demand deposit account with the FHLB
of Pittsburgh. Cash and cash equivalents typically decline in periods of high
loan demand and increase in periods of reduced loan demand. In periods of very
heavy loan demand the Savings Bank will borrow from the FHLB of Pittsburgh to
satisfy loan demand and repay such borrowings from subsequent loan payments or
increased deposits.
Management's strategy in the past few years has been to invest the funds
received from the repayments and prepayments of loans and mortgage-backed
securities into short-term, liquid investments. As a result of this strategy,
cash and cash equivalents were $4.4 million or 4.8% of total assets at December
31, 1995. In the longer term, the Savings Bank anticipates using a significant
portion of these funds and the proceeds from the Conversion to fund fixed-rate
or adjustable-rate mortgage loans with various maturities and, depending upon
then current interest rates and management's estimate of how such rates merit
change, purchasing mortgage-backed securities with various maturities. Although
this strategy will have the effect of increasing the Savings Bank's interest
rate exposure, management believes that the increased earnings potential offsets
this increased interest rate risk.
Management has promoted one-to-four family residential mortgage loans with
fixed interest rates to 15 year terms or less whenever possible. Management
continues to offer adjustable rate mortgage loans ("ARMs") for one-to-four
family residential mortgages. U.S. Government and U.S. Government agency
securities and mortgage-backed securities are purchased with contract maturities
up to 15 years upon terms which securities management believes are attractive
because of yield, call features to the security or market conditions. The
Savings Bank has increased its exposure to consumer loans which combine higher
yields and lower average loan maturities. The Board of Directors intends to
continue the strategy set forth above and will also attempt to increase
commercial and consumer loans. The foregoing investment strategy is based on the
Board of Directors' assessment of future economic conditions and is necessarily
subject to change. The Savings Bank cannot state with any certainty the
aggregate amount of funds that it will invest pursuant to this strategy
generally or in any particular maturity category.
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<PAGE> 31
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Savings Bank's asset and liability
management function is to evaluate the interest-rate risk included in its asset
and liability mix to determine the level of risk appropriate given the Savings
Bank's business focus, operating environment, capital and liquidity requirements
and performance objectives, establish prudent asset concentration guidelines and
manage the risk consistent with Board approved guidelines. The Savings Bank
concentrates on maintaining a sufficient deposit base to fund loan activities
and securities investments. A large core deposit base (defined as demand deposit
accounts, passbook savings accounts and money market savings accounts) provides
the Savings Bank with a lower cost source of funds relative to its alternative
principal borrowing sources, i.e., advances from the FHLB of Pittsburgh.
Management calculates its cost of funds monthly and chooses interest-bearing
assets in excess of its average cost of funds at the time. In periods of
relatively low interest rates the Savings Bank may price its certificates of
deposit in excess of its competition to attract and maintain deposits and avoid
borrowing from the FHLB of Pittsburgh or selling investment securities to
maintain liquidity needs. This strategy will result in periods of reduced net
interest income and net income if the Savings Bank is unable to invest deposits
in interest-bearing assets with sufficient yield to maintain its average
interest rate spread between its assets and liabilities. See "--Operating
Strategy". The Savings Bank seeks to reduce the vulnerability of its operations
to changes in interest rates and to manage the ratio of interest-rate sensitive
assets to interest-rate sensitive liabilities within specified maturities or
repricing dates. The Savings Bank's actions in this regard are taken under the
guidance of the Asset/Liability Committee ("ALCO"), which is comprised of
Messrs. Stiver, Zyla and Hein. The ALCO reviews, among other things, the
sensitivity of the Savings Bank's asset and liabilities to interest rate
changes, unrealized gains and losses, purchase activity and maturities of all
interest bearing assets and liabilities. In connection therewith, the ALCO
generally reviews the Savings Bank's liquidity, cash flow needs, maturities of
investments, deposits and borrowings and current market conditions and interest
rates. The Chief Financial Officer and President of the Savings Bank has
authority to adjust pricing weekly with respect to the Savings Bank's retail
deposits.
As discussed under "Regulation--The Savings Bank--Capital Requirements",
the OTS is in the process of implementing an interest rate risk component
("IRR") into its risk-based capital rules, which is designed to calculate on a
quarterly basis the extent to which the value of an institution's assets and
liabilities would change if interest rates increase or decrease. The
effectiveness of these requirements has been postponed several times and
recently the Director of the OTS indicated that no institution will be required
to deduct capital for interest rate risk until further notice. The IRR component
has been proposed to be a dollar amount that will be deducted from total capital
for the purpose of calculating an institution's risk-based capital requirement
and is measured in terms of the sensitivity of its net portfolio value ("NPV")
to changes in interest rates. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities, and off-balance sheet
contracts. An institution's IRR is measured as the change to its NPV as a result
of a hypothetical 200 basis point change in market interest rates. A resulting
change in NPV of more than 2% of the estimated market value of its assets would
have required the institution to deduct from its capital 50% of that excess
change. The following table presents the Savings Bank's NPV as of December 31,
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<PAGE> 32
1995, as calculated by the OTS in accordance with its suspended proposal, based
on information provided to the OTS by the Savings Bank.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE (NPV)
(DOLLARS IN THOUSANDS)
------------------------------------------
CHANGES IN RATES NPV PERCENT CHANGE
(EXPRESSED AS EXPRESSED OF ESTIMATED
BASIS POINTS) IN $ $ CHANGE(1) NPV(2) NPV RATIO(3) CHANGE(4)
------------ ---- ---------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C>
+400..................... $5,660 $-2,818 -33% 6.39% -265 bp
+300..................... 6,621 -1,858 -22 7.35 -169 bp
+200..................... 7,429 -1,049 -12 8.12 -92 bp
+100..................... 8,057 -421 -5 8.69 -35 bp
0.................... 8,478 9.04
- -100..................... 8,842 364 +4 9.33 +29 bp
- -200..................... 8,793 315 +4 9.21 +17 bp
- -300..................... 8,687 208 +2 9.04 +0 bp
- -400..................... 8,931 453 +5 9.20 +16 bp
</TABLE>
- ---------
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by the present value of the Savings
Bank's assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
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 Savings Bank'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 measurements and net interest income
models provide an indication of the Savings Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Savings Bank's net interest income and will differ from actual results.
Based upon the above calculations, the Savings Bank believes that it would
not have had to deduct any amount from its regulatory capital as of December 31,
1995, if such regulation had been effective as of such date. Management uses the
NPV and the IRR rule as an additional tool to evaluate the Savings Bank's asset
and liability position.
32
<PAGE> 33
RESULTS OF OPERATIONS
AVERAGE BALANCES, INTEREST INCOME, INTEREST EXPENSE AND YIELDS EARNED AND
RATES PAID. The following table sets forth, for the periods and at the date
indicated, information regarding the Savings Bank's average balance sheet.
Information is based on average monthly balances during the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
AT ------------------------------------------------------------------------------------------------
DECEMBER 31,
1995 1995 1994 1993
------------- ---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---- ------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Investment
securities
(1).......... 5.21% $ 6,562 $ 335 5.11% $6,277 $ 290 4.62% $ 5,303 $ 316 5.96%
---- ------- ------- ------ ------ ------ ---- ------- ------- ------
Loans
receivable
(2):
Real estate
loans...... 7.2 56,655 3,937 6.95 54,664 3,734 6.83 51,889 3,893 7.50
Consumer.... 6.78 4,983 352 7.06 3,838 246 6.41 3,052 204 6.68
Mortgage-backed
securities
(1)........ 6.32 16,363 1,015 6.20 17,495 1,023 5.85 14,988 889 5.93
Other
interest-earning
assets..... 5.66 1,345 80 5.95 681 21 3.08 3,401 108 3.18
------- ------- ------ ------ ------- -------
Total
interest-earning
assets..... 6.85 85,908 5,719 6.66 82,955 5,314 6.41 78,633 5,410 6.88
Noninterest-earning
assets......... -- 2,962 -- -- 2,272 -- -- 2,212 -- --
------ ------ -------
Total
assets..... -- $88,870 -- -- $85,227 -- -- $80,845 -- --
======= ======= =======
Interest-bearing
liabilities:
Deposits...... 4.29% $77,711 $3,214 4.14% $74,315 $2,464 3.32% $73,584 $ 2,631 3.58%
FHLB
advances..... 6.25 3,078 192 6.24 3,194 156 4.88 76 3 3.96
---- ------- ------- ------ ------ ------ ----- ------- ------- ------
Total
interest-bearing
liabilities... 4.37 80,789 3,406 4.22 77,509 2,620 3.38 73,660 2,634 3.58
Noninterest-bearing
liabilities:... -- 952 -- -- 922 -- -- 1,019 -- --
------ ------ -------
Total
liabilities... -- 81,741 -- -- 78,431 -- -- 74,679 -- --
Equity.......... -- 7,129 -- -- 6,796 -- -- 6,166 -- --
------ ------ -------
Total
liabilities
and equity... -- $88,870 -- -- $85,227 -- -- $80,845 -- --
======= ======= =======
Net
interest-earning
assets......... -- $ 5,119 -- -- $ 5,546 -- -- $ 4,973 -- --
======= ======= =======
Net interest
income/interest
rate spread.... 2.48% -- $ 2,313 2.44% -- $2,694 3.03% -- $ 2,776 3.30%
===== ======= ===== ====== ===== ======= ======
Net yield on
interest-
earning assets
(3)............ -- -- -- 2.69% -- -- 3.25% -- -- 3.53%
====== ===== ======
Ratio of average
interest-
earning assets
to average
interest-bearing
liabilities.... -- -- -- 106.03% -- -- 107.03% -- -- 106.75%
====== ====== ======
</TABLE>
- ---------
(1) The average yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
(2) Includes non-performing loans.
(3) Net interest income divided by interest-earning assets.
RATE/VOLUME ANALYSIS. A savings association typically acquires funds in
the form of deposits and loans from the FHLB. A savings association then pays
interest on such deposits and advances. In turn, a savings association will lend
these funds to third parties or purchase investment securities which generate
interest income for the savings association. A savings association also operates
in an environment of changing interest rates and fluctuating volumes of
deposits, advances from third parties, loans made to third parties and
securities bought, sold or repaid. The following table describes the extent to
which changes in interest rates and changes in volume of interest-related assets
and liabilities have affected the Savings Bank's interest income and expense
during the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume
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<PAGE> 34
multiplied by prior year rate), (ii) changes in rate (change in rate multiplied
by prior year volume), and (iii) total change in rate and volume.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 VS. 1994 1994 VS. 1993
--------------------------------------- ---------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
--------------- RATE/ INCREASE --------------- RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME (DECREASE)
---- ------ ------ --------- ---- ------ ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable,
net.................. $ 90 $209 $10 $ 309 $(357) $261 $(21) $(117)
Mortgage-backed
securities........... 62 (66) (4) (8) (13) 149 (2) 134
Investment
securities........... 30 13 2 45 (71) 58 (13) (26)
Other interest-earning
assets............... 19 21 19 59 (3) (86) 2 (87)
----- ---- --- ----- ----- ---- ---- -----
Total interest-
earning assets..... 201 177 27 405 (444) 382 (34) (96)
----- ---- --- ----- ----- ---- ---- -----
Interest-bearing
liabilities:
Deposits.............. 609 113 28 750 (191) 26 (2) (167)
FHLB advances......... 44 (6) (2) 36 0 122 31 153
----- ---- --- ----- ----- ---- ---- -----
Total interest-bearing
liabilities.......... 653 107 26 786 (191) 148 29 (14)
----- ---- --- ----- ----- ---- ---- -----
Increase (decrease) in
net interest income.... $(452) $ 70 $ 1 $(381) $(253) $234 $(63) $ (82)
===== ==== === ===== ===== ==== ==== =====
</TABLE>
NET INCOME. The Savings Bank reported net income of $161,000, $548,000 and
$685,000 for the fiscal years ended December 31, 1995, 1994 and 1993,
respectively. For fiscal 1995, the $387,000 decrease in net income compared with
fiscal 1994 is primarily attributable to a $381,000 or 14.1% decrease in net
interest income, a $72,000 or 24.5% decrease in other income and a $197,000 or a
9.6% increase in other expenses which was partially offset by a $263,000 or a
76.0% decrease in income tax expense. For fiscal 1994, the $137,000 decrease in
net income compared with fiscal 1993 was attributable to a $82,000 or 3%
decrease in net interest income and a $16,000 or 5.2% decrease in other income
and a $145,000 or 7.6% increase in other expenses, which was partially offset by
a $106,000 or 23.5% decrease in income tax expense.
NET INTEREST INCOME. Net interest income before provision for loan losses
amounted to $2.3 million during fiscal 1995, compared to $2.7 million in fiscal
1994 and $2.8 million during fiscal 1993. During fiscal 1995, the $381,000 or
14.1% decrease from fiscal 1994 was attributable to a $786,000 or 30% increase
in total interest expense, which was partially offset by a $405,000 or 7.6%
increase in total interest income. During fiscal 1994, the $82,000 or 3%
decrease in net interest income compared with fiscal 1993 was attributable to a
$96,000 or 1.8% decrease in total interest income, which more than offset a
$14,000 or 0.5% decrease in total interest expense.
The $381,000 reduction in total interest income during the year ended
December 31, 1995 over the prior comparable period was primarily due to a
$786,000 or 30% increase in total interest expense incurred by the Savings Bank
for the fiscal year ending December 31, 1995. This increase was caused by a
$750,000 or 30.4% increase in interest paid on deposits. While average daily
deposits for the Savings Bank rose from $74.3 million in 1994 to $77.7 million
in 1995, the average daily yield earned by depositors increased from 3.32% to
4.14%. In addition, during fiscal 1995, the Savings Bank decreased borrowings
from the FHLB of Pittsburgh by $1.3 million by year end, however due to the
increased rates offered by the FHLB of Pittsburgh during 1995, the Savings Bank
incurred $36,000 of additional interest expense on FHLB of Pittsburgh advances
as compared to fiscal 1994.
The increase in interest expense in 1995, compared with 1994, was primarily
a result of an increase in the Savings Bank's cost of funds from 3.38% to 4.22%.
This increase of 84 basis points resulted from an increase in general market
rates on deposits and advances from the FHLB of Pittsburgh and a shift to
certificates of
34
<PAGE> 35
deposits from passbook and money market accounts. This increase was the primary
reason for the decline in the net interest rate spread and net interest margin
to 2.44% and 2.69%, respectively, for the year ended December 31, 1995 compared
with a net interest rate spread and net interest margin of 3.03% and 3.25%,
respectively, for the year ended December 31, 1994.
Total interest income decreased by $96,000 or 1.8% during fiscal 1994 over
fiscal 1993, primarily due to a $117,000 or 2.9% decrease in interest and fees
earned on loans and a $87,000 or 80.6% decrease in interest on other
interest-bearing deposits in other financial institutions. The reduction in
interest and fees on loans is due primarily to lagging indices for adjustable
rate mortgages. The reduction in interest on other interest-bearing deposits in
other financial institutions is due to a decrease in cash reserves of the
Savings Bank. The average yield earned on interest-earning assets was 6.41% in
1994 compared with 6.88% in 1993.
Total interest expense decreased by $14,000 or 0.5%, during fiscal 1994
compared with fiscal 1993, as the result of lower rates paid by the Savings Bank
on deposits. In addition, during fiscal 1994, the Savings Bank increased
borrowings from the FHLB of Pittsburgh by $3.8 million and incurred $153,000 of
additional interest expense on FHLB of Pittsburgh advances as compared to fiscal
1993. The decrease in the Savings Bank's cost of funds was primarily the result
of a decrease in market interest rates which more than offset a $586,000
increase in deposits and $3.8 million increase in advances.
PROVISION FOR LOAN LOSSES. The Savings Bank establishes provisions for
loan losses, which are charged to operations, in order to maintain the allowance
for loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, the volume and type of lending presently
being conducted by the Savings Bank, industry standards, past due loans,
economic conditions in the Savings Bank's market area generally and other
factors related to the collectibility of the Savings Bank's loan portfolio. For
each of the three years ended December 31, 1995, provisions for loan losses were
$36,000. During fiscal 1995, the Savings Bank charged $53,000 against the
allowance for loan losses to reduce the carrying value of the Savings Bank's
interest in a commercial loan participation and two residential mortgage loans.
At December 31, 1995, the Savings Bank's allowance for loan losses amounted to
93.79% of total non-performing loans and .46% of total loans receivable.
Management and the directors of the Savings Bank believe that the provisions for
loan losses are adequate. See "Business of the Savings Bank--Asset
Quality--Non-Performing Assets" and "--Allowance for Loan Losses".
The Savings Bank calculates expected loan losses using a formula approach
based primarily upon historical experience and current economic conditions.
Although management utilizes its best judgment in providing for losses, there
can be no assurance that the Savings Bank will not have to increase its
provisions for loan losses in the future as a result of future increases in
non-performing loans or for other reasons, which could adversely affect the
Savings Bank's results of operations. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Savings Bank's provision for loan losses and the carrying value of its other
non-performing assets based on their judgments about information available to
them at the time of their examination. The Savings Bank was last examined by the
OTS as of September 30, 1995.
OTHER INCOME. Total other income, net amounted to $222,000 for the year
ended December 31, 1995, a decrease of $72,000 or 24.5% from the $294,000 earned
in fiscal 1994. The primary reason for the decrease was a $28,000 one-time
charge for a loss on the sale of the former Mt. Oliver office and a $7,000 write
off of equipment and other assets. In addition, 1994 other income, net included
a gain of $35,000 as the result of a legal settlement. Disregarding these
one-time postings, core other income remains relatively stable. See "Business of
the Savings Bank--Asset Quality--Non-Performing Assets".
Total other income amounted to $294,000 for the year ended December 31,
1994, compared to $310,000 during fiscal 1993. Other income, net in 1993
included a gain of $35,000 as a result of interest on a tax settlement and a
mutual fund loss on sale of $14,000. Adjusting for the 1993 and 1994 one-time
postings, core other income decreased by $30,000. The primary reason for the
decrease was a reduction in automated teller interchange fees.
35
<PAGE> 36
OTHER EXPENSES. Total other expenses amounted to $2.3 million for the year
ended December 31, 1995, an increase of $197,000 or 9.6% from the $2.1 million
incurred in fiscal 1994. The increase is primarily attributable to increases in
salaries and employee benefits, which increased by $82,000 or 8.8%.
Approximately $60,000 of this increase was due to salary costs which increased
due to the hiring of three additional employees and the annual wage increases
provided to the Savings Bank's employees. The increase is also attributable to
increases in premises and occupancy costs, which increased during 1995 by
$54,000 or 20.7%. The increase in premises and occupancy costs during 1995 was
due primarily to increased depreciation for equipment. Data processing costs
climbed in 1995 by $21,000 to $154,000 for a total percentage increase of 15.8%
over 1994 costs due mainly to the addition of monthly wide area network
telephone line charges.
Total other expenses amounted to $2.1 million for the year ended December
31, 1994, an increase of $145,000 or 7.6% from the $1.9 million incurred in
fiscal 1993. This increase in total other expenses during fiscal 1994 was
primarily due to additional salary, employee benefits and FDIC premium
increases. During the year ended December 31, 1994 the Savings Bank experienced
a $53,000 increase in salaries and a $61,000 increase in employee benefits. The
increase in salaries was due to the hiring of two new employees and the annual
wage increases provided to the Savings Bank's employees. $31,000 of the $61,000
increase in employee benefits was due to the increase of net periodic pension
expense from $36,000 to $67,000.
INCOME TAXES. For the fiscal years ended December 31, 1995, 1994 and 1993,
the Savings Bank incurred income tax expense of $83,000, $346,000 and $452,000.
The effective tax rate was 34.1% during the year ended December 31, 1995,
compared to 38.7% during the year ended 1994, and 39.8% in fiscal 1993. For
further information, see Note 10 of the Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows are categorized as to whether they relate to the operating,
investing or financing activities of the Savings Bank. Cash flow from operating
activities includes net income plus or minus non-cash income statement items.
Cash flow from investing activities includes proceeds from the sale or maturity
of investment securities, principal payments collected on loans and
mortgage-backed and related securities, loan originations and purchases of
investments and mortgage backed and related securities. Cash flow from financing
activities includes the increase or decrease in deposits, borrowings and
escrows. The amount of principal repayments on loans and mortgage-backed and
related securities are heavily influenced by the general level of interest rates
in the economy. During periods in which the Savings Bank is unable to originate
a sufficient amount of loans that it intends to retain, such as adjustable rate
mortgage loans and other loans with shorter terms and during periods of high
principal repayments, the Savings Bank will increase liquid assets, with
remaining amounts invested in U.S. Government and federal agency securities and
mortgage-backed and related securities.
Net cash used by operating activities for the year ended December 31, 1995
was approximately $5,000 whereas for year ended December 31, 1994, the cash
provided from operations was $920,000. The decrease of $925,000 in cash provided
from operations during 1995 was primarily due to the $387,000 decrease in net
income and the $419,000 decrease in other liabilities.
Net cash used by investing activities decreased from $5.8 million in 1994
to $1.3 million in 1995. The primary reason for this $4.5 million or 77.6%
decrease was due to diminished loan origination activity. During 1995 the
Savings Bank's new loan originations were only $795,000 in excess of their loan
payments, while in 1994, the Savings Bank's loan originations exceeded the loan
payments by $5.6 million. This decrease in loan originations was a combination
of decreased loan demand and increased competition.
While net cash provided by financing activities decreased during 1995 by
$200,000 from $4.4 million to $4.2 million, two offseting factors took place.
Overall, during 1995, the Savings Bank's deposits rose by $5.4 million while
there was a shift from core deposits to certificates of deposit. Because of the
increased level of deposits, the Savings Bank repaid certain of its advances
with the FHLB of Pittsburgh.
The Savings Bank's primary sources of funds are deposits, repayments,
prepayments and maturities of outstanding loans and mortgage-backed securities,
maturities of investment securities and other short-term investments, and funds
provided from operations. While scheduled loan and mortgage-backed securities
36
<PAGE> 37
repayments and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by the movement of interest rates in general, economic
conditions and competition. The Savings Bank manages the pricing of its deposits
to maintain a deposit balance deemed appropriate and desirable by its Board of
Directors. In addition, the Savings Bank invests in short-term interest-earning
assets which provides liquidity to meet lending requirements. The Savings Bank
has also utilized advances from the FHLB of Pittsburgh, and currently maintains
a total line of credit of $8.6 million with the FHLB of Pittsburgh, which line
of credit will expire January 2, 1997 absent further extension. See "Business of
the Savings Bank--Sources of Funds".
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as cash and cash
equivalents, interest bearing deposits with other institutions (including the
FHLB of Pittsburgh), U.S. Treasury, U.S. Government agencies and other qualified
investments. On a longer-term basis, the Savings Bank maintains a strategy of
investing in various mortgage-backed securities and other investment securities
and lending products as described in greater detail under "Business of the
Savings Bank". During the year ended December 31, 1995, the Savings Bank used
its sources of funds primarily to meet its ongoing commitments to pay maturing
savings certificates and savings withdrawals, fund loan commitments and maintain
a portfolio of mortgage-backed securities. The Savings Bank has outstanding
various commitments (i.e. one-to-four family loan commitments, credit card
limits and commercial loans commitments) to extend credit approximating $1.5
million as of December 31, 1995. Certificates of deposit scheduled to mature in
one year or less at December 31, 1995 totalled $29.2 million.
The Savings Bank experienced a growth in liquidity during the past year as
interest rates declined, investing in U.S. Government and U.S. Government agency
securities with shorter maturities and, more recently, cash and cash
equivalents, including FHLB of Pittsburgh demand deposit accounts. Cash and cash
equivalents have increased significantly, by $2.9 million or 185.3% between
December 31, 1994 and December 31, 1995. As of December 31, 1995, cash and cash
equivalents amounted to $4.4 million or 4.8% of assets, of which $3.6 million
was invested in interest bearing accounts with the FHLB of Pittsburgh
withdrawable on demand. The Savings Bank's investment securities (including
mortgage-backed securities) have a slight increase in dollar amount over the
last few years, from $22.3 million or 25.4% of assets at December 31, 1994 to
$22.6 million or 24.6% of assets at December 31, 1995. As of December 31, 1995,
$2.8 of such investment securities (including mortgage-backed securities) mature
within one year or less and $11.2 have maturities of five years or less. While
reducing the Savings Bank's interest-rate risk, these short-term investments
have had a negative effect on the Savings Bank's net interest margin, which has
declined from 3.25% for the year ended December 31, 1994 to 2.69% for the year
ended December 31, 1995.
Management of the Savings Bank believes that the Savings Bank has adequate
resources, including principal prepayments and repayments of loans,
mortgage-backed securities and maturing investments, to fund all of its
commitments to the extent required. Management believes that a significant
portion of maturing deposits will remain with the Savings Bank. See Note 7 of
the Notes to Financial Statements.
The Savings Bank is required by the OTS to maintain average daily balances
of liquid assets and short-term liquid assets (as defined) in amounts equal to
5% and 1%, respectively, of net withdrawable deposits and borrowings payable in
one year or less to assure its ability to meet demand for withdrawals and
repayment of short-term borrowings. The liquidity requirements may vary from
time to time at the direction of the OTS depending upon economic conditions and
deposit flows. The Savings Bank's average monthly liquidity ratio and short-term
liquid assets at December 31, 1995 was 20.5% and 9.0%, respectively.
As of December 31, 1995, the Savings Bank had regulatory capital which was
in excess of applicable limits. See "Regulatory Capital Requirements".
The Company, as a separately incorporated holding company, initially will
have no significant operations other than serving as sole stockholder of the
Savings Bank. On an unconsolidated basis, the Company initially shall have no
paid employees. The Company's assets will consist of its investment in the
Savings Bank, its receivable from the ESOP and the net proceeds retained from
the Conversion. See "Use of Proceeds". Its sources of income will consist of
earnings from the investment of such funds and interest from the ESOP
obligation. The only expenses expected to be incurred initially by the Company
will relate to its reporting
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<PAGE> 38
obligations under the Exchange Act and related expenses as a publicly traded
company. The Company will be directly reimbursed by the Savings Bank for all
such expenses. Management believes that the Company currently has adequate
liquidity available to respond to its obligations.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements of the Savings Bank and related notes presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Savings Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
affecting the accounting for investments in debt and certain equity securities,
which are to be classified into one of three categories. Securities which
management has positive intent and ability to hold until maturity are to be
classified as held-to-maturity and reported at amortized cost. Securities that
are bought and held principally for the purpose of selling them in the near term
are to be classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. All other securities are to be
classified as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity until realized. SFAS No. 115 was effective for fiscal years
beginning after December 15, 1993. Upon initial adoption of SFAS No. 115 the
Savings Bank classified all mutual fund investments as investments available for
sale. Additionally until late 1995, these mutual fund shares were the only
investment securities held as available for sale as of December 31, 1994. During
the period from November 15, 1995 to December 31, 1995 FASB permitted a
financial institution to re-evaluate its investment portfolio and reclassify
securities listed as held to maturity as then available for sale. The Savings
Bank elected to reclassify $6.3 million of investment securities as available
for sale. At the time of any reclassification of a security a gain or loss on
the current value of the security is recorded in accordance with SFAS No. 115.
See Notes 1 and 2 of the Notes to Financial Statements.
In May 1993, the FASB also issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan". In October 1994 the FASB issued SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure". Each SFAS was effective for fiscal years beginning after December
15, 1994. The statements establish accounting measurement' recognition and
reporting standards for impaired loans. SFAS No. 114, as amended by SFAS No.
118, provides that a loan is impaired when, based on current information and
events, it is probable that the creditor will be unable to collect all amounts
due according to the contractual terms (both principal and interest). SFAS No.
114, as amended by SFAS No. 118, requires that when a loan is impaired,
impairment should be measured based on the present value of the expected cash
flows, discounted at the loan's effective interest rate. If the loan is
collateral dependent, as a practical expedient, impairment can be based on a
loan's observable market price or the fair value of the collateral. The value of
the loan is adjusted through a valuation allowance created through a charge
against income. Loans that were treated as in-substance foreclosures under
previous accounting pronouncements are considered to be impaired loans and
remain in the loan portfolio under SFAS No. 114, as amended by SFAS No. 118.
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<PAGE> 39
The Savings Bank's policy is separately to review each of their commercial
loans in order to determine if a loan is impaired. The Savings Bank also has
identified two pools of small-dollar-value homogeneous loans which are evaluated
collectively for impairment. These separate pools are for residential mortgage
loans and for consumer loans. As facts, such as a significant delinquency in
payments of ninety days or more, a bankruptcy or other circumstances, become
known on specific loans within either loan pool, individual loans are reviewed
and are removed from the pool if deemed to be impaired.
The Savings Bank considers its specifically-identified impaired loans to be
collateral dependent; therefore, the fair value of the collateral of the
impaired loans is evaluated in measuring the impairment. For its two loan pools,
the Savings Bank calculates expected loan losses using a formula approach based
primarily upon historical experience and current economic conditions. The
Savings Bank's policy is to recognize interest on a cash basis for impaired
loans and to charge-off impaired loans when deemed uncollectible.
The adoption of these standards at January 1, 1995 resulted in loans
totaling $391,000 being specifically-identified as impaired and an allocation
being made of the existing allowance for loan losses of approximately $27,000.
At December 31, 1995, the Savings Bank had loans totaling $306,000
specifically-identified as impaired. No specific allocation of the allowance for
loan losses was deemed necessary for these impaired loans.
The average recorded balance for impaired loans during 1995 was $406,000
and $34,000 of interest income was recognized during the time within the period
that the loans was impaired. For these same loans, the interest income
recognized on a cash basis during the period of impairment was $34,000.
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes," relating to the method of accounting for income taxes. Implementation of
SFAS No. 109 was required for fiscal years beginning after December 15, 1992.
SFAS No. 109 requires companies to take into account changes in tax rates when
valuing the deferred income tax amounts recorded on the balance sheet. SFAS No.
109 also requires that deferred taxes be provided for all temporary differences
between the carrying amounts of existing assets and liabilities for financial
statement and tax purposes. SFAS No. 109 also requires that a deferred tax
liability be recognized with regard to the portion of a savings institution's
bad debt reserves which is in excess of the balance of the institution's bad
debt reserves as of the end of the last taxable year beginning before the 1988
base year. Section 585(b)(2) of the Code provides that an institution may
maintain its bad debt reserve at the level that it had attained in its base
year, or, if the amount of loans and mortgage-backed securities ("Qualifying
Assets") outstanding at the close of the current year is less than the amount of
Qualifying Assets at the close of the base year, the amount which bears the same
ratio to the Qualifying Assets at the close of the present year as the balance
of the reserve at the close of the base year bears to the amount of Qualifying
Assets at the close of the base year. As of December 31, 1995, the amount of the
Savings Bank's Qualifying Assets was less than the balance of Qualifying Assets
as of December 31, 1987. See "Summary--Prestige Bank, A Federal Savings Bank".
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", establishing financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
income and, if presented, earnings per share, as if this statement had been
adopted. The accounting requirements of this statement are effective for
transactions entered into for fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for awards granted in
their first fiscal year beginning after December 15, 1994. Management of the
Savings Bank has not completed an analysis of the potential effects of this
Statement on its financial condition or results of operations or method of
adoption since it does not presently have such plans.
In November 1993, the AICPA issued SOP 93-6, Employers' Accounting for
Employee Stock Ownership Plans, which was required effective for fiscal years
beginning after December 15, 1993. SOP 93-6
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<PAGE> 40
requires the application of its guidance for shares acquired by ESOPs after
December 31, 1992 but not yet committed to be released as of the beginning of
the year SOP 93-6 is adopted and the beginning of each year thereafter. SOP 93-6
has, among other things, changed the measure of compensation expense recorded by
employers for leveraged ESOPs from the cost of ESOP shares to the fair value of
the ESOP shares during the periods in which they become committed to be
released. To the extent that fair value of the Company's ESOP shares differ from
the cost of such shares, this differential will be charged or credited to
equity. Employers with internally leveraged ESOPs such as the Company will not
report the loan receivable from the ESOP as an asset and will not report the
ESOP debt from the employer as a liability. For information on the pro forma
effect of the ESOP on the Company's results of operations and stockholders'
equity assuming the application of SOP 93-6, see "Pro Forma Data." For
additional information on the ESOP, see "Management of the Savings
Bank--Benefits--Employee Stock Ownership Plan and Trust".
BUSINESS OF THE SAVINGS BANK
LENDING ACTIVITIES
GENERAL. The Savings Bank's lending operations follow the traditional
pattern of primarily emphasizing the origination of one-to-four family
residential loans for portfolio retention and to a substantially lesser degree,
the origination of commercial real estate loans, construction loans on
residential properties and consumer loans, including home equity or home
improvement loans, automobile loans, student loans, credit card loans and cash
collateral personal loans.
At December 31, 1995, the Savings Bank's total loans portfolio amounted to
$61.7 million, or 67.2% of total assets at that date. The Savings Bank has
traditionally concentrated its lending activities on one-to-four family
residential mortgages in its primary market. Consistent with its lending
orientation, $55.4 million or 89.7% of the Savings Bank's total loan portfolio
consisted of one-to-four family residential loans at December 31, 1995.
Management intends that one-to-four family residential mortgage loans will be
the primary lending activity of the Savings Bank.
Consumer loans, which are of shorter maturity and at higher margins above
cost of funds, have risen from $3.4 million at December 31, 1993, to $5.6
million at December 31, 1995. Each of the foregoing figures shows gross loan
receivables with no allocation for bad debt reserve or other contra accounts.
Management has sought through the promotion of automobile, student and home
equity loans to increase outstanding consumer loans. The percentage of consumer
loans against total loan receivables has changed from 6.2% at December 31, 1993,
to 9.0% at December 31, 1995. Management is committed to increase consumer loans
but no assurances can be given that this policy will be successful.
The Savings Bank anticipates that it will pursue the growth of its
commercial loan portfolio during 1996. Management of the commercial loan
portfolio will be assigned initially to existing officers of the Savings Bank.
The Savings Bank anticipates that if the growth of the commercial loan portfolio
is consistent with management's goals, the Savings Bank will hire a commercial
loan officer to supervise relations with commercial loan customers and to work
on the origination of additional commercial loans.
The Savings Bank's primary market area consists of southern and
southwestern portions of Allegheny County and, to a lesser extent, Washington
and Westmoreland Counties. All of the Savings Bank's residential mortgage loans
are secured by properties located in Pennsylvania, and a substantial portion of
the real estate mortgage loans are secured by properties located within the
Savings Bank's primary market area.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
One-to-four family(1).......... $55,367 89.68% $55,304 90.33% $51,038 91.65%
Construction................... 0 0.00 715 1.17 372 0.67
Commercial real estate......... 793 1.28 733 1.20 845 1.52
------- ------ ------- ------- ------- ------
Total....................... 56,160 90.96 56,752 92.70 52,255 93.84
------- ------ ------- ------- ------- ------
Commercial loans................. 22 0.04 0 0.00 0 0.00
------- ------ ------- ------- ------- ------
Consumer loans
Home equity loans & lines...... 2,053 3.33 1,694 2.77 1,137 2.04
Student loans.................. 2,220 3.60 2,080 3.40 1,601 2.88
Automobile loans............... 713 1.15 253 0.41 132 0.24
Other consumer loans........... 569 0.92 443 0.72 559 1.00
------- ------ ------- ------- ------- ------
Total....................... 5,555 9.00 4,470 7.30 3,429 6.16
------- ------ ------- ------- ------- ------
Total loans receivable(1)........ $61,737 100.00% $61,222 100.00% $55,684 100.00%
======= ====== ======= ======= ======= ======
Less:
Allowance for loan losses...... $ 287 $ 303 $ 268
Loans in process............... 0 232 278
Deferred loan fees............. 42 52 71
------- ------- -------
Loans receivable, net............ $61,408 $60,635 $55,067
======= ======= =======
</TABLE>
- ---------
(1) Includes non-performing loans.
CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Savings Bank's loan portfolio at December 31,
1995. Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less. The
amounts shown for each period do not take into account loan prepayments and
normal amortization of the Savings Bank's loan portfolio.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
(IN THOUSANDS)
-------------------------------------------------------------------
ONE-TO-FOUR COMMERCIAL
FAMILY REAL ESTATE COMMERCIAL CONSUMER TOTAL
------ ----------- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
1 year or less........... $ 259 $ 0 $ 0 $ 290 $ 549
After 1 year through
5 years................ 6,248 192 22 2,963 9,425
More than
5 years................ 48,860 601 0 2,302 51,763
-------
Total amounts due............. $55,367 $793 $22 $5,555 $61,737
=======
Interest rate terms on amounts
due after 1 year:
Fixed.................... $25,216 $610 0 $3,561 $29,387
=======
Adjustable/Floating...... $29,892 $183 $22 $1,704 $31,801
=======
</TABLE>
Scheduled contractual repayment of loans does not reflect the expected term
of the Savings Bank's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of
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prepayments and due-on-sale clauses, which give the Savings Bank the right to
declare a conventional loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to increase
when current mortgage loan rates are higher than rates on existing mortgage
loans and, conversely, decrease when rates on existing mortgage loans are lower
than current mortgage loan rates (due to refinancings of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher-yielding loans are repaid or
refinanced at lower rates.
LOAN ORIGINATION, PURCHASE AND SALES ACTIVITY. The following table shows
the loan origination, purchase and sale activity of the Savings Bank during the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Total loans at beginning of period.................................... $61,222 $55,684
Loan originations:
Real estate
One-to-four family.......................................... 5,852 11,979
Commercial real estate...................................... 0 0
Construction................................................ 0 925
------- -------
Total real estate loans originated..................... 5,852 12,904
------- -------
Commercial loans................................................. 23 0
------- -------
Consumer loans
Home equity loans and lines of credit....................... 1,079 1,081
Student loans............................................... 473 643
Automobile loans............................................ 652 216
Other consumer loans........................................ 524 207
------- -------
Total consumer loans originated........................ 2,728 2,147
------- -------
Total loans originated...................................... 8,603 15,051
------- -------
Deduct:
Principal loan repayments and prepayments........................ (7,960) (9,499)
Transferred to real estate owned................................. (128) (14)
------- -------
Subtotal:............................................................. (8,088) (9,513)
------- -------
Net increase in loans................................................. 515 5,538
------- -------
Total loans at end of period.......................................... $61,737 $61,222
======= =======
</TABLE>
Interest rates at the beginning of 1995 were high, which is normally a
busier time for loan originations. During periods of higher interest rates,
borrowers tend to borrow only if necessary. In contrast, 1994 began the year
with more favorable rates, hence, over 60% of mortgage originations occurred
during the first half of 1994.
Applications for residential mortgage and consumer loans are taken at any
of the Savings Bank's offices, while commercial loan, commercial real estate
loan and construction loan applications are referred to the President of the
Savings Bank. Residential mortgage loan applications are primarily developed
from referrals from real estate brokers and builders, existing customers and
walk-in customers. Commercial real estate loan and construction loan
applications are obtained primarily from previous borrowers as well as
referrals. Commercial loan applications arise from referrals at this time.
The Savings Bank's lending policies allow all one-to-four residential
mortgage loans $50,000 or less to be approved with two signatures of the
President, Executive Vice President and/or the Chairman of the Board.
One-to-four residential mortgage loans in excess of $50,000 are presented to the
Loan Committee which consists of a member of management and two outside
directors. Commercial loan applications under $25,000 may be approved with the
signatures of two of the loan officers designated by the President or the Loan
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<PAGE> 43
Committee. The Loan Committee has been authorized by the Board to grant loans up
to $250,000, with loans in excess of this amount required to be presented to the
full Board for review and approval. It has been the practice of the Savings
Bank's management to present all mortgage loans which are not single-family
residential loans to the Loan Committee and/or the Board of Directors for review
and approval, and to have the Board of Directors review any loan application
which would exceed $250,000. Under applicable regulations, the maximum amount of
loans that the Savings Bank may make to any one borrower, including related
entities, is limited to 15% of unimpaired capital and surplus, which legal
lending limit amounted to $1.1 million at December 31, 1995. As of December 31,
1995, the Savings Bank had 4 loans outstanding with principal balances in excess
of $225,000. The Savings Bank's largest loan outstanding was a $383,000
commercial real estate loan located in the City of Pittsburgh, Allegheny County,
Pennsylvania. The Savings Bank's second largest loan as of such date was a
$256,000 one-to-four family residential mortgage loan located in Upper St. Clair
Township, Allegheny County, Pennsylvania. The Savings Bank's third largest loan
as of such date was a $236,000 one-to-four family residential mortgage real
estate loan located in Peters Township, Washington County, Pennsylvania. The
Savings Bank's fourth largest loan as of such date was a $228,000 one-to-four
family residential mortgage loan in Upper St. Clair Township, Allegheny County,
Pennsylvania. All of these loans were performing in accordance with their terms
as of December 31, 1995.
Historically, the Savings Bank has originated substantially all of the
loans retained in its portfolio. Although the Savings Bank has not been a seller
of loans in the secondary market, substantially all of the residential real
estate loans originated by the Savings Bank have been under terms, conditions
and documentation which permit their sale to the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
The Savings Bank currently is not a purchaser of residential or consumer
loans. There are no current intentions to begin purchasing loans. The Savings
Bank has previously purchased loan participations secured primarily by
commercial real estate located in Pennsylvania and Ohio. Such loans were
presented to the Savings Bank from contacts primarily at other financial
institutions, particularly those which have previously done business with the
Savings Bank. At December 31, 1995, $218,000 or .35% of the Savings Bank's total
loans receivable consisted of participation interests in two loans purchased
from other financial institutions. During 1995, the Savings Bank wrote-off one
other commercial loan participation and transferred the collateral to the
classification "other real estate owned" and valued the asset in accordance with
an appraisal at $39,000. See "--Non-Performing Assets". At December 31, 1995,
neither of the remaining commercial loan participations were classified as
non-performing.
REAL ESTATE LENDING STANDARDS. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines or Real Estate Lending Policies adopted by the Federal banking
agencies in December 1992 ("Real Estate Lending Guidelines"). The Real Estate
Lending Guidelines set forth uniform regulations prescribing standards for real
estate lending. Real estate lending is defined as the extension of credit
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate,
regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in the
Real Estate Lending Guidelines, including loan-to-value ("LTV") limits, loan
administration procedures, underwriting standards, portfolio diversification
standards, and documentation, approval and reporting requirements. These
policies must also be appropriate to the size of the institution and the nature
and scope of its operations, and must be reviewed and approved by the
institution's board of directors at least annually. The LTV ratio framework,
with a LTV ratio being the total amount of credit to be extended divided by the
appraised value of the property at the time the credit is originated, must be
established for each category of real estate loans. If not a first lien, the
lender must combine all senior liens when calculating this ratio. The Real
Estate Lending Guidelines, among other things, establish the following
supervisory LTV limits: land development (75%); construction, commercial and
non-residential (80%); improved property (80%) and one-to-four family
residential (owner occupied) (no maximum ratio; however any LTV ratio in excess
of 90% should require appropriate insurance or readily marketable collateral).
Consistent with its lending philosophy, the Savings Bank's LTV limits are
generally
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<PAGE> 44
more restrictive than those in the Real Estate Lending Guidelines; construction
and land development (75%); residential properties (90% in the case of
one-to-four family owner-occupied residences); and commercial real estate (75%).
The Savings Bank requires private mortgage insurance on any residential
conventional mortgage loan that exceeds an 90% LTV ratio. While the ratios
reflected above reflect the range of desired LTV ratio coverages, the Savings
Bank will evaluate each applicant and the collateral to secure the loan on a
case-by-case basis.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Savings Bank has
historically concentrated its lending activities on the origination of loans
secured primarily by first mortgage liens on existing one-to-four family
residences located within its market. At December 31, 1995, $55.4 million or
89.7% of the Savings Bank's total loan portfolio consisted of one-to-four family
residential real estate loans, substantially all of which are conventional
loans.
The Savings Bank historically has and continues to emphasize the
origination of fixed-rate mortgage loans with terms of up to 15 years and
adjustable rate mortgage loans ("ARMs") up to 30 years which provide for
periodic adjustments to the interest rate applicable to the loan. The ARMs
currently held by the Savings Bank have up to 30-year terms and an interest rate
which adjusts every one or three years in accordance with a designated index.
Such loans have a 2% cap on any increase or decrease in the interest rate per
period, and there is currently a limit of 4% to 6% on the amount that the
interest rate can change over the life of the loan. To attract ARMs from time to
time, the Savings Bank will offer initial interest rates below market loan
rates. ARMs generally pose greater credit risk than fixed loans primarily
because as interest rates rise, the required periodic payment by the borrower
will rise, increasing the potential for default.
At December 31, 1995, approximately $25.5 million or 46.0% of the
one-to-four family residential loans in the Savings Bank's loan portfolio
consisted of loans which provide for fixed rates of interest. Although these
loans generally provide for repayments of principal over a fixed period of 5 to
30 years, it is the Savings Bank's experience that because of prepayments and
due-on-sale clauses, such loans generally remain outstanding for a substantially
shorter period of time.
Property appraisals on the real estate and improvements securing the
Savings Bank's one-to-four family residential loans are made by independent
appraisers approved by the Savings Bank's Board of Directors. Appraisals are
performed in accordance with Federal regulations and policies. The Savings Bank
obtains title insurance policies on most first mortgage real estate loans
originated by it. If title insurance is not obtained or is unavailable, the
Savings Bank obtains an abstract of title and title opinion. Borrowers also must
obtain hazard insurance prior to closing and, when required by the United States
Department of Housing and Urban Development, flood insurance. Borrowers are not
required to escrow funds for real estate taxes but may elect to escrow funds
with each monthly payment or principal and interest to a loan escrow account
from which the Savings Bank makes disbursements for items such as real estate
taxes as they become due.
COMMERCIAL REAL ESTATE LOANS. On a very limited basis, the Savings Bank
originates mortgage loans for the acquisition and refinancing of commercial real
estate properties (including multi-family complexes). At December 31, 1995,
$575,000 or .93% of the Savings Bank's total loan portfolio consisted of loans
secured by existing commercial real estate properties and an additional $218,000
or .35% of the total loan portfolio consisted of commercial real estate
participations. At December 31, 1995, the Savings Bank's commercial real estate
loan portfolio consisted of 5 loans (including 2 commercial participations) with
an average principal balance of $159,000.
The Savings Bank's commercial real estate loans are secured by apartment
complexes, developed residential lots and small retail establishments. The
Savings Bank's commercial real estate loan portfolio consists primarily of loans
secured by properties located in Pennsylvania and Ohio.
Although terms vary, commercial real estate loans generally are amortized
over a period of 10 to 15 years. The Savings Bank's commercial real estate loans
(and loan participations) have a weighted average maturity of 10.27 years at
December 31, 1995. The Savings Bank will originate these loans either with fixed
interest rates or with interest rates which adjust in accordance with a
designated index, which generally is negotiated at the time of origination. It
is also the Savings Bank's general policy to obtain personal guarantees on its
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<PAGE> 45
commercial real estate loans from the principals of the borrower and, when this
cannot be obtained, to impose more stringent loan-to-value and other
underwriting requirements.
COMMERCIAL LOANS. At December 31, 1995, $22,000 or .04% of the Savings
Bank's total loan portfolio consisted of loans classified as commercial loans.
The Savings Bank's commercial loans can be secured or unsecured depending upon
the size of the loan and the credit analysis by the Savings Bank of the
potential borrower. Lines of credit in excess of $25,000 are generally secured
by a pledge of accounts receivable and inventory. The Savings Bank's commercial
loan portfolio consists of borrowers primarily located in Western Pennsylvania.
Commercial loans generally have shorter terms and higher interest rates
than residential mortgage loans but generally involve more credit risk than
residential mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral. Fixed equipment may depreciate in
value quicker than the principal repayment of the loan. Accounts receivable may
prove to be difficult or impossible to collect in sufficient amounts to repay a
line of credit. Inventory may disappear due to loss or theft or may decline in
value due to age or change in market conditions. The Savings Bank's evaluation
of the creditworthiness of a borrower, or the value of a borrower's collateral,
may fail to fully assess the risk of the loan in question and lead to a loss.
CONSTRUCTION LOANS. The Savings Bank will occasionally originate loans to
construct primarily one-to-four family residences, and, to a much lesser extent,
loans to acquire and develop real estate for construction of residential and
commercial properties. These construction lending activities generally are
limited to the Savings Bank's primary market area. At December 31, 1995, the
Savings Bank had no construction loans outstanding.
Prior to making a commitment to fund a construction loan, the Savings
Bank's policy requires an appraisal of the property by independent appraisers
approved by the Board of Directors. The Savings Bank uses qualified appraisers
on all of its construction loans. Designated employees of the Savings Bank also
review and inspect each project at the commencement of construction. In
addition, the project is inspected by designated inspectors of the Savings Bank
prior to every disbursement of funds during the term of the construction loan.
Such inspection includes a review for compliance with the construction plan,
including materials specifications.
Construction lending is generally considered to involve a higher level of
risk as compared to one-to-four family residential lending for existing units,
due to the concentration of principal in a limited number of loans and borrowers
and the effects of general economic conditions on real estate developers and
managers. Moreover, a construction loan can involve additional risks because of
the inherent difficulty in estimating both a property's value at completion of
the project and the estimated cost (including interest) of the project. The
nature of these loans is such that they are generally more difficult to evaluate
and monitor. The Savings Bank has attempted to minimize the foregoing risks by,
among other things, limiting the extent of its construction lending generally,
by limiting its construction lending to residential properties and by
emphasizing construction loans for residences extended to the individuals who
will occupy the constructed home. In addition, the Savings Bank has adopted
underwriting guidelines which impose stringent loan-to-value, debt service and
other requirements for loans which are believed to involve higher elements of
credit risk, by limiting the geographic area in which the Savings Bank will do
business and by working with builders with whom it has established relationships
or which have quality reputations.
CONSUMER LOANS. The Savings Bank also offers automobile loans, home equity
loans and lines of credit, student loans, deposit account secured loans and
unsecured consumer loans. Automobile loans amounted to $713,000 or 1.2% of the
total loans receivable at December 31, 1995. Home equity loans and lines of
credit amounted to $2.1 million or 3.3% of the total loans receivable at
December 31, 1995. The student loan balance amounted to $2.2 million or 3.6% of
the total loans receivable as of such date, deposit account secured loans had
outstanding balances of $478,000 or .8% of total loans receivables as of such
date and unsecured personal loans stood at $91,000 or .2% of total loans
receivables as of such date.
45
<PAGE> 46
Automobile loans are secured by a lien on the title of the financed
vehicle. The terms of the loan may not exceed 60 months. Rates on automobile
loans may be fixed or floating. As of December 31, 1995, the entire automobile
loan portfolio had fixed rate contracts. Automobile loans involve higher risk
since the collateral rapidly depreciates. Defaults during the early months of
the loan will likely result in a loss of principal due to the reduced value of
the vehicle and the costs of repossession and sale. Automobile loans may be
granted for up to 100% of the purchase price.
The Savings Bank's home equity loans and lines of credit are secured by the
underlying equity in the borrower's home. Home equity loans generally have fixed
interest rates and terms of five to 15 years. Home equity lines of credit
generally have variable interest rates based on the prime rate and terms of 5 to
15 years. The Savings Bank's home equity loans and home equity lines of credit
require loan-to-value ratios of 100% or less after taking into consideration the
first mortgage loan.
The student loans made by the Savings Bank are guaranteed and serviced by
the Pennsylvania Higher Education Assistance Agency. A deposit account secured
loan is collateralized by deposits equal to no more than 90% of the principal
balance of the loans. Unsecured personal loans depend solely on the
creditworthiness of the borrower.
In December 1995 the Savings Bank began issuing consumer credit cards to
its existing customer base.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Savings
Bank attempts to cure the deficiency by contacting the borrower and seeking the
payment. Late notices are sent and/or personal contacts are made. In most cases,
deficiencies are cured promptly. While the Savings Bank generally prefers to
work with borrowers to resolve such problems, when a loan becomes 60 days
delinquent the loan is classified as substandard and presented to the
Classification Committee for evaluation. Following such evaluation if the loan
continues to be delinquent past 90 days the Savings Bank institutes foreclosure,
repossession, setoff or other proceedings, as necessary, to minimize any
potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. The Savings Bank
does not accrue interest on loans past due 90 days or more.
Real estate acquired by the Savings Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When a property is acquired, it is recorded at the lower of cost or fair value
minus estimated cost to sell the property. Fair value is generally determined
through the use of independent appraisals. Any write-downs resulting at
acquisition are charged to the allowance for loan losses. All costs incurred in
maintaining the Savings Bank's interest in the property are capitalized between
the date the loan becomes delinquent and the date of acquisition. After the date
of acquisition, all costs incurred in maintaining the property are expenses and
costs incurred for the improvement or development of such property are
capitalized.
Under generally accepted accounting principles, the Savings Bank is
required to account for certain loan modifications or restructurings as
"troubled debt restructurings". In general, the modification or restructuring of
a debt constitutes a troubled debt restructuring if the Savings Bank for
economic or legal reasons related to the borrower's financial difficulties
grants a concession to the borrower that the Savings Bank would not otherwise
consider. Debt restructurings or loan modifications for a borrower do not
necessarily always constitute troubled debt restructurings, however, and
troubled debt restructurings do not necessarily result in non-accrual loans. For
the year ended December 31, 1995, the Savings Bank had no troubled debt
restructurings and had no interest income arising from troubled debt
restructuring.
46
<PAGE> 47
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Savings Bank's loan portfolio. The amounts presented
represent the total outstanding principal balances of the related loans, rather
than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------------------------------------- --------------------------------------------------------
90 DAYS OR 90 DAYS OR
30-59 DAYS 60-89 DAYS GREATER 30-59 DAYS 60-89 DAYS GREATER
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real
estate
loans:
One-to-four
family
residences... $2,076 3.75% $621 1.12% $306 .55% $ 4,361 7.88% $214 .39% $338 .61%
Commercial.... 0 0 0 0 0 0 0 0 53 7.23
Consumer
loans......... 86 1.55 1 .02 0 0 144 3.22 0 0 0 0
------ ---- ---- ------- ---- ----
Total........ $2,162 $622 $306 $ 4,504 $214 $391
====== ==== ==== ======= ==== ====
</TABLE>
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Savings Bank's non-performing assets at the dates indicated.
The Savings Bank had no loans during the periods indicated below which should be
classified as troubled debt restructurings.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accruing loans:
One-to-four family residential(1).................................... $306 $338 $351
Commercial participations(2)......................................... 0 53 0
---- ---- ----
Total nonperforming loans....................................... 306 391 351
---- ---- ----
Real estate owned.................................................... 42 0 0
---- ---- ----
Total nonperforming assets...................................... $348 $391 $351
==== ==== ====
Total nonperforming loans as a percentage of total loans............. .50% .64% .63%
==== ==== ====
Total nonperforming assets as a percentage of total assets........... .38% .45% .43%
==== ==== ====
</TABLE>
- ---------
(1) Consists of an aggregate of 8, 12 and 10 loans at December 31, 1995, 1994
and 1993, respectively.
(2) Consists of 1 loan at December 31, 1994.
The Savings Bank's total non-performing assets have declined from $391,000
or .45% of total assets at December 31, 1994 to $348,000 or .38% of total assets
at December 31, 1995. The $43,000 decrease in total non-performing assets
between December 31, 1994 and 1995 principally reflects charge-offs against the
allowance for loan losses.
At December 31, 1995 and at December 31, 1994, approximately $22,000 and
$19,000 in interest income, respectively, would have been recorded in the period
then ended on loans accounted for on a non-accrual basis if such loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period. The
Savings Bank had no accruing loans greater than 90 days delinquent.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at a
level that management considers adequate to provide for potential losses based
upon an evaluation of known and inherent risks in the loan portfolio. Allowances
for loan losses are based on estimated net realizable value. Management's
periodic evaluation is based upon examination of the loan portfolio, past loss
experience, current economic conditions, the results of the most recent
regulatory examinations, and other relevant factors. The allowance is increased
by provisions for loan losses which are charged against income. While management
uses the best information
47
<PAGE> 48
available to make such evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluations. In addition, there can be no assurance that bank
regulators will agree with the Savings Bank on the systematic methodology for
determining the adequacy of the allowance for loan losses during future
examination. The Savings Bank could be required to increase its allowance for
loan losses, thereby negatively affecting the Savings Bank's financial condition
and earnings at that time.
The following table summarizes changes in the allowance for loan losses and
other selected statistics for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average total loans....................................... $61,638 $58,502 $54,941
======= ======= =======
Allowance for loan losses, beginning of year.............. $ 303 $ 268 $ 233
Charged-off loans(1)...................................... (53) (1) (3)
Recoveries on loans previously charged off................ 1 0 2
Provision for loan losses................................. 36 36 36
------- ------- -------
Allowance for loan losses, end of period.................. $ 287 $ 303 $ 268
======= ======= =======
Net loans charged-off to average loans.................... .09% 0.00% 0.01%
======= ======= =======
Allowance for loan losses to total loans.................. .46% .49% .48%
======= ======= =======
Allowance for loan losses to nonperforming loans.......... 93.79% 77.49% 76.36%
======= ======= =======
</TABLE>
- ---------
(1) Consists of $23,000 of commercial real estate loans and $30,000 of
one-to-four family residential loans in 1995; consists of $1,000 of consumer
loans in 1994; and consists of $3,000 of consumer loans in 1993.
The Savings Bank's management is unable to determine in what loan category
future charge-offs and recoveries may occur. The following schedule sets forth
the allocation of the allowance for loan losses among various categories. This
allocation is based upon historical experience. The entire allowance for loan
losses is available to absorb future loan losses in any loan category.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------------- ---------------------------------- ----------------------------------
% OF % OF LOANS % OF % OF LOANS % OF % OF LOANS
RESERVE IN EACH RESERVE IN EACH RESERVE IN EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT RESERVE TOTAL LOANS AMOUNT RESERVE TOTAL LOANS AMOUNT RESERVE TOTAL LOANS
------ ------- ----------- ------ ------- ----------- ------ ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four
family,
commercial real
estate,
participation,
construction
and other real
estate........... $207 72.13% 90.96% $224 73.93% 92.70% $188 70.15% 93.84%
Commercial: 0 0 .04 0 0 0 0 0 0
Consumer:
Automobile, home
equity,
student, share
and other
consumer......... 80 27.87 9.00 79 26.07 7.30 80 29.85 6.16
---- ------ ------ ---- ------ ------ ---- ------ ------
Total........... $287 100.00% 100.00% $303 100.00% 100.00% $268 100.00% 100.00%
==== ====== ====== ==== ====== ====== ==== ====== ======
</TABLE>
Effective December 21, 1993, the OTS, in conjunction with the Office of the
Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued an
Interagency Policy Statement on the Allowance for Loan and Lease Losses ("Policy
Statement"). The Policy Statement, which effectively supersedes previous OTS
proposed guidance, includes guidance (i) on the responsibilities of management
for the assessment and establishment of an adequate allowance and (ii) for the
agencies' examiners to use in
48
<PAGE> 49
evaluating the adequacy of such allowance and the policies utilized to determine
such allowance. The Policy Statement also sets forth quantitative measures for
the allowance with respect to assets classified substandard and doubtful,
described below, and with respect to the remaining portion of an institution's
loan portfolio. Specifically, the Policy Statement sets forth the following
quantitative measures which examiners may use to determine the reasonableness of
an allowance: (i) 50% of the dollar value of the portfolio that is classified
doubtful must be accounted for in the allowance of the institution; (ii) 15% of
the dollar value of the portfolio that is classified substandard must be
accounted for in the allowance of the institution; (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on facts
and circumstances available on the evaluation date must be accounted for in the
allowance of the institution, and (iv) in the cases where the institution has an
insufficient basis for determining this amount, an examiner may use industry
average net charge-off rate for nonclassified loans and leases (based on a study
of the Federal Reserve Board a rate of .50% for risk-weighted "pass" loans and
3% for special mention loans is acceptable). While the Policy Statement sets
forth this quantitative measure, such guidance is not intended as a "floor" or
"ceiling".
Federal regulations require that each insured savings institution classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions, Federal examiners have authority to identify problem
assets and, if appropriate, classify them. There are three classifications for
problem assets: "substandard," "doubtful" and "loss". Substandard assets have
one or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of those classified as
substandard with the added characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset
classified as loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified as
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. At December 31,
1995, the Savings Bank had $306,000 of assets classified as "substandard" (all
of which are set forth under "Non-Performing Assets" above) and no assets
classified as "doubtful", "loss" or "special mention".
INVESTMENT ACTIVITIES
GENERAL. The Savings Bank's investment activities are managed by the
President with the assistance of other senior officers designated by the Board
of Directors. These activities are conducted in accordance with a written
investment policy which is reviewed and approved by the Board of Directors at
least annually. The Savings Bank's Asset and Liability Committee has been
designated to work with management and the Board to implement and achieve the
investment plan goals and to report at least quarterly to the Board in
conjunction with its review of the Savings Bank's overall gap and interest rate
risk position. As reflected in its investment policy, the Savings Bank's
investment objective is to maintain a balance of high quality and diversified
investments with a minimum of credit risk. Accordingly, the Savings Bank seeks a
competitive return from its investments, but the rate of return is only one
consideration which is weighed against the Savings Bank's other goals and
objectives of liquidity and operating in a manner deemed by the Board to reflect
safety and soundness.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents increased by $2.9
million or 185.3% from fiscal 1994 to fiscal 1995. Most of this increase
occurred during the fourth quarter when the Savings Bank experienced an increase
in deposits. These funds were deposited in interest-bearing FHLB of Pittsburgh
accounts pending the decision of management as to how to invest these sums. The
Savings Bank has experienced an increased mortgage demand during the first
quarter of 1996 and will use much of these deposits to fund mortgages. Other
funds will be invested in the capital markets in U.S. Government and Federal
agency securities. At December 31, 1995, cash and cash equivalents amounted to
$4.4 million or
49
<PAGE> 50
4.8% of total assets. The largest component in this category, which accounted
for the majority of the increase during the period, is interest bearing deposits
in banks, which amounted to $3.6 million at December 31, 1995. All such deposits
were made with the FHLB of Pittsburgh.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES. The Savings Bank has
authority to invest in various types of assets. The Savings Bank's Investment
Committee appointed by the Board are authorized by the Board to: purchase or
sell U.S. Government securities and securities issued by agencies thereof;
purchase, sell or trade any securities qualifying as eligible liquidity;
purchase mortgage-related securities; purchase participations in the secondary
mortgage market; invest in repurchase agreements secured by securities eligible
for investment by the Savings Bank; invest in mutual funds restricted to
authorized investments; invest in deposits with the FHLB of Pittsburgh and other
authorized investments; invest in various corporate securities and bonds that
have at least an "AA" rating by Standard & Poor's; and invest in various other
mutual funds and certain equity issues as authorized by the Board. The Board
does not permit investments in highly speculative securities.
The Savings Bank's investments are all classified as "held to maturity" or
"available for sale" upon acquisition based upon the Savings Bank's intent and
ability to hold such investments to maturity at the time of investment in
accordance with generally accepted accounting principles. The investment
securities and mortgage-backed securities of the Savings Bank which are
classified as "held to maturity" are carried at amortized cost, with any
discount or premium amortized to maturity. The investment securities and
mortgage-backed securities of the Savings Bank which are classified as
"available for sale" are carried at fair value and are repriced quarterly. All
mutual fund investments are classified as investments available for sale. During
the period from November 15, 1995 to December 31, 1995 FASB permitted a
financial institution to re-evaluate its investment portfolio and reclassify
securities listed as held to maturity as then available for sale. The Savings
Bank used this period to reclassify $6.3 million of investment securities as
available for sale. At the time of any reclassification of a security a gain or
loss on the current value of the security is recorded in accordance with SFAS
No. 115. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Recent Accounting Pronouncements" and Notes 1 and 2 of the
Notes to Financial Statements.
The Savings Bank maintains a portfolio of mortgage-backed securities as a
means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention and with
limited credit risk of default which arises in holding a portfolio of loans to
maturity. Mortgage related securities (which also are known as mortgage
participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Savings Bank. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the FHLMC,
the FNMA and the Government National Mortgage Association ("GNMA").
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and Federally insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal. The FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and FNMA are U.S. Government sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low-
50
<PAGE> 51
and middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. For example, the FNMA and the FHLMC currently limit
their loans secured by a single-family, owner-occupied residence to $203,000. To
accommodate larger-sized loans, and loans that, for other reasons, do not
conform to the agency programs, a number of private institutions have
established their own home-loan origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
repayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security thus approximates the life of the
underlying mortgages.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans. Mortgage-backed
securities issued or guaranteed by FNMA or FHLMC (except interest-only
securities or the residual interests in collateralized mortgage obligations) are
weighted at no more than 20% for risk-based capital purposes, compared to a
weight of 50% to 100% for residential loans. See "Regulation--The Savings
Bank--Capital Requirements".
The following tables set forth certain information relating to the Savings
Bank's investment and mortgage-backed securities portfolio at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
---- ----- ---- ----- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
Investment securities:
U.S. Government
securities......,........... $ 3,502 100.00% $ 2,497 55.55% $ -- --%
Federal agency
obligations................. -- -- 1,998 44.45 4,005 77.39
Marketable equity
securities(1)............... -- -- -- -- 1,170 22.61
------- ------ ------- ------ ------- ------
Total investment
securities............. $ 3,502 100.00% $ 4,495 100.00% $ 5,175 100.00%
======= ====== ======= ====== ======= ======
Average remaining
contractual life of
investment securities....... 2.50 yrs. 2.54 yrs. 2.38 yrs.
========= ========= =========
Mortgage-backed
securities:
GNMA..................... $ 1,584 13.69% $ 1,783 10.72% $ 2,118 11.90%
FHLMC.................... 9,841 85.04 13,221 79.49 14,862 83.54
FNMA..................... 147 1.27 1,628 9.79 812 4.56
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities............. $11,572 100.00% $16,632 100.00% $17,792 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- ---------
(1) Consists of shares in the Ivy Short-Term Bond Fund, a registered open-end
diversified investment company.
51
<PAGE> 52
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1995 1994 1993
------------------ ------------------ -----------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
---- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
Investment securities:
Federal agency
obligations................... $ 1,999 60.83% $ 0 0% $0 0%
Marketable equity
securities(1)................. 1,287 39.17 1,219 100.00 0 0
------- ------ ------ ------ -- --
Total investment
securities............... $ 3,286 100.00% $1,219 100.00% $0 0%
======= ====== ====== ====== == ==
Average remaining
contractual life of
investment securities......... 2.75 yrs. N/A 0
========= ====== ==
Mortgage-backed
securities:
FHLMC...................... $ 2,930 67.87% $ 0 0% $0 0%
FNMA....................... 1,387 32.13 0 0 0 0
------- ------ ------ ------ -- --
Total mortgage-backed
securities............... $ 4,317 100.00% $ 0 0% $0 0%
======= ====== ====== ====== == ==
</TABLE>
- ---------
(1) Consists of shares in the Ivy Short-Term Bond Fund, a registered open-end
diversified investment company.
The composition and maturities of the investment securities portfolio by
contractual maturity are indicated in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 OVER TOTAL INVESTMENT
1 YEAR YEARS YEARS 5 YEARS SECURITIES CARRYING
--------- --------- --------- --------- ----------------------- VALUE
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED -----
COST COST COST COST COST FAIR VALUE
--------- --------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government
securities and
federal agency
obligations............. $1,500 $1,999 $2,002 $ 0 $5,501 $5,491 $5,462
Marketable equity
securities (1).......... 1,287 0 0 0 1,287 1,258 1,258
------ ------ ------ ---- ------ ------ ------
Total investment
securities.............. $2,787 $1,999 $2,002 $ 0 $6,788 $6,749 $6,720
====== ====== ====== ==== ====== ====== ======
Weighted average
yield............... 4.68% 4.70% 5.87% 0.00% 5.04% N/A N/A
====== ====== ====== ==== ====== ====== ======
</TABLE>
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
- ---------
(1) Consists of shares in the Ivy Short-Term Bond Fund, a registered open-end
diversified investment company.
The Bank's investment securities portfolio at December 31, 1995 did not
contain securities of any issuer with an aggregate book value in excess of 10%
of the Savings Bank's equity, excluding those issued by the United States
Government or its agencies.
52
<PAGE> 53
The following table sets forth the final contractual maturities of the
Savings Bank's mortgage-backed securities at December 31, 1995.
<TABLE>
<CAPTION>
DUE IN
---------------------------------------------------------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 DECEMBER 31, 1995 CARRYING
1 YEAR YEARS YEARS YEARS YEARS YEARS AMORTIZED COST VALUE
------ ----- ----- ----- ----- ----- -------------- -----
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR
COST COST COST COST COST COST VALUE
---- ---- ---- ---- ---- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> C> <C> <C>
GNMA...... $ 0 $ 0 $ 0 $ 0 $ 0 $1,584 $ 1,584 $ 1,612 $ 1,584
FHLMC..... 0 2,140 1,747 0 5,713 3,171 12,771 12,827 12,769
FNMA...... 0 147 437 950 0 0 1,534 1,496 1,492
---- ------ ------ ---- ------ ------ ------- ------- -------
Total..... $ 0 $2,287 $2,184 $950 $5,713 $4,755 $15,889 $15,935 $15,845
==== ====== ====== ==== ====== ====== ======= ======= =======
Weighted
average
yield... N/A 5.49% 5.93% 5.00% 6.16% 7.46% 6.35% N/A N/A
==== ====== ====== ==== ====== ====== ======= ======= =======
</TABLE>
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The following table sets forth the final contractual maturities of the
Savings Bank's securities classified as held-to-maturity at December 31, 1995.
<TABLE>
<CAPTION>
DUE IN DECEMBER 31,
--------------------------------------------------------------------------- 1995
DUE 1 TOTAL
YEAR OR 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 SECURITIES
LESS YEARS YEARS YEARS YEARS YEARS -----------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
---- ---- ---- ---- ---- ---- ---- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. gov't & agency
securities............... $1,500 $ 0 $2,002 $0 $ 0 $ 0 $ 3,502 $ 3,532 $ 3,502
FHLMC certificates......... 0 458 938 0 5,713 2,732 9,841 9,898 9,841
GNMA certificates.......... 0 0 0 0 0 1,584 1,584 1,612 1,584
FNMA certificates.......... 0 147 0 0 0 0 147 151 147
----
------ ---- ------ ------ ------ ------- ------- -------
Total...................... $1,500 $605 $2,940 $0 $5,713 $4,316 $15,074 $15,193 $15,074
====== ==== ====== ==== ====== ====== ======= ======= =======
Weighted average yield..... 4.13% 6.87% 6.07% 0.00% 6.16% 7.41% 6.33%
====== === ====== ==== ====== ====== =======
</TABLE>
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
53
<PAGE> 54
The following table sets forth the final contractual maturities of the
Savings Bank's securities classified as available-for-sale at December 31, 1995.
<TABLE>
<CAPTION>
DUE IN DECEMBER 31,
--------------------------------------------------------------------------- 1995
DUE 1 TOTAL
YEAR OR 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 SECURITIES
LESS YEARS YEARS YEARS YEARS YEARS -----------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
---- ---- ---- ---- ---- ---- ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Marketable equity
securities............... $1,287 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,287 $ 1,258 $ 1,258
U.S. gov't & agency
securities............... 0 1,999 0 0 0 0 1,999 1,960 1,960
FHLMC certificates......... 0 1,681 810 0 0 439 2,930 2,928 2,928
GNMA certificates.......... 0 0 0 0 0 0 0 0 0
FNMA certificates.......... 0 0 437 950 0 0 1,387 1,345 1,345
------ ------ ------ ------ ----- ----- ------- ------- -------
Total...................... $1,287 $3,680 $1,247 $ 950 $ 0 $ 439 $ 7,603 $ 7,491 $ 7,491
====== ====== ====== ====== ===== ===== ======= ======= =======
Weighted average yield..... 5.31% 4.84% 5.50% 5.00% 0.00% 8.00% 5.23%
====== ====== ======= ===== ===== ===== =======
</TABLE>
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
At December 31, 1995, the contractual maturity of all of the Savings Bank's
mortgage-backed securities was in excess of one year and the weighted average
yield on the mortgage-backed securities portfolio was 6.35%. The actual maturity
of a mortgage-backed security is less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and adversely affect its yield
to maturity. The yield is based upon the interest income and the amortization of
any premium or discount related to the mortgage-backed security. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Savings Bank
may be subject to reinvestment risk because to the extent that the Savings
Bank's mortgage-backed securities amortize or prepay faster than anticipated,
the Savings Bank may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate. The declining yields earned during recent
periods is a direct response to falling interest rates and accelerated
prepayments. At December 31, 1995, of the $15.9 million of mortgage-backed
securities, an aggregate of $11.7 million were secured by fixed-rate mortgage
loans and an aggregate of $4.2 million were secured by adjustable-rate mortgage
loans.
In February 1992, the OTS adopted a policy statement which states, among
other things, that mortgage derivative products (including CMOs and CMO
residuals and stripped mortgage-backed securities) which possess average life or
price volatility in excess of a benchmark fixed rate 30-year mortgage-backed
pass-through security are "high-risk mortgage securities," are not suitable
investments for depository institutions, must be carried in the institution's
trading account or as assets held for sale, and must be marked to market on a
regular basis. The Savings Bank has no "high-risk" mortgage securities at
December 31, 1995 and has no present intention to materially alter its
investment policies and practices.
SOURCES OF FUNDS
GENERAL. The Savings Bank's principal source of funds for use in lending
and for other general business purposes has traditionally come from deposits
obtained through the Savings Bank's branch offices. The Savings Bank also
derives funds from amortization and prepayments of outstanding loans and
mortgage-
54
<PAGE> 55
backed securities and from maturing investment securities. The Savings Bank has
also borrowed, from time to time, from the FHLB of Pittsburgh. Loan repayments
are a relatively stable source of funds, while deposits inflows and outflows are
significantly influenced by general interest rates and money market conditions.
DEPOSITS. The Savings Bank's current deposit products include passbook
accounts, negotiable order of withdrawal ("NOW") accounts, non-interest bearing
demand deposit accounts, money market deposit accounts and certificates of
deposit ranging in terms from six months to five years. The Savings Bank's
deposit products also include Individual Retirement Account ("IRA") and Keogh
certificates.
The Savings Bank's deposits are obtained primarily from residents in its
primary market area of Allegheny County and portions of Washington County and
Westmoreland County, all of which are located in Western Pennsylvania. The
Savings Bank to a lesser extent obtains deposits from other locations in the
greater Pittsburgh metropolitan area. The Savings Bank attracts deposit accounts
by offering a wide variety of accounts, competitive interest rates, and
convenient branch office locations and service hours. The Savings Bank primarily
utilizes print media to attract new customers and savings deposits. The Savings
Bank has never utilized the services of deposit brokers and had no brokered
deposits at December 31, 1995. The Savings Bank presently operates three
automated teller machines ("ATMs"), one at each of the branch offices. The
Savings Bank is affiliated with a regional ATM network.
The Savings Bank has been competitive in the types of accounts and in
interest rates it has offered on its deposit products but does not necessarily
seek to match the highest rates paid by competing institutions. At times of
declining interest rates, the Savings Bank has chosen to aggressively price
certificate of deposit rates to discourage disintermediation of deposits into
competing investment products offered by other institutions.
The following table shows the distribution of, and certain other
information relating to, the Savings Bank's deposits by type of deposit as of
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts................. $16,396 20.31% $18,053 23.97% $21,105 28.24%
Money market............................... 9,085 11.25 10,663 14.16 11,560 15.47
Certificates of deposit.................... 45,842 56.78 37,905 50.33 34,872 46.67
NOW accounts............................... 7,325 9.07 7,382 9.80 6,407 8.57
Non-interest bearing....................... 2,083 2.58 1,310 1.74 783 1.05
------- ------ ------- ------- ------- ------
Total deposits......................... $80,731 100.00% $75,313 100.00% $74,727 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 1995 and the amounts at
December 31, 1995 which mature during the periods indicated.
<TABLE>
<CAPTION>
AMOUNTS AT DECEMBER 31, 1995
MATURING WITHIN
TOTAL AS OF ------------------------------------
DECEMBER 31, AFTER ONE
1995 BUT WITHIN
------------ THREE
CERTIFICATES OF DEPOSIT ONE YEAR YEARS THEREAFTER
----------------------- -------- ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
2.00% to 4.00%.............................. $ 448 $ 448 $ 0 $ 0
4.01% to 6.00%.............................. 32,638 25,951 4,803 1,884
6.01% to 8.00%.............................. 12,756 2,802 6,304 3,650
8.01% to 10.0%.............................. 0 0 0 0
10.01% or more.............................. 0 0 0 0
-------- ------- -------- ------
Total certificate accounts............. $ 45,842 $29,201 $ 11,107 $5,534
======== ======= ======== ======
</TABLE>
55
<PAGE> 56
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type, net of early withdrawal penalties
for the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook and club accounts........... $16,882 2.54% $20,141 2.57% $20,399 3.17%
Money market......................... 9,914 2.97 11,204 2.77 10,766 3.18
Certificates of deposit.............. 42,456 5.58 34,858 4.34 35,442 4.22
NOW accounts......................... 7,017 1.72 7,137 1.73 6,300 2.36
Non-interest bearing................. 1,442 0.00 975 0.00 677 0.00
------- ----- ------- ---- ------- ----
Total deposits....................... $77,711 4.14% $74,315 3.32% $73,584 3.58%
======= ===== ======= ==== ======= ====
</TABLE>
The following table sets forth the Savings Bank's net savings flows during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance............................................. $75,313 $74,727 $71,549
Increase (Decrease) before interest credited.................. 2,201 (1,875) 546
Interest credited............................................. 3,217 2,461 2,632
Net savings increase.......................................... 5,418 586 3,178
------- ------- -------
Ending balance................................................ $80,731 $75,313 $74,727
======= ======= =======
</TABLE>
The following table sets forth maturities of the Savings Bank's
certificates of deposit of $100,000 or more at December 31, 1995 by time
remaining to maturity.
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------
<S> <C>
Three months or less.......................................... $ 919
Over three months through six months.......................... 2,631
Over six months through 12 months............................. 1,282
Over 12 months................................................ 1,239
-------
Total.................................................... $ 6,071
=======
</TABLE>
BORROWINGS FROM FHLB OF PITTSBURGH AS OF DECEMBER 31. The following table
sets forth the borrowing history of the Savings Bank from the FHLB of Pittsburgh
for the last three years.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount Outstanding At Year End.................................... $2,977 $4,261 $461
====== ====== ====
Maximum Balance................................................... $4,861 $5,161 $461
====== ====== ====
Average Balance................................................... $3,078 $3,194 $ 76
====== ====== ====
Weighted Average Interest Rate:
At end of year............................................... 6.25% 6.19% 3.96%
====== ====== ====
During Year.................................................. 6.24% 4.88% 3.96%
====== ====== ====
</TABLE>
As of December 31, 1995, the Savings Bank also had a revolving credit commitment
from the FHLB of Pittsburgh of $8.6 million all of which remained available for
borrowing. This revolving credit commitment expires on January 2, 1997 unless
the Savings Bank and FHLB of Pittsburgh negotiate an extension.
56
<PAGE> 57
Management has no indication at this time the FHLB of Pittsburgh will be
unwilling to, or has any reason not to, agree to an extension of this revolving
credit commitment. To secure the repayment of any outstanding borrowings from
the FHLB of Pittsburgh and any borrowings under this revolving credit
commitment, the Savings Bank has pledged to the FHLB of Pittsburgh investments
of the Savings Bank in U.S. Government and U.S. agency securities and U.S.
Government and U.S. agency mortgage-backed securities and 100% of its
unencumbered home loan mortgages.
OFFICES AND OTHER MATERIAL PROPERTY
The following table sets forth certain information with respect to the
Savings Bank's branch offices and operations center at December 31, 1995.
<TABLE>
<CAPTION>
NET BOOK VALUE
DESCRIPTION/ADDRESS LEASED/OWNED OF PROPERTY AMOUNT OF DEPOSITS
------------------- ------------ ----------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CORPORATE AND MAIN
OFFICE:
710 Old Clairton Road
Pleasant Hills,
Pennsylvania 15236.... Owned $572 $31,495
BRANCH OFFICES:
543 Brownsville Road
Mt. Oliver,
Pennsylvania
15210................. Owned $428 $31,427
6257 Library Road
Bethel Park,
Pennsylvania 15102.... Owned $160 $17,809
</TABLE>
In April, 1996, the Savings Bank exercised its option to purchase a parcel
of land in Bethel Park, Pennsylvania located within 3/4 of a mile of the current
Bethel Park branch office of the Savings Bank. The purchase price for this
parcel is $250,000. The Savings Bank has not made a decision on the ultimate use
of this parcel but it has been considered as a location to construct a new
branch office building and move the Bethel Park branch to this location.
MARKET AREA OF THE SAVINGS BANK
The economy in the Pittsburgh area experienced a significant restructuring
during the early 1980's from a heavy manufacturing and industrial base (notably
steel) to a more diversified, service-oriented economy. During this period, many
of the area's industrial plants reduced their operations and staff or were
closed. Although the economy in the Pittsburgh area has improved in recent
periods, there can be no assurance that the economy will continue to improve.
The Savings Bank's market area is primarily located in the southern portion
of the Pittsburgh metropolitan area. The largest employers in the Pittsburgh
area include the U.S. Government, the Pennsylvania State Government, USAir
Group, Inc., the University of Pittsburgh Medical Center, Westinghouse Electric
Corp., the University of Pittsburgh and Mellon Bank Corp.
COMPETITION
The Savings Bank faces significant competition for real estate loans,
principally from mortgage banking companies and other non-bank financial
entities, other savings institutions, commercial banks and credit unions.
Factors which affect competition generally include the general and local
economic conditions, current interest rate levels and volatility in the mortgage
markets. As discussed under "Business of the Savings Bank--Lending Activities",
the Savings Bank has undertaken to maintain a stable base of deposits and to
increase its exposure to consumer and commercial loans. Furthermore, with the
significant decline in interest
57
<PAGE> 58
rates in the last year, the Savings Bank while continuing to offer ARMs, sought
to originate fixed rate mortgage loans with 5 year, 7 year and 15 year
maturities and to offer a limited number of fixed rate mortgages with terms in
excess of 15 years. The Savings Bank has adopted an investment strategy pursuant
to which it seeks to supplement its loan portfolio with investment securities of
terms and with comparable rates to match the Savings Bank's liquidity needs and
to absorb excess deposits. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Operating Strategy".
The Savings Bank also faces significant competition in attracting deposits.
Its most direct competition for deposits has historically come from commercial
banks and other savings institutions located in its market area. The Savings
Bank faces additional significant competition for investors' funds from other
financial intermediaries. The Savings Bank competes for deposits principally by
offering depositors a variety of deposit programs, periodic aggressive pricing
of certificates of deposit, convenient branch locations, hours and other
services. The Savings Bank does not rely upon any individual group or entity for
a material portion of its deposits.
Federal legislation in recent years has eliminated many of the distinctions
between commercial banks and savings institutions and holding companies and
allowed bank holding companies to acquire savings institutions. Such legislation
has generally resulted in an increase in the competition encountered by savings
institutions and has resulted in a decrease in both the number of savings
institutions and the aggregate size of the savings industry.
EMPLOYEES
The Savings Bank had 28 full-time employees and 7 part-time employees as of
February 29, 1996. None of these employees is represented by a collective
bargaining agent. The Savings Bank believes that it enjoys good relations with
its personnel.
LEGAL PROCEEDINGS
There are no material legal proceedings to which the Savings Bank is a
party or to which any of their property is subject.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Savings Bank. The
description of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is
qualified in its entirety by reference to applicable laws and regulations.
THE COMPANY
GENERAL. The Company as a savings and loan holding company within the
meaning of the HOLA will be required to register with the OTS and will be
subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Savings
Bank will be subject to certain restrictions in its dealings with the Company
and affiliates thereof. The application of the Company with the OTS will
describe the Conversion transaction through which the Company will acquire all
of the to be issued common stock of the Savings Bank.
FEDERAL ACTIVITIES RESTRICTIONS. There are few restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association so long as such savings association meets the "qualified
thrift lender" test (the "QTL Test"). In the first instance no savings and loan
holding company and no non-savings association subsidiary of a savings and loan
holding company may engage in any activity or render any service for or on
behalf of any savings association for the purpose, or with the effect of,
evading any law or regulation applicable to the related savings association. In
addition, if the Director of the OTS determines that there is reasonable cause
to believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary
58
<PAGE> 59
savings association, the Director may impose such restrictions as deemed
necessary to address such risk, including limiting (i) payment of dividends by
the savings association; (ii) transactions between the savings association and
its affiliates; and (iii) any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, under OTS regulations, any savings and loan holding company is
required to register as a bank holding company within one year of the failure of
the QTL Test by its subsidiary insured institution. Under such circumstances,
the holding company would become subject to all of the provisions of the BHC Act
and other statutes applicable to bank holding companies, in the same manner and
to the same extent as if the company were a bank holding company. The Savings
Bank currently satisfies the QTL Test.
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Savings Bank,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Savings Bank or other subsidiary savings
associations) would thereafter be subject to further restrictions. No multiple
savings and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof any
business activity, other than: (i) furnishing or performing management services
for a subsidiary savings association; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings association; (iv) holding or managing
properties used or occupied by a subsidiary savings association; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. The activities described in (i) through (vi) above may only be
engaged in after giving the OTS prior notice and being informed that the OTS
does not object to such activities. In addition, the activities described in
(vii) above also must be approved by the Director of the OTS prior to being
engaged in by a multiple savings and loan holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the FRA.
An affiliate of a savings association is any company or entity which controls,
is controlled by or is under common control with the savings association. In a
holding company context, the parent holding company of a savings association
(such as the Company) and any companies which are controlled by such parent
holding company are affiliates of the savings association. Generally, Sections
23A and 23B (i) limit the extent to which the savings association or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such association's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the association or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar transactions. In addition to the restrictions imposed
by Sections 23A and 23B, no savings association may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
association.
In addition, Sections 22(h) and (g) of the FRA places restrictions on loans
to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a savings institution (a "principal stockholder"), and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
59
<PAGE> 60
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1995, the Savings Bank was in compliance with the
above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings association, other than
a subsidiary savings association, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act, or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
RESTRICTIONS ON DIVIDENDS FROM SUBSIDIARY SAVINGS BANK. Every subsidiary
savings association must give the Director of the OTS not less than thirty days
notice of the proposed declaration by the board of directors of such savings
association of a dividend on the stock of such savings association held by its
parent holding company. Thus, the Savings Bank must notify the OTS thirty days
before declaring any dividend to the Company.
FEDERAL SECURITIES LAWS. The Company has filed with the Securities and
Exchange Commission (the "SEC") a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), for the registration of the
Common Stock to be issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock will be registered with the SEC under the
Exchange Act. The Company will then be subject to the information, proxy
solicitation, insider trading 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 (generally
officers, directors and principal shareholders) 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.
THE SAVINGS BANK
GENERAL. The Savings Bank is subject to extensive regulation, examination
and supervision by the OTS, as its chartering agency, and the FDIC, as the
deposit insurer. The Savings Bank is a member of the FHLB System and its deposit
accounts are insured up to applicable limits by the SAIF managed by the FDIC.
The Savings Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test
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the Savings Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The 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 OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Savings Bank and their operations. Certain of the regulatory
requirements applicable to the Savings Bank are referred to below or elsewhere
herein.
BUSINESS ACTIVITIES. The activities of savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA"), and in certain respects,
the Federal Deposit Insurance Act ("FDI Act"). The Federal banking statutes, as
amended by the FIRREA and Federal Deposit Insurance Corporation Improvement Act
of 1991 (the "FDICIA") (1) restrict the solicitation of brokered deposits by
savings institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire healthy
savings institutions.
The description of statutory provisions and regulations applicable to
savings associations set forth in this Prospectus does not purport to be a
complete description of such statutes and regulations and their effects on the
Savings Bank. Moreover, because some of the provisions of FDICIA are still in
the process of being implemented through the adoption of regulations by the
various Federal banking agencies, the Savings Bank cannot yet fully assess the
impact of these provisions on its operations.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the Savings Bank's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. At December 31, 1995, the Savings Bank's largest aggregate
amount of loans to any one borrower consisted of $ 383,000 which was below the
Savings Bank's loans to one borrower limit of $1.1 million at such date.
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
mortgage-backed and related securities) on a monthly basis in 9 out of every 12
months.
A savings association that fails the QTL Test must either convert to a bank
charter or operate under certain restrictions. As of December 31, 1995, the
Savings Bank maintained 106.98% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL Test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to 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 capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of (1) 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
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capital requirements) at the beginning of the calendar year; or (ii) 75% of its
net earnings for the previous four quarters; provided that the institution would
not be undercapitalized, as that term is defined in the OTS Prompt Corrective
Action regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. The Savings Bank
currently qualifies as a Tier 1 Association. In the event the Savings Bank's
capital fell below its fully-phased in requirement or the OTS notified it that
it was in need of more than normal supervision, the Savings Bank's ability to
make capital distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
LIQUIDITY. The Savings Bank is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances,
specified U.S. Government, state or Federal agency obligations, shares of
certain mutual funds and certain corporate debt securities and commercial paper)
equal to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10% depending upon economic conditions and the savings flow of
member institutions, and is currently 5%. OTS regulations also require each
savings institution to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Savings Bank's average monthly liquidity ratio at December 31,
1995 was 20.5%, which exceeded the then applicable requirements. The Savings
Bank has never been subject to monetary penalties for failure to meet its
liquidity requirements.
ASSESSMENTS. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The assessments paid
by the Savings Bank for the years ended December 31, 1995 and 1994 totalled
$29,000 and $27,000, respectively.
BRANCHING. Under OTS regulations, Federally chartered savings associations
are permitted, subject to OTS approval, to branch nationwide to the extent
allowed by Federal statute. This permits Federal savings associations with
interstate networks to diversify their loan portfolios and lines of business.
The OTS authority preempts any state law purporting to regulate branching by
Federal savings associations. The OTS will evaluate a branching applicant's
record of compliance with the Community Reinvestment Act, as amended ("CRA") as
part of any grant of permission to establish a new branch. A poor CRA record may
be the basis for denial of a branching application.
COMMUNITY REINVESTMENT. Under the CRA, as implemented by OTS regulations,
a savings institution has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA rating
system identifies four levels of performance that may describe an institution's
record of meeting community needs: "outstanding", "satisfactory", "needs to
improve" and "substantial noncompliance". The CRA also requires all institutions
to make public disclosure of their CRA ratings. The Savings Bank received a
"Satisfactory" CRA rating in its most recent Federal examination by the OTS.
BROKERED DEPOSITS. Under FDIC regulations, well-capitalized institutions
that are not troubled are subject to no brokered deposit limitations, while
adequately capitalized institutions are able to accept, renew or roll over
brokered deposits only (i) with a waiver from the FDIC and (ii) subject to the
limitation that they do not pay an effective yield on any such deposit which
exceeds by more than (a) 75 basis points of the effective yield paid on deposits
of comparable size and maturity in such institution's normal market area for
deposits
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accepted in its normal market area or (b) 120 basis points for retail deposits
and 130 basis points for wholesale deposits, respectively, of the current yield
on comparable maturity U.S. treasury obligations for deposits accepted outside
the institution's normal market area. Undercapitalized institutions are not
permitted to accept brokered deposits and may not solicit deposits by offering
an effective yield that exceeds by more than 75 basis points of the prevailing
effective yields on insured deposits of comparable maturity in the institution's
normal market area or in the market area in which such deposits are being
solicited. Although there exist no prohibitions under FDIC regulations, the
Savings Bank does not solicit nor accept brokered deposits.
TRANSACTIONS WITH RELATED PARTIES. The Savings Bank's authority to engage
in transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the FRA. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies. Notwithstanding Sections 23A and 23B, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the Bank Holding Company Act ("BHC Act"). Further, no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% stockholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations require such loans to be made
on terms substantially the same as those offered to unaffiliated individuals and
do not involve more than the normal risk of repayment, place limits on the
amount of loans the Savings Bank may make to such persons based, in part, on the
Savings Bank's capital position, and require certain approval procedures to be
followed. The OTS regulations, with certain minor variances, apply Regulation O
to savings institutions. See "Management of the Savings Bank -- Transactions
With Certain Related Persons".
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. In addition, regulators have
substantial discretion to impose enforcement action on an institution that fails
to comply with its regulatory requirements, particularly with respect to the
capital requirements. Possible enforcement action ranges from the imposition of
a capital plan and capital directive to receivership, conservatorship or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
director, the FDIC has authority to take such action under certain
circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act, as amended by FDICIA,
requires each Federal banking agency to prescribe for all insured depository
institutions and their holding companies 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. Under the FDI Act, if an insured
depository institution or its holding company fails to meet any of its standards
described above, it will be
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required to submit to the appropriate Federal banking agency a plan specifying
the steps that will be taken to cure the deficiency. If an institution fails to
submit an acceptable plan or fails to implement the plan, the appropriate
Federal banking agency will require the institution or holding company, to
correct the deficiency and until corrected, may impose restrictions on the
institution or the holding company including any of the restrictions applicable
under the prompt corrective action regulations.
The Federal banking agencies recently adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness ("Safety
and Soundness Guidelines") and a final rule which will implement the safety and
soundness standards established by FDICIA. The Safety and Soundness Guidelines
and the final rule 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 standards set forth in the
Safety and Soundness Guidelines address internal controls and information
systems: internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
The agencies also adopted a proposed rule which proposes asset quality and
earnings standards which, if adopted in final, would be added to the Safety and
Soundness Guidelines. If the appropriate Federal banking agency determines that
an institution fails to meet any standard prescribed by the Safety and Soundness
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 rule establishes deadlines for the submission and review of such
safety and soundness compliance plans.
CAPITAL REQUIREMENTS. OTS capital regulations require savings institutions
to meet three capital standards: (1) tangible capital equal to 1.5% of total
adjusted assets, (2) a leverage ratio (core capital) equal to at least 3% of
total adjusted assets and (3) a risk-based capital requirement equal to 8.0% of
total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.
The capital standards require core capital (as defined above) equal to at
least 3% of adjusted total assets (as defined by regulation). As a result of the
prompt corrective action provisions of FDICIA, however, a savings association
must maintain a core capital ratio of at least 4% to be considered adequately
capitalized unless its supervisory condition is such to allow it to maintain a
3% ratio. At December 31, 1995, the Savings Bank had no intangibles which would
affect the application of these tests.
The OTS requires that only those savings associations rated a composite one
(the highest rating) under the CAMEL rating system for savings associations will
be permitted to operate at nor near the regulatory minimum leverage ratio of 3%.
All other savings associations will be required to maintain a minimum leverage
ratio of 4% to 5%. The OTS will assess each individual savings association
through the supervisory process on a case-by-case basis to determine the
applicable requirement. For information on the Savings Bank capital levels, see
"Pro Forma Data", "Regulatory Capital Requirements".
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the allowance for loan and lease losses.
The portion of the allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, supplementary capital is limited to 100% of core capital. A savings
association must calculate its risk-weighted assets by multiplying each asset
and off-balance sheet item by various risk factors as determined by the OTS,
which range from 0% for cash to 100% for delinquent loans, property acquired
through foreclosure, commercial loans and other assets.
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In August, 1995, the OTS and Federal Financial Institutions Examination
Council ("FFIEC") announced that effective October 1, 1995, they would not
require institutions to include unrealized gains and losses on available for
sale debt securities when calculating regulatory capital. This announcement
reversed prior OTS policy concerning the implementation of SFAS No. 115. As a
result, institutions must now value available for sale debt securities at
amortized cost, rather than at fair value, for purposes of calculating
regulatory capital. Institutions are still required to comply with SFAS No. 115
for financial reporting purposes.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
component into the risk-based capital regulation. Under the rule, an institution
with a greater that "normal" level of interest rate risk is subject to a
deduction of its interest rate risk component from total capital for purposes of
calculating its risk-based capital requirement. An institution with a greater
than "normal" interest rate risk is defined as an institution that would suffer
a loss of net portfolio value exceeding 2.0% of the estimated economic value of
its assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component is
calculated, on a quarterly basis, as one-half of the difference between an
institutions's measured interest rate risk and 2.0, multiplied by the economic
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institutions's interest rate risk component on a
cases-by-case basis. The final rule was originally to be effective as of January
1, 1994, subject however to a three quarter "lag" time between the reporting
date of the data used to calculate an institution's interest rate risk and the
effective date of each quarter's interest rate risk component. However, in
October 1994, the Director of the OTS indicated that it would waive the capital
deduction for institutions with greater that "normal" interest rate risk until
the OTS publishes an appeals process. In August 1995, the OTS issued Thrift
Bulletin No. 67 which allows eligible institutions to request adjustment to
their interest rate risk component as calculated by the OTS, or to request to
use their own models to calculate their interest rate component. The OTS also
indicated that it will delay invoking its interest rate rule requiring
institutions with above normal interest rate risk exposure to adjust their
regulatory capital requirement until new procedures are implemented and
evaluated. The OTS has not yet established an effective date for the capital
deduction. In any event, management of the Savings Bank does not believe that
the OTS' adoption of an interest rate risk component to the risk-based capital
requirement will adversely affect the Savings Bank's regulatory capital
position.
At December 31, 1995, the Savings Bank met each of its capital
requirements. See "Regulatory Capital Requirements" for a table which sets forth
in terms of dollars and percentages the OTS tangible, leverage and risk-based
capital requirements, the Savings Bank's historical amounts and percentages
based upon the issuance of the shares within the Estimated Valuation 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 total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
capital ratio that is less than 4.0% is considered to be undercapitalized. A
savings institution that has total risk-based capital less than 6.0%, a Tier 1
risk-based capital ratio of less than 3% 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%
is deemed to be "critically undercapitalized". Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is critically undercapitalized. The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date an institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized". In addition,
numerous mandatory supervisory actions become immediately applicable to the
institution, including, but not limited to, restrictions on growth, investment
activities, capital distributions, and affiliate transactions. The OTS 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.
As of December 31, 1995, the Savings Bank was classified as a
"well-capitalized" institution (an institution with 10% or more total risk-based
capital ratio, a Tier I risk-based capital ratio of 6% or more, and a leverage
capital ratio of 5.0% or more), and is not subject to any order or final capital
directive to meet and
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maintain a specific capital level for any capital measure and as such is not
subject to any prompt corrective action measures.
INSURANCE OF DEPOSIT ACCOUNTS. On June 17, 1993, the FDIC adopted a final
rule establishing a new risk-based system that was implemented beginning with
the semi-annual assessment period commencing on January 1, 1994. Under the rule,
the FDIC assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of 1) well capitalized, 2)
adequately capitalized or 3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary Federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Under the rule, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates range from 23 basis points for an
institution in the highest category (i.e., well-capitalized and healthy) to 31
basis points for an institution in the lowest category (i.e., undercapitalized
and substantial supervisory concern). The FDIC is authorized to raise the
assessment rates in certain circumstances. If the FDIC determined to increase
the assessment rates for all institutions, institutions in all risk categories
could be affected. 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 Savings Bank.
The Savings Bank's assessment rate for 1995 was .23% of deposits.
The FDIC sets the assessment rate for institutions on a semi-annual basis.
On November 14, 1995, the FDIC adopted a new assessment rate schedule of zero to
27 basis points (subject to a $2,000 minimum) for BIF members beginning on or
about January 1, 1996, while retaining the existing assessment rate schedule of
SAIF member institutions. In announcing this new schedule, the FDIC noted that
the premium differential may have 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 Savings Bank, could be placed at
a competitive disadvantage to BIF members with respect to pricing of loans and
deposits and the ability to achieve lower operating costs. For information
concerning proposed legislation which is intended to address this competitive
disadvantage and, among, other matters, recapitalize the SAIF, see "Risk Factors
- -- Recent Legislative Proposals". The Savings Bank understands that its
assessment rate has not changed for the first annual assessment period.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Savings Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM. The Savings Bank 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 Savings Bank, 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 Savings Bank was in compliance with this requirement with an investment in
FHLB stock at December 31, 1995, of $734,000.
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 December 31, 1995, 1994 and 1993,
dividends from the FHLB to the Savings Bank amounted to $49,000, $41,000 and
$49,000, respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Savings Bank's net interest income would likely also be
reduced. Further, there
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can be no assurance that the impact of FDICIA and the FIRREA on the FHLBs will
not also cause a decrease in the value of the FHLB stock held by the Savings
Bank.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board regulations require
savings institutions to maintain non-interest-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 $54.0
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $54.0 million, the reserve
requirement is $1.6 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 $54.0 million. The first $4.2 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. The Savings Bank is in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Savings Bank'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.
FIRREA requires the OTS to establish accounting standards to be applicable
to all savings associations for purposes of complying with regulations, except
to the extent otherwise specified in the capital standards. Such standards must
incorporate generally accepted accounting principles to the same degree as is
prescribed by the Federal banking agencies for banks or may be more stringent
than such requirements. Such standards must have been fully implemented by
January 1, 1994 and must be phased in as provided in Federal regulations in
effect on May 1,1989.
On September 2, 1992, the OTS amended a number of its accounting
regulations and reporting requirements (effective October 2, 1992). The
amendments reflected the adoption by the OTS of the following standards: (i)
regulatory reports will incorporate generally accepted accounting principles
when generally accepted accounting principles are used by Federal banking
agencies; (ii) savings association transactions, financial condition and
regulatory capital must be reported and disclosed in accordance with OTS
regulatory reporting requirements that will be at least as stringent as for
national banks; and (iii) the director of the OTS may prescribe regulatory
reporting requirements more stringent than generally accepted accounting
principles whenever the director determines that such requirements are necessary
to ensure the safe and sound reporting and operation of savings associations.
The OTS anticipates further similar revisions to its regulations in the near
future.
The OTS adopted a statement of policy ("Statement") set forth in Thrift
Bulletin 52 concerning (i) procedures to be used in the selection of a
securities dealer, (ii) the need to document and implement prudent policies and
strategies for securities, whether held to maturity, trading or for sale, and to
establish systems and internal controls to ensure that securities activities are
consistent with the financial institution's policies and strategies, (iii)
securities trading and sales practices that may be unsuitable in connection with
securities held in an investment portfolio, (iv) high-risk mortgage securities
that are not suitable for investment portfolio holdings for financial
institutions, and (v) disproportionately large holdings of long-term,
zero-coupon bonds that may constitute an imprudent investment practice. The
Statement applies to investment securities, high-yield, corporate debt
securities, loans, mortgage-backed securities and derivative securities, and
provides guidance concerning the proper classification of, and accounting for,
securities held to maturity, sale, and trading. Securities held to maturity,
sale or trading may be differentiated based upon an institution's desire to earn
an interest yield (held to maturity), to realize a holding gain from assets held
for indefinite periods of time (held for sale), or to earn a dealer's spread
between the bid and asked prices (held for trading). Depository institution
investment portfolios are maintained to provide earnings consistent with the
safety factors of quality, maturity, marketability and risk diversification.
Securities that are purchased to accomplish these objectives may be reported at
their amortized cost only when the depository institution has both the intent
and ability to hold the assets for long-term investment purposes. Securities
held to maturity
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may be accounted for at amortized cost, securities held for sale are to be
accounted for at the lower of cost or market, and securities held for trading
are to be accounted for at market. The Savings Bank believes that its investment
activities have been and will continue to be conducted in accordance with the
requirements of OTS policies and generally accepted accounting principles.
RECENT LEGISLATION. The deposits of the Savings Bank are currently insured
by the SAIF. Both the SAIF and the BIF are required by law to attain and
thereafter maintain a reserve ration of 1.25% of insured deposits. The BIF has
achieved the required reserve rate, and therefore, the FDIC recently
substantially reduced the average deposit insurance premium paid by BIF-insured
banks to a level approximately 80% below the average premium paid by savings
institutions.
The House of Representatives and the Senate of the United States provided
for a resolution of the recapitalization of the SAIF in the Balanced Budget Act
of 1995 (the "Reconciliation Bill") which was vetoed by the President in
December 1995 for reasons unrelated to the recapitalization of the SAIF. The
Reconciliation Bill provided that all SAIF member institutions would pay a
special one-time assessment to recapitalize the SAIF, which in the aggregate
would be sufficient to bring the reserve ratio in the SAIF Fund to 1.25% of
insured deposits. Based on the level of reserves maintained by the SAIF Fund it
was anticipated that the amount of the special assessment required to
recapitalize the SAIF was to be approximately 80 to 85 basis points of the
SAIF-assessable deposits. The special assessment was to be payable based on the
amount of SAIF deposits on March 31, 1995. The final outcome of the budget
debate and reconciliation process cannot be predicted. However, it is likely
that some kind of legislative or regulatory action will be undertaken that will
impact the Bank's insured deposits. A one-time special assessment of 80 to 85
basis points would result in the Bank paying approximately $420,000 to $446,000
net of related tax benefits, if any. In addition, the enactment of such
legislation may have the effect of immediately reducing the capital of
SAIF-member institutions by the amount of the special assessment. It is
anticipated that, after the recapitalization of the SAIF, premiums of
SAIF-insured institutions would be comparable to those currently being assessed
BIF-insured commercial banks.
The Reconciliation Bill also provided for the merger of the BIF and SAIF on
January 1, 1998, with such merger being conditioned upon the prior elimination
of the thrift charter. The Banking Committees of the House of Representatives
and the Senate in adopting the Reconciliation Bill agreed that Congress should
consider and act upon separate legislation as early as possible in 1996 to
eliminate the thrift charter. If adopted, such legislation would require that
the Savings Bank, as a federal savings bank, to convert to a bank charter. Such
a requirement to convert to a bank charter could cause savings institutions to
lose favorable tax treatment for its bad debt reserves that they currently enjoy
under Section 593 of the Code.
In light of the President's veto of the Reconciliation Bill and the
different proposals currently under consideration and the uncertainty of the
legislative process generally, management cannot predict whether legislation
reducing SAIF premiums and/or imposing a special one-time assessment will be
adopted, or if adopted, the amount of the assessment, if any, that would be
imposed on the Savings Bank.
FEDERAL AND STATE TAXATION
GENERAL
The Company and the Savings Bank are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. 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 Company and
the Savings Bank.
FISCAL YEAR
The Company and the Savings Bank will file a consolidated Federal income
tax return on a December 31 year end basis.
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<PAGE> 69
METHOD OF ACCOUNTING
The Savings Bank maintains its books and records for Federal income tax
purposes using the accrual method of accounting. The accrual method of
accounting generally requires that items of income be recognized when all events
have occurred that establish the right to receive the income and the amount of
income can be determined with reasonable accuracy, and that items of expense be
deducted at the later of (i) the time when all events have occurred that
establish the liability to pay the expense and the amount of such liability can
be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.
BAD DEBT RESERVES
Under applicable provisions of the Code, savings institutions such as the
Savings Bank are permitted to establish reserves for bad debts and to make
annual additions thereto which qualify as deductions from taxable income. The
bad debt deduction is generally based on a savings institution's actual loss
experience (the "Experience Method"). In addition, provided that certain
definitional tests relating to the composition of assets and the nature of its
business are met, a savings institution may elect annually to compute its
allowable addition to its bad debt reserves for qualifying real property loans
(generally loans secured by improved real estate) by reference to a percentage
of its taxable income (the "Percentage Method").
Under the Experience Method, the deductible annual addition is the amount
necessary to increase the balance of the reserve at the close of the taxable
year to the greater of (i) the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum of
the loans outstanding at the close of those six years, or (ii) the lower of (x)
the balance in the reserve account at the close of the Savings Bank's "base
year," which was its tax year ended December 31, 1987, or (y) if the amount of
loans outstanding at the close of the current year is less than the amount of
loans outstanding at the close of the base year, the amount which bears the same
ratio to loans outstanding at the close of the current year as the balance of
the reserve at the close of the base year bears to the amount of loans
outstanding at the close of the base year.
Under the Percentage Method, the bad debt deduction with respect to
qualifying real property loans is computed as a percentage of the Savings Bank's
taxable income before such deduction, as adjusted for certain items (such as
capital gains and the dividends received deduction). Under this method, a
qualifying institution such as the Savings Bank generally may deduct 8% of its
taxable income.
For taxable years ended on or before December 31, 1995, the Savings Bank
has generally elected to use the Percentage Method to compute the amount of its
bad debt deduction with respect to its qualifying real property loans. As of
December 31, 1995, the Savings Bank's qualified assets constituted approximately
99.2% of its total assets. The Savings Bank's accumulated bad debt reserve for
tax purposes was approximately $2.0 million at December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Recent Accounting Pronouncements".
The income of the Company would not be subject to the bad debt deduction
allowed the Savings Bank, whether or not consolidated tax returns are filed;
however, losses of the Company or its subsidiaries, if any, included in the
consolidated tax returns may reduce the bad debt deduction allowed the Savings
Bank if a deduction is claimed under the Percentage Method.
DISTRIBUTIONS
If the Savings Bank were to distribute cash or property to its sole
stockholder having a total fair market value in excess of its accumulated
tax-paid earnings and profits, or were to distribute cash or property to its
stockholder in redemption of its stock, the Savings Bank would generally be
required to recognize as income an amount which, when reduced by the amount of
Federal income tax that would be attributable to the inclusion of such amount in
income, is equal to the lesser of: (i) the amount of the distribution or (ii)
the sum of (a) the amount of the accumulated bad debt reserve of the Savings
Bank with respect to qualifying real property loans (to the extent that
additions to such reserve exceed the additions that would be permitted under
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the Experience Method) and (b) the amount of the Savings Bank's supplemental bad
debt reserve. The Savings Bank will continue to deduct additions to its bad debt
reserves in the same manner as it has in past years.
MINIMUM TAX
The Code imposes an alternative minimum tax at a rate of 20% on a base of
regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI"). The alternative minimum tax is payable to the extent
such AMTI is in excess of an exemption amount. The Code provides that an item of
tax preference is the excess of the bad debt deduction allowable for a taxable
year pursuant to the percentage of taxable income method over the amount
allowable under the experience method. The other items of tax preference that
constitute AMTI include (a) tax exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) for taxable years beginning after 1989, 75% of the
excess (if any) of (i) adjusted current earnings as defined in the Code, over
(ii) AMTI (determined without regard to this preference and prior to reduction
by net operating losses). Net operating losses can offset no more than 90% of
AMTI. Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.
FEDERAL INCOME TAX RETURNS
The Savings Bank's Federal income tax returns have been filed for taxable
years through December 31, 1994. The Savings Bank has not been notified by the
IRS that it intends to examine any of the corporate income tax returns filed by
the Savings Bank. Under the current statute of limitations, the Savings Bank's
returns for taxable years ending December 31, 1991 and prior are free from
examination by the IRS.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS
The Company may exclude from its income 100% of dividends received from the
Savings Bank 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 Savings
Bank will not file a consolidated tax return, except that if the Company owns
more than 20% of the stock of a corporation distributing a dividend, 80% of any
dividends received may be deducted.
STATE AND LOCAL TAXATION
The Savings Bank is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on the Savings Bank's financial net income
determined in accordance with generally accepted accounting principles with
certain adjustments. The tax rate under the Mutual Thrift Institutions Tax is
11.5%. Interest on Commonwealth of Pennsylvania and Federal obligations is
excluded from net income. An allocable portion of net interest expense incurred
to carry the obligations is disallowed as a deduction. Three year carryforwards
of losses are allowed.
The Company is subject to the Corporate Net Income Tax and the Capital
Stock Tax of the Commonwealth of Pennsylvania.
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MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes of 2
directors, 3 directors and 2 directors. 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. Zyla and McCullough, has a term of office expiring at the first annual
meeting of stockholders. A second class, consisting of Messrs. Stiver, White and
Macosko, has a term of office expiring at the second annual meeting of
stockholders. A third class, consisting of Messrs. Dowling and Schoen, has a
term of office expiring at the third annual meeting of stockholders. Their names
and biographical information are set forth under "Management of the Savings
Bank--Directors".
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITION HELD WITH COMPANY
---- --------------------------
<S> <C>
Robert S. Zyla President
James M. Hein Controller
Patricia A. White Secretary and Treasurer
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors. See "--Employment
Agreements" for the terms of the officers' agreements and the severance pay due
officers in the event they are terminated in violation of their employment
agreements.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
Information concerning the principal occupations, employment and compensation of
the directors and officers of the Company during the past five years is set
forth under "Management of the Savings Bank--Directors" and "--Executive
Officers Who Are Not Directors". Directors and executive officers of the Company
initially will not be compensated by the Company but will serve and be
compensated by the Savings Bank. It is not anticipated that separate
compensation will be paid to directors and officers of the Company until such
time as such persons devote significant time to the separate management of the
Company's affairs, which is not expected to occur until the Company becomes
actively engaged in additional businesses other than holding the stock of the
Savings Bank. The Company may determine that such compensation is appropriate in
the future.
MANAGEMENT OF THE SAVINGS BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Savings Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITIONS HELD WITH THE SAVINGS BANK SINCE EXPIRES
---- ---- ------------------------------------ ----- -------
<S> <C> <C> <C> <C>
Martin W. Dowling 68 Director 1992 1999
Michael R. Macosko 44 Director 1992 1998
Charles P. McCullough 40 Director 1995 1997
Mark R. Schoen 42 Director 1994 1999
John A. Stiver 51 Chairman of the Board of Directors 1986 1998
Patricia A. White 49 Executive Vice President and Secretary 1989 1998
Robert S. Zyla 48 President, Chief Executive Officer and 1984 1997
Treasurer
</TABLE>
- ---------
(1) As of December 31, 1995
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Set forth below is information with respect to the principal occupations
during the last five years for the Directors of the Savings Bank.
Martin W. Dowling has been president and owner of Jefferson Hills Real
Estate, Inc. He is also president of Martin W. Dowling, Inc., a building and
remodeling company, and president of Town Hall Estates, Inc., and Meadow Green
Corp., both companies being in the business of real estate development. Mr.
Dowling also serves as director of Jefferson Hospital and other
healthcare-related organizations.
Michael R. Macosko has been a pharmacist with Thrift Drug, Inc. since 1995.
From 1974 until 1995 he was pharmacist, owner and president of Woody's Drug
Store, Inc.
Charles P. McCullough has been an attorney with Tucker Arensberg, P.C.
since November of 1995. Prior to his employment by Tucker Arensberg, P.C., Mr.
McCullough had been a solo practitioner attorney at law. During 1991 and 1992
Mr. McCullough had acted as vice president and general counsel of Navarra
Insurance Services, Inc., a property and casualty insurance agency and had
continued in the same position with a successor insurance agency, T. M. Warwick
& Co. For a short time prior to his employment with Navarra Insurance Services,
Inc. Mr. McCullough had been an attorney with the law firm of Karlowitz, O'Brien
& Cromer.
Mark R. Schoen has acted as assistant vice president of product development
for Federated Investors, a mutual fund company, since 1992. From 1990 until 1992
he worked as an assistant vice-president of Mellon Bank, N.A. as a technical
manager of automation products from their Backroom Systems Group.
John A. Stiver has been self employed as a certified public accountant
since 1980. He has also been president and owner of C & J Leasing Co., an
equipment leasing company and of Miller's Mini Storage, Inc. In addition, he is
also president of Chirp, Inc., which supplies equipment to chiropractors.
Patricia A. White has acted as executive vice president of the Savings Bank
since 1989. She has also acted as corporate secretary of the Savings Bank since
1986. Her main duties include oversight of the marketing, compliance, security
and loan origination areas of the Savings Bank.
Robert S. Zyla has been president and chief executive officer and treasurer
of the Savings Bank since 1989.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information with respect to the principal occupations
during the last five years for the one executive officer of the Savings Bank who
does not serve as a director.
James M. Hein has acted as chief financial officer of the Savings Bank
since January of 1996. Prior to that time he had acted as controller of the
Savings Bank.
COMMITTEES AND MEETINGS OF THE BOARD OF THE SAVINGS BANK AND COMPANY
The Board of Directors of the Savings Bank meets on a monthly basis and may
have additional special meetings upon the request of the President, the Chairman
of the Board or a majority of the Directors. During the fiscal year ended
December 31, 1995, the Board of Directors met 12 times. No director attended
fewer than 75% of the total number of Board meetings or committee meetings on
which he or she served that were held during this period. The Board of Directors
of the Savings Bank has established the following committees:
LOAN COMMITTEE. The Loan Committee consists of Messrs. Zyla (Chairman),
Stiver, McCullough, and Dowling. Additional senior officers of the Savings Bank
also alternate on the Loan Committee. The Loan Committee has the authority to
approve loans up to $250,000. The Loan Committee met 17 times during fiscal
1995.
AUDIT COMMITTEE. The Audit Committee consists of Messrs. Stiver
(Chairman), Macosko, and Schoen. The Audit Committee recommends engagement of
the Savings Bank's external auditors and reviews their audit reports. The Audit
Committee met 4 times during fiscal 1995.
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<PAGE> 73
INVESTMENT COMMITTEE. The Investment Committee consists of Messrs. Zyla
(Chairman), Stiver, and Hein. The Investment Committee has the authority to
approve investments in securities eligible for purchase by a savings association
up to $2 million and makes recommendations to the full board of directors with
respect to investment policies and investments in excess of $2 million. The
Investment Committee met 2 times during fiscal 1995.
ASSET CLASSIFICATION COMMITTEE. The Asset Classification Committee
consists of Messrs. Zyla, Stiver and Hein. The Asset Classification Committee
reviews the Savings Bank's loan portfolio to determine the classification of
loans which are past due. The Asset Classification Committee met 12 times during
1995.
MARKETING/COMMUNITY REINVESTMENT ACT COMMITTEE. The Marketing/Community
Reinvestment Act Committee consists of Mrs. White and Messrs. Dowling, Schoen
and Macosko. The Committee oversees the Savings Bank's marketing efforts and
monitors its compliance with the Community Reinvestment Act. The committee met 4
times during 1995.
In addition to the committees described above, the Savings Bank has also
established other committees which consist of members of the Board and/or other
members of senior management and which meet as required. These committees
include: a Nominating Committee, an Asset/Liability Committee and a Facilities
Committee. The Board has also caused a Conversion Committee to be formed to
oversee the Conversion of the Savings Bank.
DIRECTOR'S COMPENSATION
All Directors are paid a $500 monthly fee at each Board of Directors'
meeting. In addition, all outside directors receive $125 for each committee
meeting they attend. Also, in January of 1996, the Board of Directors approved
the payment of compensation to the Chairman of the Board of Directors which will
amount to $2,500 per month during 1996. The aggregate amount of fees paid to the
Directors for the year ended December 31, 1995 for all board and committee
meetings was $48,500.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth a summary of certain information concerning
the compensation paid by the Savings Bank for services rendered in all
capacities during the year ended December 31, 1995 to the President and Chief
Executive Officer of the Savings Bank. No executive officer of the Savings Bank
received total compensation during the fiscal year exceeding $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) COMPENSATION
--------------------------- ------ ----- --------------- ------------
<S> <C> <C> <C> <C>
Robert S. Zyla, President and Chief Executive
Officer..................................... $73,140 $6,095 $ 0 $6,000(2)
</TABLE>
- ---------
(1) Does not include amounts attributable to miscellaneous benefits received by
Mr. Zyla. In the opinion of management of the Savings Bank the costs to the
Savings Bank of providing such benefits to Mr. Zyla during the year ended
December 31, 1995 did not exceed the lesser of $50,000 or 10% of the total
of annual salary and bonus reported for Mr. Zyla.
(2) Reflects $6,000 in fees paid for service as a member of the Board of
Directors of the Savings Bank.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation of each of the executive officers is set annually by the
Board of Directors as a whole, except that the Directors who are executive
officers do not participate in the compensation deliberations.
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<PAGE> 74
There are no interlocks between any board member who participates in the setting
of compensation for the Savings Bank and compensation setting boards or
committees of other entities.
EMPLOYMENT AGREEMENTS
In connection with the Conversion, the Company and the Savings Bank (the
"Employers") intend to enter into employment agreements with each of Mr. Zyla,
Ms. White and Mr. Hein (individually the "Executive" and collectively the
"Executives"). The agreements are subject to the review and approval of the OTS
and may be amended as a result of such OTS review. The Employers intend to
employ each of the Executives for a term of two years, in each case in their
current respective positions. The agreements with Mr. Zyla, Ms. White and Mr.
Hein are initially at their current base salary levels of $84,000, $60,000 and
$50,000, respectively. The term of each Executive's employment agreement shall
be extended annually for an additional one-year period such that at any time the
remaining term of the agreement will be from one to two years, unless, not less
than 30 days prior to the annual anniversary date, a determination not to extend
the agreement is made by either the Company or the Savings Bank or the
Executive, or unless the Executive's employment with the Employers has been
previously terminated.
Each of the employment agreements shall be terminable with or without cause
by the Employers. The Executive shall have no right to compensation or other
benefits pursuant to the employment agreement for any period after voluntary
termination or termination by the Employers for cause, disability, retirement or
death, provided, however, that for the remaining term of the employment
agreement the Executive may be entitled to supplemental disability benefits upon
termination of employment due to disability. In the event that (1) the Executive
terminates his or her employment (a) because of failure of the Employers to
comply with any material provision of the employment agreement, or (b) for "good
reason", as defined in the employment agreement as a result of certain adverse
actions which are taken with respect to the Executive's employment following a
Change in Control of the Company, including without limitation, (i) a change in
the Executive's title or duties by the Employers, (ii) a reduction in the
Executive's base salary or fringe benefits; or (iii) a relocation of the
principal executive office of the Employers outside of the Pittsburgh,
Pennsylvania area, or (2) prior to a Change in Control the employment agreement
is terminated by the Employers without cause, or for other than the disability,
retirement or death of the Executive, the Executive, or in the event of the
Executive's death, his beneficiary or estate, will be entitled to the
continuation of the base salary and certain fringe benefits that the Executive
was receiving at the time of such termination for the remaining term of the
agreement (approximately one to two years). Under such circumstances and based
upon current levels of Executive base salary, base salary and fringe benefits
would continue for a period not to exceed two years and one month, resulting in
a maximum base salary continuation benefit to Mr. Zyla, Ms. White and Mr. Hein
of $175,000, $125,000 and $104,167 respectively, and $404,167 in the aggregate
assuming all three Executives were entitled to such base salary continuation
benefits, payable over approximately 25 months. In the event that following a
Change in Control the employment agreement is terminated by the Employers
without cause, or for other than the disability, retirement or death of the
Executive, for purposes of determining the duration of severance pay the
remaining term of the agreement will be extended for a period of one year and
the Executive, or in the event of the Executive's death, his beneficiary or
estate, will be entitled to the continuation of the base salary and certain
fringe benefits that the Executive was receiving at the time of such termination
for the remaining extended term of the agreement (approximately two to three
years). Under such circumstances and based upon current levels of Executive base
salary, base salary and fringe benefits would continue for a period not to
exceed three years and one month, resulting in a maximum base salary
continuation benefit to Mr. Zyla, Ms. White and Mr. Hein of $259,000, $185,000
and $154,167 respectively, and $598,167 in the aggregate assuming all three
Executives were entitled to such base salary continuation benefits, payable over
approximately 37 months.
A Change in Control is generally defined in the employment agreement to
include any change in control of the Company required to be reported under the
Federal securities laws, as well as (i) the acquisition, directly or indirectly,
by any person of 25% or more of the combined voting power of the Company's then
outstanding securities or (ii) a change in a majority of the directors of the
Company during any period of two
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consecutive years without the approval of at least two-thirds of the persons
then still in office who were directors of the Company at the beginning of such
period.
Each employment agreement provides that in the event that any of the
payments to be made thereunder or otherwise upon termination of employment are
deemed to constitute "excess parachute payments" within the meaning of Section
280G of the Code, then such payments and benefits received thereunder shall be
reduced, in the manner determined by the employee, by the amount, if any, which
is the minimum necessary to result in no portion of the payments and benefits
being non-deductible by the Employers for Federal income tax purposes. Excess
parachute payments generally are payments in excess of three times the base
amount, which is defined to mean the recipient's average annual compensation
from the employer includable in the recipient's gross income during the most
recent five taxable years ending before the date on which a change in control of
the employer occurred. Recipients of excess parachute payments are subject to a
20% excise tax on the amount by which such payments exceed the base amount, in
addition to regular income taxes, and payments in excess of the base amount are
not deductible by the employer as compensation expense for Federal income tax
purposes.
Although the above-described employment agreements could increase the cost
of any acquisition of control of the Company, management of the Company does not
believe that the terms thereof would have a significant anti-takeover effect.
BENEFITS
DEFINED BENEFIT PLAN AND TRUST. The Savings Bank has a defined benefit
pension plan and trust ("Defined Benefit Plan") covering substantially all of
its employees. The benefits are based on years of service and employees'
compensation. Employees of the Savings Bank are eligible to participate in the
Defined Benefit Plan after one year of service and attainment of age 21. In
general, the Defined Benefit Plan provides for benefits to a participant payable
monthly upon normal retirement at age 65 (or, if later, the 5th anniversary of
the participant's original date of participation) in an amount equal to 2% of
the participant's average monthly compensation multiplied by the participant's
first 20 years of benefit service, plus 1% of such average monthly compensation
multiplied by the participant's next 10 years of benefit service. Years of
benefit service are limited to 30 years. Average monthly compensation is the
average monthly compensation paid to the participant over the three consecutive
plan years of service which produce the highest average during the 10 years
preceding the participant's retirement, death or termination of employment.
Compensation means the total earnings received by the participant from the
Savings Bank which are subject to Federal income tax, including salary deferrals
made on behalf of a participant to the Code Section 401(k) Plan maintained by
the Savings Bank. A participant may elect to retire early (and receive a reduced
monthly benefit) on or after the participant has attained the age of 60 and has
provided 20 continuous years of service. Alternatively, a participant may elect
a late retirement and receive an adjusted benefit. A year of service is any year
in which an employee works a minimum of 1,000 hours. Under the Defined Benefit
Plan, a participant's benefits are fully vested after five years of service. In
addition, a participant's benefits are fully vested upon the participant
attaining the normal retirement age of 65 or provided the participant is still
employed by the Savings Bank, upon the participant attaining the early
retirement age of 60 and having been employed by the Savings Bank for at least
20 consecutive years.
Payment of benefits under the Defined Benefit Plan generally will be made
in the form of a guaranteed annuity payable monthly for as long as the
participant lives. If the participant dies before receiving 120 monthly
payments, the remainder of the 120 payments will be paid to the participant's
designated beneficiary. The automatic form of benefit is a life annuity to an
unmarried participant and a qualified joint and survivor annuity to a married
participant, although alternative forms of benefits are available. The Defined
Benefit Plan also provides a qualified pre-retirement survivor annuity and a
pre-retirement death benefit in the event of death of the participant prior to
retirement.
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The following table illustrates annual pension benefits for retirement at
age 65 under various levels of compensation and years of service. The figures in
the table assume that the Defined Benefit Plan continues in its present form and
that the participants elect a straight life annuity form of benefit.
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
THREE YEAR ---------------------------------------------------------------------------
ANNUAL AVERAGE 15 YEARS OF 20 YEARS OF 25 YEARS OF 30 YEARS OF 35 YEARS OF
COMPENSATION SERVICE SERVICE SERVICE SERVICE SERVICE
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 20,000 $ 6,000 $ 8,000 $ 9,000 $10,000 $10,000
$ 30,000 $ 9,000 $12,000 $13,500 $15,000 $15,000
$ 40,000 $12,000 $16,000 $18,000 $20,000 $20,000
$ 50,000 $15,000 $20,000 $22,500 $25,000 $25,000
$ 60,000 $18,000 $24,000 $27,000 $30,000 $30,000
$ 70,000 $21,000 $28,000 $31,500 $35,000 $35,000
$ 80,000 $24,000 $32,000 $36,000 $40,000 $40,000
$ 90,000 $27,000 $36,000 $40,500 $45,000 $45,000
$100,000 $30,000 $40,000 $45,000 $50,000 $50,000
$125,000 $37,500 $50,000 $56,250 $62,500 $62,500
</TABLE>
For the years ended December 31, 1995, 1994 and 1993 the Defined Benefit
Plan funding expense amounted to $69,035, $67,032 and $36,150, respectively. The
amounts expended as contributions to the Defined Benefit Plan for financial
reporting purposes on behalf of any particular individual or group of
individuals participating in the Defined Benefit Plan cannot be determined. For
additional information about the Defined Benefit Plan, see Note 11 of the Notes
to the Financial Statements.
At December 31, 1995, Mr. Zyla, Ms. White and Mr. Hein had 28, 30 and 9
years, respectively, of credited service under the Defined Benefit Plan.
401(K) PLAN AND TRUST. Effective January 1, 1994 the Savings Bank adopted
a 401(k) profit sharing plan and trust (the "401(k) Plan") covering
substantially all of its employees. The 401(k) Plan has no age or service
requirements as a condition of eligibility to participate in the 401(k) Plan. In
general, the 401(k) Plan allows each participant through a salary reduction
arrangement to elect to have his or her compensation paid by the Savings Bank
during the plan year reduced by up to 10%, subject to certain limitations, and
contributed to the 401(k) Plan. A participant's compensation includes his or her
W-2 compensation and other compensation which is not currently includable in the
participant's gross income by reason of Code Sections 125, 401(a)(8),
402(h)1)(B), or 403(b) (the "Compensation"). The Savings Bank may make matching
contributions on behalf of all participants equal to a discretionary percentage,
to be determined by the Savings Bank, of the participant's elective salary
reduction. In addition, the Savings Bank may make a discretionary contribution
which is not limited to its current or accumulated net profit, to be allocated
in the same proportion as each participant's Compensation bears to the total of
such Compensation for all participants. All Employer contributions are
discretionary, and not mandatory. Participants are provided with the opportunity
to direct the investment of their account balances in the 401(k) Plan through
one or more investment funds. Contributions made by a participant through a
salary reduction arrangement are credited to a participant's elective account,
are fully vested when made and cannot be forfeited for any reason. Employer
contributions, if any, are credited to an employer contribution account for each
participant. A participant is fully vested in the employer contribution account
after five years of credited service with the Savings Bank. If the participant
terminates employment for any reason other than normal retirement at age 65,
late retirement, death or total and permanent disability, any amount in the
employer contribution account which is not vested will be forfeited. There are
no provisions for early retirement benefits or pre-retirement distributions.
Withdrawals from a participant's elective account are not permitted except in
the event of normal retirement at age 65, disability, termination of employment
or a specified hardship. Distributions of benefits under the 401(k) Plan will be
made in a cash lump sum payment. For the years ended December 31, 1995 and 1994
the Savings Bank made no matching or other discretionary contributions to the
401(k) Plan.
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EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST.
The Company intends to establish the ESOP for employees of the Company and
the Savings Bank. Substantially all employees of the Company and the Savings
Bank will be eligible to participate in the ESOP. The ESOP will have no age
requirement and a one hour service requirement as a condition of eligibility to
participate.
As part of the Conversion, in order to fund the purchase of 8% of the
Common Stock to be issued in the Conversion, it is anticipated that the ESOP
will borrow funds from the Company. It is anticipated that such loan will equal
100% of the aggregate purchase price of the Common Stock acquired by the ESOP in
the Conversion. The loan to the ESOP will be repaid principally from the
Company's and the Savings Bank's contributions to the ESOP over a period of 15
years, and the collateral for the loan will be the Common Stock purchased by the
ESOP and remaining unallocated to participant accounts. As of the date of this
Prospectus, the interest rate for the ESOP loan is expected to be a fixed rate
of 7.0%. See "Pro Forma Data". The Company may, in any plan year, make
additional discretionary contributions for the benefit of plan participants in
either cash or shares of Common Stock, which may be acquired through the
purchase of outstanding shares in the market or from individual stockholders,
through the original issuance of additional shares by the Company or through the
sale of treasury shares by the Company. Such purchases, if made, would be funded
through additional borrowings by the ESOP or additional contributions from the
Company. The timing, amount and manner of future contributions to the ESOP will
be affected by various factors, including prevailing regulatory policies, the
requirements of applicable laws and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held by
the trustees in a suspense account and released on a pro rata basis as debt
service payments are made. Discretionary contributions to the ESOP and shares
released from the suspense account will be allocated among participants on the
basis of compensation for the year of allocation. All participants must be
employed by the Company or the Savings Bank on the last day of the plan year in
order to receive an allocation. Forfeitures will be reallocated among remaining
participating employees and may reduce any amount the Company might otherwise
have contributed to the ESOP. Participants will vest in their right to receive
their account balances within the ESOP at the rate of 20 percent per year,
starting with completion of their third year of credited service, until 100%
vesting is achieved after seven years of credited service. For purposes of
vesting, credit is given for years of service with the Savings Bank prior to the
adoption of the ESOP. A year of credited service will be earned by a participant
for each calendar year in which the participant is credited with not less than
1000 hours of service for the Company or the Savings Bank. Prior to the
completion of three years of credited service, a participant who terminates
employment will not receive any benefit under the ESOP. Participants will become
100% vested in the ESOP upon the attainment of age 65, death, disability or
termination of the ESOP. Benefits may be payable upon retirement, disability or
separation from service. The Company's contributions to the ESOP are not fixed,
so benefits payable under the ESOP cannot be estimated.
A committee will be appointed by the Board to administer the ESOP. Messrs.
John A. Stiver and Robert S. Zyla will serve as trustees of the ESOP. Under the
ESOP, the trustees must vote all allocated shares held in the ESOP in accordance
with the instructions of the participating employees, and allocated shares for
which employees do not give instructions, and unallocated shares, will generally
be voted by the ESOP trustee in the same ratio on any matter as to those shares
for which instructions are given.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Accounting Pronouncements" for a discussion of SOP
93-6, which changes the measure of compensation expense recorded by employers
for leveraged ESOPs from the cost of ESOP shares to the fair value of ESOP
shares.
Generally accepted accounting principles require that any third party
borrowing by the ESOP be reflected as a liability on the Company's statement of
financial condition. Since the ESOP is borrowing from the Company, such
obligation is not treated as a liability, but will be excluded from
stockholders' equity. If the ESOP purchases newly-issued shares from the
Company, total stockholders' equity would neither increase nor
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decrease, but per share stockholders' equity and per share net earnings would
decrease because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and the regulations of the IRS
and the Department of Labor thereunder.
STOCK OPTION PLAN.
Following the Conversion, the Board of Directors of the Company intends to
adopt the Stock Option Plan. The Company intends to submit the Stock Option Plan
for approval to stockholders at a meeting of stockholders to be held no earlier
than six months following the Conversion. No options will be awarded under the
Stock Option Plan unless stockholder approval is obtained, or if awarded, such
options will be conditioned upon obtaining stockholder approval.
The Stock Option Plan will be designed to attract and retain qualified
directors, officers and personnel in key positions, and to provide directors,
officers and key employees with a proprietary interest in the Company as an
incentive to contribute to the success of the Company. The Stock Option Plan
will provide for the grant of incentive stock options intended to comply with
the requirements of Section 422 of the Code ("incentive stock options") and
non-incentive or compensatory stock options ("compensatory stock options")
(collectively "Awards"). Awards will be available for grant to directors,
officers and key employees of the Company and any subsidiaries, except that
non-employee directors will not be eligible to receive incentive stock options.
The Stock Option Plan will be administered and interpreted by a committee
of the Board of Directors ("Committee") which is "disinterested" pursuant to
applicable regulations under the Federal securities laws. Unless sooner
terminated, the Stock Option Plan will be in effect for a period of ten years
from the earlier of adoption by the Board of Directors or approval by the
Company's stockholders.
Under the Stock Option Plan, the Committee will determine which officers
and key employees will be granted options, whether such options will be
incentive or compensatory options, the number of shares subject to each option,
the exercise price of each option, whether such options may be exercised by
delivering other shares of Common Stock and when such options become
exercisable. The per share exercise price of the incentive stock options and the
compensatory options shall be required to be at least equal to the fair market
value of a share of Common Stock on the date the option is granted. All options
shall become vested and exercisable in the manner determined by the Committee,
provided, however, that such options shall vest at a rate no greater than 20% a
year beginning one year from the date the Stock Option Plan is approved by
stockholders or one year from the date of grant, whichever is later. Upon the
death or disability of a person granted incentive or compensatory stock options,
the options will be immediately vested.
Each incentive stock option or portion thereof shall be exercisable at any
time on or after it vests and is exercisable until ten years after its date of
grant or three months after the date on which the optionee's employment
terminates. The failure to exercise incentive stock options within three months
after the date on which the optionee's employment terminates may result in
adverse tax consequences to the optionee. Stock options are non-transferable
except by will or the laws of descent and distribution.
Non-employee directors will be granted non-discretionary formula awards as
follows: (1) initial awards will be granted (a) on the effective date of the
Stock Option Plan, to each non-employee director of the Company serving on its
Board of Directors on the date of the Conversion in the amount of 2,500
compensatory stock options plus an additional 250 compensatory stock options for
each full year of service on the board of directors of the Savings Bank, and (b)
on the date of election or appointment to the Board of Directors of the Company,
to each non-employee director so elected or appointed for the first time
(excluding those non-employee directors receiving an initial award on the
effective date of the Stock Option Plan) in the amount of 2,500 compensatory
stock options; and (2) subsequent to each annual meeting of stockholders of the
Company (a) 250 compensatory stock options will be awarded to each non-employee
director remaining on the Board of Directors of the Company after such annual
meeting and (b) an additional 250 compensatory stock options will be awarded to
the person serving as chairperson of the Board of Directors of the Company
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immediately after such meeting. If less than 1,322,500 shares of Common Stock
are issued in the Conversion, the Board of Directors of the Company may adjust
the amount of non-employee director formula awards.
Non-employee director formula awards will be granted at a per share
exercise price equal to the fair market value of a share of Common Stock on the
date the option is granted, will vest at a rate of 20% a year beginning one year
from the date the Stock Option Plan is approved by stockholders or one year from
the date of grant, whichever is later, and will be exercisable at any time after
it vests until the earlier of 10 years after the date of grant or the third
anniversary of the date on which the non-employee director ceases to serve on
the Board of Directors of the Company. If an optionee dies while serving as a
non-employee director or within three years following the termination of the
optionee's service as a non-employee director as a result of disability,
retirement or resignation without having fully exercised his options, the
optionee's executors, administrators, legatees or distributees of his estate
shall have the right to exercise such options during the twelve-month period
following such death, provided no option will be exercisable within six months
after the date of grant or more than ten years from the date it was granted.
The Company intends to reserve for future issuance pursuant to the Stock
Option Plan a number of authorized shares of Common Stock equal to 10% of the
Common Stock issued in the Conversion, or 85,000 shares and 115,000 shares,
based on the issuance of 850,000 shares and 1,150,000 shares at the minimum and
maximum of the Estimated Valuation Range, respectively. In the event of a stock
split, a subdivision or consolidation of shares or any other capital adjustment,
or a stock dividend or other increase or decrease with the shares effected
without receipt of consideration by the Company, the number of shares of Common
Stock under the Stock Option Plan, the number of shares to which any Award
relates and the exercise price per share under any option shall be adjusted to
reflect such increase or decrease in the total number of shares of the Common
Stock outstanding. Similar adjustments will be made in the event of a
recapitalization, merger, reorganization, liquidation, consolidation or similar
transaction pertaining to the Company.
Under current provisions of the Code, the Federal income tax treatment of
incentive stock options and compensatory stock options is different. With
regards to incentive stock options, an optionee who meets certain holding period
requirements will not recognize income at the time the option is granted or at
the time the option is exercised, and a Federal income tax deduction generally
will not be available to the Company at any time as a result of such grant or
exercise. With respect to compensatory stock options, the difference between the
fair market value on the date of exercise and the option exercise price
generally will be treated as compensation income upon exercise, and the Company
will be entitled to a deduction in the amount of income so recognized by the
optionee.
Assuming the receipt of stockholder approval for the Stock Option Plan, the
Board of Directors has not, at this time, made a specific reserve of any shares
available under the Stock Option Plan for the executive officers and employees
of the Savings Bank or the non-employee directors of the Savings Bank, except
that 3% of the shares of Common Stock of the Company issued in the Conversion
will be allocated to non-employee director formula awards to be awarded pursuant
to the formula until depleted. OTS regulations provide that no individual
employee may receive more than 25% of the shares of any plan and non-employee
directors may not receive more than 5% of any plan individually or 30% in the
aggregate for all directors' unless the Regional Director of the OTS permits
otherwise.
RECOGNITION AND RETENTION PLAN AND TRUST.
Following the Conversion, the Board of Directors of the Company intends to
adopt the Recognition Plan for directors, officers and employees. The objective
of the Recognition Plan will be to enable the Company to provide directors,
officers and employees of the Company and the Savings Bank with a proprietary
interest in the Company as an incentive to contribute to its success.
The Company intends to seek stockholder approval of the Recognition Plan at
a meeting of stockholders to be held no earlier than six months following the
Conversion. Assuming the receipt of stockholder approval, the Company expects to
acquire Common Stock on behalf of the Recognition Plan, in an amount equal to 4%
of the Common Stock issued in the Conversion, or 34,000 shares and 46,000 shares
at the minimum and maximum of the Estimated Valuation Range. These shares will
be acquired through open market purchases or
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from authorized but unissued shares. Although no specific award determinations
have been made, the Company anticipates that, if stockholder approval is
obtained, it will provide discretionary awards to its officers and employees of
the Company and the Savings Bank, and non-discretionary formula awards to the
non-employee directors of the Company, to the extent permitted by applicable
regulations. OTS regulations provide that no individual employee may receive
more than 25% of the shares of any plan and non-employee directors may not
receive more than 5% of any plan individually or 30% in the aggregate for all
directors' unless the Regional Director of the OTS permits otherwise.
Non-employee directors will be granted non-discretionary formula awards as
follows: (1) initial awards will be granted (a) on the effective date of the
Recognition Plan, to each non-employee director of the Company serving on its
Board of Directors on the date of the Conversion in the amount of 1,000 shares
plus an additional 100 shares for each full year of service on the board of
directors of the Savings Bank, and (b) on the date of election or appointment to
the Board of Directors of the Company, to each non-employee director so elected
or appointed for the first time (excluding those non-employee directors
receiving an initial award on the effective date of the Recognition Plan) in the
amount of 1,000 shares; and (2) subsequent to each annual meeting of
stockholders of the Company (a) 100 shares will be awarded to each non-employee
director remaining on the Board of Directors of the Company after such annual
meeting and (b) an additional 100 shares will be awarded to the person serving
as chairperson of the Board of Directors of the Company immediately after such
meeting. 1.2% of the shares of Common Stock of the Company issued in the
Conversion (30% of such shares acquired by the Recognition Plan) will be
allocated to non-employee director formula awards to be awarded pursuant to the
formula until depleted. If less than 1,322,500 shares of Common Stock are issued
in the Conversion, the Board of Directors of the Company may adjust the amount
of non-employee director formula awards.
The Recognition Plan will be administered and interpreted by a committee of
the Board of Directors which is "disinterested" pursuant to applicable
regulations under the Federal securities laws. The Board of Directors will
appoint Messrs. John A. Stiver and Robert S. Zyla to serve as trustees of the
trust to be established pursuant to the Recognition Plan (the "Trust"). The
trustees will have the responsibility to invest all funds contributed by the
Company and the Savings Bank to the Trust. Shares of Common Stock granted
pursuant to the Recognition Plan generally will be in the form of restricted
stock which shall become unrestricted and payable over a five (5) year period at
a rate of 20% a year beginning one year from the later of the date the
Recognition Plan is approved by stockholders of the Company or the date of the
grant of the award. Upon the death or disability of a recipient, the stock will
become unrestricted. For accounting purposes, compensation expense in the amount
of the fair market value of the Common Stock at the date of the grant to the
recipient will be recognized pro rata over the number of years during which the
shares are payable. A recipient will be entitled to all voting and other
stockholder rights, except that the shares, while restricted, may not be sold,
pledged or otherwise disposed of and are required to be held in the Trust. Under
the terms of the Recognition Plan, the trustees will be authorized to vote
unallocated shares in the same proportion as it receives instructions from
recipients with respect to allocated shares which have not been earned and
distributed. The trustees will not vote allocated shares which have not been
distributed if it does not receive instructions from the recipient. In the event
that a tender offer is made, the trustees shall tender shares held by the
trustees which have not been earned and distributed in the same proportion in
which a recipient of an award tenders shares which have been earned and
distributed. If a recipient terminates employment for reasons other than death
or disability, the recipient will forfeit all rights to the allocated shares
under restriction. If the recipient's termination is caused by death or
disability, all restrictions will expire and all allocated shares will become
unrestricted. The Board of Directors of the Company will be authorized to
terminate the Recognition Plan at any time, and if it does so, any shares not
allocated will revert to the Company.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
FIRREA requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
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comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features.
The Savings Bank's policy provides that all loans made by the Savings Bank
to its directors and officers are made in the ordinary course of business, are
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons
and do not involve more than the normal risk of collectability or present other
unfavorable features.
As of December 31, 1995, John A. Stiver, a director and chairman of the
board, and C&J Leasing Co. (of which Mr. Stiver is owner) have borrowings from
the Savings Bank with a total aggregate balance of $173,924 at December 31,
1995. The largest aggregate balance during 1995 of Mr. Stiver's loans (and his
affiliates) was $180,151. These loans were made in the ordinary course of
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons. These extensions do not involve more than the normal risk of
collectability or present other unfavorable features. Mr. Stiver also leases
space from the Savings Bank for his offices at an annual rental of $11,100,
which management believes is comparable to rates chargeable to unrelated third
parties for rentals of similar space.
In addition, Mr. Stiver has prepared the federal and state tax returns of
the Savings Bank and during 1995 received a fee of $4,950 for this service.
Management believes this fee for tax preparation services is comparable to rates
charged by unrelated third parties for comparable services.
As of December 31, 1995, the Savings Bank had committed to make an
additional loan to Mr. Stiver in an amount not to exceed $250,000. This loan
commitment was made in the ordinary course of business of the Savings Bank on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. These
extensions do not involve more than the normal risk of collectability or present
other unfavorable features.
At December 31, 1995, no other director or executive officer, or their
affiliates, had aggregate loan balances in excess of $60,000 and no such
individual, or his or her affiliate, had engaged in any transaction with the
Savings Bank with a value in excess of $60,000. The aggregate amount of loans to
insiders at December 31, 1995 was $442,018, which constitutes 6.2% of equity.
Charles P. McCullough, a director of the Savings Bank, is an attorney with
the law firm of Tucker Arensberg, P.C., which has been retained by the Savings
Bank and the Company to advise it in connection with the Conversion of the
Savings Bank and with respect to other legal matters on an ongoing basis. The
Company and the Savings Bank expect this relationship to continue after the
completion of the Offerings.
The Savings Bank retained media services from a company owned by the
brother of one of the Savings Bank's officers. The total costs for such services
in 1995, 1994 and 1993 were $24,765, $26,320 and $31,160, respectively.
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of Common Stock of the
Company proposed to be purchased by the Savings Bank's directors and executive
officers and by all directors and executive officers as a
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group and their associates, assuming shares of Common Stock are issued at the
minimum and maximum of the Estimated Valuation Range and that sufficient shares
will be available to satisfy their subscriptions.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED VALUATION RANGE(1) OF THE ESTIMATED VALUATION RANGE(1)
--------------------------------------- ---------------------------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED AMOUNT OF SHARES OFFERED
---- ------ ---------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
John A. Stiver............ $150,000 15,000 1.76% $150,000 15,000 1.30%
Robert S. Zyla............ $ 75,000 7,500 .88% $ 75,000 7,500 .65%
Patricia A. White......... $100,000 10,000 1.18% $100,000 10,000 .87%
Martin W. Dowling......... $100,000 10,000 1.18% $100,000 10,000 .87%
Michael R. Macosko........ $100,000 10,000 1.18% $100,000 10,000 .87%
Mark R. Schoen............ $ 50,000 5,000 .59% $ 50,000 5,000 .43%
Charles P. McCullough..... $ 25,000 2,500 .3% $ 25,000 2,500 .22%
James M. Hein............. $ 65,000 6,500 .76% $ 65,000 6,500 .57%
Directors and Executive
Officers as a Group..... $665,000 66,500 7.82% $665,000 66,500 5.78%
</TABLE>
- ---------
(1) Includes proposed subscriptions, if any, by associates. See "Risk
Factors--Certain Anti-Takeover Provisions--Voting Control of Officers and
Directors".
THE CONVERSION
THE BOARD OF DIRECTORS OF THE SAVINGS BANK AND THE OTS HAVE APPROVED THE
PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE SAVINGS BANK
ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS.
SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT
OF THE PLAN BY SUCH AGENCY.
GENERAL
On February 14, 1996, the Savings Bank's Board of Directors unanimously
adopted the Plan, pursuant to which the Savings Bank will be converted from a
Federally chartered mutual savings bank to a Federally chartered stock savings
bank. It is intended that all of the common stock of the Savings Bank to be
issued in the Conversion will be held by the Company, which is incorporated
under Pennsylvania law. The Plan has been approved by the OTS, subject to, among
other things, approval of the Plan and certain other matters by the Savings
Bank's members. A special meeting has been called for this purpose to be held on
June 19, 1996.
The Company has applied for and received the approval of the OTS to become
a savings and loan holding company and to acquire all of the common stock of the
Savings Bank to be issued in the Conversion. The Company plans to retain 50% of
the net Conversion proceeds from the sale of the Common Stock, with the other
50% of the net Conversion proceeds used to purchase all of the to be issued and
outstanding capital stock of the Savings Bank. Based on the issuance of 1
million shares at the Purchase Price, approximately $800,000 of the net proceeds
retained by the Company are intended to be used to loan funds to the ESOP to
enable the ESOP to purchase up to 8% of the shares issued in the Conversion. The
Conversion will be effected only upon completion of the sale of all of the
shares of Common Stock of the Company to be issued pursuant to the Plan.
The Plan provides generally that (i) the Savings Bank will convert from a
Federally chartered mutual savings bank to a Federally chartered stock savings
bank and (ii) the Company will offer shares of Common Stock for sale in the
Subscription Offering to Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders, Other Members and to the Directors, Officers and
Employees. Commencing concurrently with the Subscription Offering, and subject
to the prior rights of holders with subscription rights, the Company is offering
the Common Stock not subscribed for in the Subscription Offering in a Community
Offering to
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certain members of the general public, with preference to natural persons
residing in the Local Community. See "--Community 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 to be managed by Ryan, Beck. The Savings Bank has the right
in its sole discretion to accept or reject, in whole or in part, any orders to
purchase shares of the Common Stock received in the Community Offering or in the
Syndicated Community Offering.
The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Valuation Range, currently estimated to be
between $8.5 million and $11.5 million, will be determined based upon an
independent appraisal of the estimated pro forma market value of the Common
Stock of the Company. All shares of Common Stock to be issued and sold in the
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 FinPro,
an independent consulting firm experienced in the valuation and appraisal of
savings institutions. See "--Stock Pricing and Number of Shares to be Issued"
for more information as to the determination of the estimated pro forma market
value of the Common Stock.
The following is a brief summary of pertinent aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at each branch of the
Savings Bank and at the offices of the OTS. The Plan is also filed as an exhibit
to the Registration Statement of which this Prospectus is a part, copies of
which may be obtained from the SEC. See "Additional Information".
PURPOSES OF CONVERSION
The Savings Bank, as a Federally chartered mutual savings bank, does not
have stockholders and has no authority to issue capital stock. By converting to
the capital stock form of organization, the Savings Bank will be structured in
the form used by commercial banks, most business entities and a growing number
of savings institutions. The Conversion will be important to the future growth
and performance of the institution by providing a larger capital base on which
the Savings Bank may operate, enhanced future access to capital markets,
enhanced ability to diversify into other financial services related activities,
and enhanced ability to render services to the public.
The holding company form of organization will provide additional
flexibility to diversify the Savings Bank's business activities through newly
formed subsidiaries, or through acquisition 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.
After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's articles of incorporation will permit the Company,
subject to market conditions and applicable regulatory approvals, 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 issuance of additional shares upon exercise of stock options or the
issuance of additional shares under the Recognition Plan. Following Conversion,
the Company will also be able to use one or more stock-related incentive
programs, such as a stock option program and a management recognition and
retention program to attract and retain executive and other personnel for itself
and its subsidiaries. See "Management of the Savings Bank--Compensation of
Executive Officers".
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings bank 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. However, this
ownership interest is tied to the depositor's account and has no tangible market
value separate from such deposit account. Any
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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 bank 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 bank is liquidated. 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 bank converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE SAVINGS BANK'S COMMON STOCK AND THE COMMON STOCK OF
THE COMPANY 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 Common Stock upon completion of the
Conversion. 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 Savings Bank of accepting deposits and making loans will
continue without interruption. The Savings Bank will continue to be subject to
regulation by the OTS and the FDIC. After Conversion, the Savings Bank will
continue to provide services for depositors and borrowers under current policies
by its present management and staff.
The directors serving the Savings Bank at the time of the Conversion will
continue to serve as directors of the Savings Bank after the Conversion. The
Directors of the Company will consist of individuals currently serving on the
Board of Directors of the Savings Bank. All officers of the Savings Bank at the
time of the Conversion will retain their positions after the Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Savings
Bank at the time of the Conversion will automatically continue as a depositor of
the Savings Bank after the Conversion of the Savings Bank from a mutual form to
a stock form, 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. Depositors will
continue to hold their existing certificates, passbooks and other evidences of
their accounts.
EFFECT ON LOANS. No loan outstanding from the Savings Bank 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 Savings Bank are members of the Savings Bank. All members who
have maintained a deposit or borrowing relationship for a period of up to sixty
days before a membership meeting have voting rights in the Savings Bank as to
all matters requiring membership action. Upon Conversion, the depositors and
such borrowers will cease to be members and will no longer be entitled to vote
at meetings of the Savings Bank. Upon Conversion, all voting rights in the
Savings Bank will be vested in the Company as the sole stockholder of the
Savings Bank. Exclusive voting rights with respect to the Company will be vested
in the holders of Common Stock. The depositors of, and such borrowers from, the
Savings Bank 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 Savings Bank has received opinions with regard to Federal
and Pennsylvania income tax which indicate that the adoption and implementation
of the Plan of Conversion will not be taxable for Federal or Pennsylvania tax
purposes to the Savings Bank or its Eligible Account Holders and Supplemental
Eligible Account Holders or the Company, except as discussed below. See "--Tax
Aspects".
EFFECT ON LIQUIDATION RIGHTS. Were a mutual savings bank 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 receive such remaining assets, pro rata, based upon the deposit
balances in their
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deposit accounts immediately prior to liquidation. In the unlikely event that
the Savings Bank 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 Savings Bank'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 required to be assumed by the surviving institution.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Plan of Conversion requires that the 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 Savings Bank and the
Company have retained FinPro to make such valuation. For its services in making
such appraisal, and for services performed in connection with the Company's
holding company application to the OTS, FinPro will receive a fee of $30,000.
The Savings Bank and the Company have agreed to indemnify FinPro and its
employees and affiliates against certain losses (including any losses in
connection with claims under the Federal securities laws) arising out of its
services as appraiser, except where the liability of FinPro results from its
negligence or willful misconduct.
An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Financial Statements. FinPro also
considered the following factors, among others: the present and projected
operating results and financial condition of the Company and the Savings Bank
and the economic and demographic conditions in the Savings Bank's existing
marketing area; certain historical, financial and other information relating to
the Savings Bank; a comparative evaluation of the operating and financial
statistics of the Savings Bank with those of other similarly situated
publicly-traded savings institutions located in Pennsylvania and other regions
of the United States; the aggregate size of the offering of the Common Stock;
the impact of Conversion on the Savings Bank's net worth and earnings potential;
the proposed dividend policy of the Company and the Savings Bank; and the
trading market for securities of comparable institutions and general conditions
in the market for such securities. In the process of appraising the Savings
Bank, the appraisal included, but was not limited to, consideration that the
Savings Bank was less competitive to other publicly traded thrifts, that were
considered its peers, in various financial areas including balance sheet data,
balance sheet growth, asset quality and profitability. A copy of the Conversion
Valuation Appraisal Report of FinPro may be obtained without charge by calling
the Savings Bank at (412) 655-1190. This appraisal of the Common Stock is not
intended and should not be construed as a recommendation of any kind as to the
advisability of purchasing such stock nor can any assurance be given that
purchasers of the Common Stock in the Conversion will be able to sell such
shares after the Conversion at or above the Purchase Price. See "Additional
Information".
On the basis of the foregoing, FinPro has advised the Company and the
Savings Bank that, in its opinion, dated March 5, 1996, the Estimated Valuation
Range of the Common Stock ranged from a minimum of $8.5 million to a maximum of
$11.5 million and a midpoint of $10.0 million. Based upon the Estimated
Valuation Range and the Purchase Price of $10.00 per share for the Common Stock
established by the Board of Directors, the Company expects to issue between
850,000 and 1,150,000 shares of Common Stock. The Estimated Valuation 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 Savings
Bank or market conditions generally. There is no obligation or understanding on
the part of management to take and/or pay for any shares in order to complete
the Conversion. In the event the appraisal is updated to amend the value of the
Savings Bank below $8.5 million or above $13.2 million (the maximum of the
Estimated Valuation Range, as adjusted by 15%), such appraisal will be filed
with the SEC by post-effective amendment and subscribers will be resolicited, as
described below.
Based upon current market and financial conditions and recent practices and
policies of the OTS, in the event the Company receives orders for Common Stock
in excess of $11.5 million (the maximum of the Estimated Valuation Range) and up
to $13.2 million (the maximum of the Estimated Valuation Range, as
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adjusted by 15%), the Company may be required by the OTS to accept all such
orders. No assurances, however, can be made that the Company will receive orders
for Common Stock in excess of the maximum of the Estimated Valuation Range or
that, if such orders are received, that all such orders will be accepted because
the Company's final valuation and number of shares to be issued are subject to
the receipt of an updated appraisal from FinPro which reflects such an increase
in the valuation and the approval of such increase by the OTS.
Such valuation, however, is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing such shares.
FinPro did not independently verify the Financial Statements and other
information provided by the Savings Bank, nor did FinPro value independently the
assets or liabilities of the Savings Bank. The valuation considers the Savings
Bank as a going concern and should not be considered as an indication of the
liquidation value of the Savings Bank. Moreover, because such valuation is
necessarily based upon estimates and projections of a number of matters, all of
which are subject to change from time to time, no assurance can be given that
persons purchasing such shares in the Conversion will thereafter be able to sell
such shares at prices at or above the Purchase Price.
Prior to the completion of the Conversion or to fill in part, or in whole,
the subscription order of the ESOP, the maximum of the Estimated Valuation 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 1,322,500 shares to reflect changes in the
market and financial conditions, without the resolicitation of subscribers. See
"Conversion--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 Valuation Range to fill unfilled orders in the
Subscription Offering.
No sale of shares of Common Stock in the Conversion may be consummated
unless prior to such consummation FinPro confirms that nothing of a material
nature has occurred which, taking into account all relevant factors, would cause
it to conclude that the Purchase Price is materially incompatible with the
estimate of the pro forma market value of a share of Common Stock at the time of
the sale of the Common Stock. If such is not the case, a new Estimated Valuation
Range may be set, a new Subscription and Community Offering and/or Syndicated
Community Offering may be held or such other action may be taken as the Company
and the Savings Bank shall determine and the OTS may permit.
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
Purchase Price is not below the minimum or more than 15% above the maximum of
the Estimated Valuation Range. In the event market or financial conditions
change so as to cause the aggregate Purchase Price of the shares to be below the
minimum of the Estimated Valuation Range or more than 15% above the maximum of
such range, purchasers will be resolicited. In the event of a resolicitation,
subscribers will be permitted to continue, modify or rescind their orders. In
order to continue an order, subscribers will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will either be promptly refunded with interest at the
Savings Bank's passbook rate of interest, or deposit authorizations will be
cancelled. Any change in the Estimated Valuation 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 Valuation Range to reflect changes in
market or financial conditions, 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".
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 or to fulfill the
order of the ESOP, would decrease both a subscriber's ownership interest and the
Company's pro forma net income and stockholders' equity on a per share basis
while increasing pro forma net income 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
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Company's pro forma net income and stockholders' equity on a per share basis
while decreasing pro forma net income and stockholders' equity on an aggregate
basis. 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) Eligible
Account Holders, (2) the ESOP, (3) Supplemental Eligible Account Holders, (4)
Other Members, and (5) Directors, Officers and Employees of the Savings Bank.
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".
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 (i)
$50,000 of Common Stock, (ii) one-tenth of one percent (1/10 of 1%) of the total
offering of shares of Common Stock or (iii) 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 and the denominator
of which is the total amount of qualifying deposits of all Eligible Account
Holders, in each case on the December 31, 1994 (the "Eligibility Record Date"),
subject to the overall purchase limitation and without giving effect to an
increase in the shares issued pursuant to an increase in the Estimated Valuation
Range of up to 15%.
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Common Stock in excess of the total number of such shares
eligible for subscription, the shares of Common 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 shares 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 provided that no fractional shares shall be issued. 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. The term "Qualifying Deposit" means
the balance of each savings account of $50 or more in the Savings Bank at the
close of business on December 31, 1994.
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 Savings Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding December 31, 1994.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. The ESOP will receive, without
payment therefor, second priority non-transferable subscription rights to
purchase, in the aggregate, up to 8% of the Common Stock issued in the
Conversion. The ESOP intends to purchase 8% of the shares to be issued in the
Conversion, or 68,000 shares and 92,000 shares, based on the issuance of 850,000
shares and 1,150,000 shares, 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 and
Community Offerings, including subscriptions of any of the Savings Bank's
directors, officers, employees or associates thereof. See "Management of the
Savings Bank--Benefits--Employee Stock Ownership Plan and Trust". The
subscription rights granted to the ESOP are subject to the availability of
shares after taking into account the shares
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purchased by Eligible Account Holders; provided, however, that in the event that
the total number of shares offered in the Conversion is increased to an amount
greater than the number of shares representing the maximum of the Estimated
Valuation Range, the ESOP has been granted a priority right in accordance with
applicable regulations to purchase any such shares up to an aggregate of 8% of
the Common Stock offered.
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that
there are sufficient shares remaining after satisfaction of the subscriptions by
Eligible Account Holders and the ESOP, 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 (i) $50,000 of Common Stock, (ii) one-tenth of one percent (1/10 of
1%) of the total offering of shares of Common Stock or (iii) 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 of which 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 without
giving effect to an increase in the shares issued pursuant to an increase in the
Estimated Valuation Range of up to 15%.
In the event of an oversubscription for shares of Common Stock based on the
subscription of the Supplemental Eligible Account Holders, the remaining shares
of Common Stock shall be allocated among the subscribing Supplemental Eligible
Account Holders so as to permit each such Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares of Common Stock
sufficient to make his total allocation (including the number of shares of
Common Stock, if any, allocated in accordance with the rules for allocation
among Eligible Account Holders) equal to 100 shares of Common Stock or the total
amount of his subscription, whichever is less. Any shares of Common Stock not
allocated as provided in the previous sentence shall be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled,
provided that no fractional shares shall be issued.
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.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
ESOP and 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
(i) $50,000 of Common Stock or (ii) one-tenth of one percent (1/10 of 1%) of the
total offering of shares of Common Stock, subject to the overall purchase
limitation and without giving effect to an increase in shares issued pursuant to
an increase in the Estimated Valuation Range of up to 15%. In the event that
such Other Members subscribe for a number of shares of Common Stock which, when
added to the shares of Common Stock subscribed for by the Eligible Account
Holders, the ESOP and the Supplemental Eligible Account Holders, is in excess of
the total number of shares of Common Stock being issued, the subscriptions of
such Other Members will be allocated among the subscribing Other Members so as
to permit each subscribing Other Member, to the extent possible, to purchase a
number of shares sufficient to make his total allocation of Common Stock equal
to the lesser of 100 shares or the number of shares subscribed for by the Other
Member. Any shares remaining will be allocated among the subscribing Other
Members whose subscriptions remain unsatisfied on a 100 shares (or whatever
lesser amount is available) per order basis until all orders have been filled or
the remaining shares have been allocated.
PRIORITY 5: DIRECTORS, OFFICERS AND EMPLOYEES. To the extent that there
are sufficient shares remaining after satisfaction of all subscriptions by
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and
Other Members, then the Directors, Officers and Employees will receive, without
payment therefor, fifth priority, nontransferable subscription rights to
subscribe for, in this category, an aggregate of up to 24% of the Common Stock
offered in the Conversion. The subscription rights made available to the
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Directors, Officers and Employees shall be allocated among such Directors,
Officers and Employees as determined by the Board of Directors after considering
the period of service of any such Director, Officer or Employee and the
compensation and position of any such Director, Officer or Employee. The ability
of Directors, Officers and Employees to purchase Common Stock under this
category is in addition to rights which are otherwise available to them under
the Plan, and generally allows such persons to purchase up to 24% of the total
number of shares of Common Stock sold in the Conversion in the aggregate;
provided, however, each such Director, Officer and Employee is subject to the
terms of the purchase limits which are applicable to the Conversion as set forth
in the Plan.
In the event that such Directors, Officers and Employees subscribe for a
number of shares of Common Stock which, when added to the shares of Common Stock
subscribed for by the Eligible Account Holders, the ESOP, the Supplemental
Eligible Account Holders and Other Members is in excess of the total number of
shares of Common Stock being issued in the Conversion, the subscriptions of such
Directors, Officers and Employees will be allocated among the subscribing
Directors, Officers and Employees so as to permit each subscribing Director,
Officer and Employee, to the extent possible, to purchase a number of shares
sufficient to make his total allocation of Common Stock equal to the lesser of
100 shares or the number of shares subscribed for by the subscribing Director,
Officer or Employee in question. Any shares remaining will be allocated among
the subscribing Directors, Officers and Employees whose subscriptions remain
unsatisfied on a 100 shares (or whatever lesser amount is available) per order
basis until all orders have been filled or the remaining shares have been
allocated.
For information as to the number of shares proposed to be purchased by
certain of the directors and officers, see "Management of the Savings
Bank--Subscriptions by Directors and Executive Officers".
No person who is eligible to subscribe to purchase Common Stock in this
category shall have any right to purchase 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 Valuation Range.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on June 17, 1996 (the "Expiration Date"), unless extended for up to
45 days or such additional periods by the Savings Bank with the approval of the
OTS. Such extensions may not be extended beyond June 19, 1998. Subscription
rights which have not been exercised prior to the Expiration Date will become
void.
The Savings Bank will not execute orders until at least the minimum number
of shares of Common Stock (850,000) 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 Savings Bank pursuant to the Subscription Offering will
be returned promptly to the subscribers with interest and all withdrawal
authorizations will be cancelled. If an extension beyond the 45 day period
following the Expiration Date is granted, the Savings Bank will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES. The Company and the
Savings Bank 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 Savings Bank 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: (a) the number of persons otherwise eligible to subscribe for shares
under the Plan who reside in such jurisdiction is small; (b) the granting of
subscription rights or the offer or sale of shares of Common Stock to such
persons would require the Company, the Savings Bank, or their officers,
directors or employees under the laws of such jurisdiction, to register as a
broker, dealer, salesman or selling agent or to register or otherwise qualify
its securities for sale in such jurisdiction or to qualify as a foreign
corporation or file a consent to service of process in such jurisdiction; and
(c) such registration or qualification in the Company's and the Savings Bank's
judgment would be impracticable or unduly burdensome for reasons of costs or
otherwise. Where the number of persons eligible to subscribe for shares in one
state is small, the Savings Bank 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
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holders in the state, the cost of registering or qualifying the shares or the
need to register the Company, its officers, directors or employees as brokers,
dealers or salesmen.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders, Other Members and the Directors, Officers and
Employees, the Savings Bank has determined to offer shares pursuant to the Plan
to certain members of the general public, with preference given to natural
persons residing in the Local Community ("Preferred Subscribers"). Persons may
purchase in each of the Local Community Offering or the Syndicated Community
Offering up to $50,000 of aggregate value of shares of Common Stock Offered in
the conversion, subject to the maximum purchase limitation and without giving
effect to shares issued pursuant to an increase in the Estimated Valuation Range
by up to 15%. See "--Limitations on Common Stock Purchases". This amount may be
increased or decreased at the sole discretion of the Company and the Savings
Bank. The opportunity to subscribe for shares of Common Stock in the Community
Offering category is subject to the right of the Savings Bank 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.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Subscription and Community
Offerings, such stock will be allocated first to each Preferred Subscriber whose
order is accepted by the Savings Bank, 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 orders remain unsatisfied in the same proportion
that the unfilled subscription of each bears to the total unfilled subscriptions
of all Preferred Subscribers whose subscription remains unsatisfied. If there
are any shares remaining, shares will be allocated to other members of the
general public who subscribe in the Community Offering applying the same
allocation described above for Preferred Subscribers.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Savings Bank and the Company have engaged Ryan, Beck as a financial and
marketing advisor in connection with the offering of the Common Stock and Ryan,
Beck 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 Savings Bank and the Company concerning fee structure, Ryan, Beck
will receive an advisory and management fee of $50,000 in consideration for
providing certain advisory and administrative services in connection with the
Conversion and a marketing fee equal to 1.75% of the aggregate Purchase Price of
Common Stock sold in the Subscription Offering and the Community Offering. The
marketing fee paid by the Savings Bank shall be reduced by 50% of the advisory
and management fee. No fees will be paid to Ryan, Beck on subscriptions by any
Director, Officer or Employee of the Company or the Savings Bank or members of
their immediate families or by the ESOP. In the event that a selected dealer
agreement is entered into in connection with a Syndicated Community Offering,
the Savings Bank will pay a fee (to be negotiated at such time under such
agreement) to such selected dealers, and a management fee to Ryan, Beck of 1.5%
for shares sold by a member firm of the National Association of Securities
Dealers ("NASD") pursuant to a selected dealers agreement; provided, however,
that any fees payable to Ryan, Beck for Common Stock sold by them pursuant to
such a selected dealers agreement shall not exceed 6.5% of the actual Purchase
Price. Fees to Ryan, Beck and to any other broker-dealer may be deemed to be
underwriting fees and Ryan, Beck and such broker-dealers may be deemed to be
underwriters. Ryan, Beck will also be reimbursed for its reasonable out-
of-pocket expenses. Ryan, Beck will not incur any single expense in an amount
exceeding $3,000 without the prior approval of the Company and the Savings Bank.
The legal fees of the counsel of Ryan, Beck up to $30,000 will be paid by the
Company and the Savings Bank.
Directors and executive officers of the Company and the Savings Bank may
participate in the solicitation of offers to purchase Common Stock. Other
employees of the Savings Bank 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
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Common Stock. Questions of prospective purchasers will be directed to executive
officers or registered representatives. 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 Savings Bank will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a Prospectus.
To purchase shares in the Subscription and Community Offerings, an executed
order form with the required payment for each share subscribed for, or with
appropriate authorization for withdrawal from the Savings Bank's deposit account
(which may be given by completing the appropriate blanks in the order form),
must be received by the Savings Bank at any of its offices by 12:00 noon,
Eastern Time, on the Expiration Date. 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 Savings Bank will not accept orders submitted on photocopied or
facsimilied order forms. The Company and the Savings Bank 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 order form may
not be modified, amended or rescinded without the consent of the Savings Bank
unless the Conversion has not been completed within 45 days after the end of the
Subscription and Community Offerings, 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 priority, depositors as of the Eligibility Record Date, the
Supplemental Eligibility Record Date, and/or the Voting Record Date must list
all accounts on the stock order form giving all names in each account and the
account numbers. In the case of Other Members, the reference to account and
account number requests information concerning either the account number or the
loan account of the Other Member with the Savings Bank, as the case may be.
Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Savings Bank, (ii) by check, bank draft or money order,
or (iii) by authorization of withdrawal from deposit accounts maintained with
the Savings Bank. Interest will be paid on payments made by cash, check, bank
draft or money order at the Savings Bank's passbook rate of interest from the
date payment is received until completion or termination of the Conversion. 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 Savings Bank to withdraw the amount of the
purchase price from his deposit account, the Savings Bank will do so as of the
effective date of Conversion. The Savings Bank 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 cancelled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the 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 they
subscribe, but rather, may pay for such shares of Common Stock subscribed for by
the ESOP at the Purchase Price upon consummation of the Subscription and
Community Offering, if all shares are sold, or upon consummation of the
Syndicated Community Offering if shares remain to be sold in such offering,
provided that, in the case of the ESOP, there is in force from the time of its
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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 IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Subscription and Community Offerings, provided
that such IRAs are not maintained at the Savings Bank. Persons with
self-directed IRAs maintained at the Savings Bank must have their accounts
transferred to an unaffiliated institution or broker to purchase shares of
Common Stock in the Subscription and Community Offerings. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and ten
percent shareholders who use self-directed IRA funds to purchase shares of
Common Stock in the Subscription and Community Offerings, make such purchases
for the exclusive benefit of the IRAs.
Certificates representing shares of Common Stock purchased will be mailed
to purchasers at the last address of such persons appearing on the records of
the Savings Bank, or to such other address as may be specified in properly
completed 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
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan 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. Federal regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of the
Conversion.
THE SAVINGS BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND
EQUITABLE REMEDIES IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF
SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS BELIEVED BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
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
may be offered for sale to the general public in a Syndicated Community Offering
through a syndicate of registered broker-dealers to be formed or through an
underwritten public offering. The Savings Bank and the Company expect to market
any shares which remain unsubscribed after the Subscription and Community
Offerings through a Syndicated Community Offering. The Company and the Savings
Bank have the right to reject orders in whole or part in their sole discretion
in the Syndicated Community Offering. Neither Ryan, Beck 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, Ryan, Beck 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 and Number
of Shares to be Issued". 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 total number of shares offered in the Conversion, without giving
effect to an increase in shares issued pursuant to an increase in the Estimated
Valuation 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 Savings Bank's passbook rate of interest from the date
such payment is actually received by the Savings Bank until completion or
termination of the Conversion.
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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 Savings Bank 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 Savings Bank for deposit in a segregated
account. If such alternative procedure is employed, purchasers' funds are not
required to be in their accounts with selected dealers until the debit date.
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 Expiration Date, unless extended by the Company with the approval
of the OTS. See "-- Stock Pricing and Number of Shares to be Issued" above for a
discussion of rights of subscribers, if any, in the event an extension is
granted.
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 (i) $50,000 of Common Stock,
(ii) one-tenth of one percent (1/10th of 1%) of the total offering of
shares of Common Stock or (iii) 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 limitation in clause (8) below and without giving effect to an
increase in the total number of shares issued due to an increase in the
Estimated Valuation Range of up to 15%;
(3) The ESOP may purchase in the aggregate up to 8% of the shares of
Common Stock issued in the Conversion; and in the event that the total
number of shares in the Conversion is increased to an amount greater than
the number of shares representing the maximum of the Estimated Valuation
Range, the ESOP has been granted a priority right to purchase any shares up
to an aggregate of 8% of the Common Stock offered;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of (i) $50,000 of
Common Stock, (ii) one-tenth of one percent (1/10 of 1%) of the total
offering of shares of Common Stock or (iii) 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 each
case on the Supplemental Eligibility Record Date,
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subject to the overall limitation in clause (8) below and without giving
effect to an increase in the total number of shares issued due to an
increase in the Estimated Valuation Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the
Subscription Offering up to the greater of (i) $50,000 of Common Stock or
(ii) one-tenth of one percent (1/10 of 1%) of the total offering of shares
of Common Stock, subject to the overall limitation in (8) below and without
giving effect to an increase in the total number of shares issued due to an
increase in the Estimated Valuation Range of up to 15%;
(6) Each Person purchasing shares of Common Stock in the Community
Offering may purchase up to $50,000 of aggregate value of shares of Common
Stock offered in the Conversion, subject to the overall limitation in
clause (8) below and without giving effect to an increase in the total
number of shares issued due to an increase in the Estimated Valuation Range
of up to 15%;
(7) Each Person purchasing shares of Common Stock in the Syndicated
Community Offering may purchase up to $50,000 of aggregate value of shares
of Common Stock offered in the Conversion, subject to the overall
limitation in clause (8) below and without giving effect to an increase in
the total number of shares issued due to an increase in the Estimated
Valuation Range of up to 15%;
(8) No person, other than the ESOP, may purchase more than $50,000 of
aggregate value of shares of Common Stock in all categories of the
Subscription Offering; and Eligible Account Holders, Supplemental Eligible
Account Holders, Other Members and Directors, Officers and Employees of the
Savings Bank may purchase stock in the Community and Syndicated Community
Offerings subject to the purchase limitations described in clauses (6) and
(7) above, provided that, except for the ESOP, the maximum number of shares
of Common Stock subscribed for or purchased in all categories of the
Conversion by any person together with associates of and groups of persons
acting in concert with such persons, shall not exceed $150,000 of Common
Stock offered in the Conversion and without giving effect to an increase in
the total number of shares issued due to an increase in the Estimated
Valuation Range of up to 15%;
(9) No more than 34% of the total number of shares offered for sale in
the Conversion may be purchased by directors and officers of the Savings
Bank and their associates in the aggregate, excluding purchases by the
ESOP; and
(10) No Director, Officer and Employee which has been allocated
subscription rights by the Board of Directors pursuant to the fifth
priority of the Subscription Offering shall receive subscription rights in
an amount equal to the greater of (i) $50,000 of Common Stock or (ii)
one-tenth of one percent (1/10 of 1%) of the total offering of shares of
Common Stock, subject to the overall limitation in (8) above and without
giving effect to an increase in the total number of shares issued due to an
increase in the Estimated Valuation Range of up to 15%.
If the number of shares of Common Stock otherwise allocable pursuant to the
Subscription Offering, the Community Offering and the Syndicated Community
Offering, or any combination thereof, to any person or that person's associates
would be in excess of the maximum number of shares permitted as set forth above,
the number of shares of Common Stock allocated to each such person shall be
reduced to the lowest limitation applicable to that person, and then the number
of shares allocated to each group consisting of a person and that person's
associates shall be reduced so that the aggregate allocation to that person and
his or her associates complies with the above maximums, and such maximum number
of shares shall be reallocated among that person and his or her associates as
they may agree, or in the absence of an agreement, in proportion to the shares
subscribed by each (after first applying the maximums applicable to each person,
separately).
Orders for Common Stock in any Community Offering or Syndicated Community
Offering shall first be filled up to a maximum of two percent of the Common
Stock and thereafter remaining shares shall be allocated on an equal number of
shares per order basis until all orders have been filled.
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Depending upon market or financial conditions, the Board of Directors of
the Savings Bank and the Company, without further approval of the members of the
Savings Bank, may decrease or increase the purchase limitations in the Plan of
Conversion, provided that the maximum purchase limitations may not be increased
to a percentage in excess of 5%. Notwithstanding the foregoing, the maximum
purchase limitation may be increased up to 9.99% provided that orders for Common
Stock exceeding 5% of the shares being offered shall not exceed, in the
aggregate, 10% of the total offering. If the Savings Bank and the Company
increase the maximum purchase limitations, the Savings Bank and the Company are
only required to resolicit Persons who subscribed for the maximum purchase
amount and may, in the sole discretion of the Savings Bank and the Company,
resolicit certain other large subscribers.
In the event of an increase in the total number of shares offered in the
conversion due to an increase in the maximum of the Estimated Valuation Range of
up to 15 % (the "Adjusted Maximum") the additional shares will be used in the
following order of priority: (i) to fill the ESOP's subscription to up to 8% of
the Adjusted Maximum; (ii) in the event that there is an oversubscription at the
Eligible Account Holder level, to fill unfilled subscriptions of Eligible
Account Holders exclusive of the Adjusted Maximum; (iii) in the event that there
is an oversubscription at the Supplemental Eligible Account Holder level, to
fill unfilled subscriptions of Supplemental Eligible Account Holders exclusive
of the Adjusted Maximum; (iv) in the event that there is an oversubscription at
the Other Member level, to fill unfilled subscriptions of Other Members
exclusive of the Adjusted Maximum; (v) in the event that there is an
oversubscription at the Directors, Officers and Employees level, to fill
unfilled subscriptions of the Directors, Officers and Employees level exclusive
of the Adjusted Maximum; and (vi) to fill unfilled Subscriptions in the
Community Offering exclusive of the Adjusted Maximum, with preference given to
natural persons residing in the Local Community.
Each person purchasing Common Stock in the Conversion shall be deemed to
confirm that such purchase does not conflict with the above purchase limitations
contained in the Plan of Conversion. The Directors of the Savings Bank and the
Company shall not be deemed to be associates or a group affiliated with each
other or otherwise acting in concert solely as a result of their being Directors
of the Savings Bank or the Company.
The term "associate" of a person is defined to mean: (i) any corporation or
other organization (other than the Company, the Savings Bank or a majority-owned
subsidiary of the Savings Bank) of which such person is an officer or partner or
is directly or indirectly the beneficial owner of 10% or more of any equity
securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or serves as a director or in a similar
fiduciary capacity, provided, however, such term shall not include any employee
stock benefit plan of the Savings Bank in which such person has a substantial
beneficial interest or serves as a trustees 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 as such person or who is a director or officer of
the Savings Bank or the Company or any of their subsidiaries.
The term "Acting in Concert" or "acting in concert" means (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise; or
(iii) a person which acts in concert with another person ("other party") shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party, except that any Tax-Qualified Employee Stock
Benefit Plan will not be deemed to be acting in concert with its trustees or a
person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustees and stock held by the plan will be
aggregated. The Board of Directors has the authority to determine whether
persons are acting in concert.
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Savings Bank in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Savings Bank 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
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account was to the total value of all deposit accounts in the Savings Bank 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 Savings Bank.
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 Savings Bank 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 net worth of the Savings Bank as of the date of its latest statement of
financial condition 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 Savings
Bank, would be entitled, on a complete liquidation of the Savings Bank after
Conversion, to an interest in the liquidation account prior to any payment to
the stockholders of the Savings Bank. Each Eligible Account Holder and
Supplemental Eligible Account Holder would have an initial interest in such
liquidation account for each deposit account, including passbook accounts,
transaction accounts such as NOW accounts, money market deposit accounts, and
certificates of deposit, held in the Savings Bank on December 31, 1994 and March
31, 1996, respectively. Each Eligible Account Holder and Supplemental Eligible
Account Holder will have a pro rata interest in the total liquidation account
for each of his deposit accounts based on the proportion that the balance of
each such deposit account on the December 31, 1994 eligibility record date and
the April 30, 1996 supplemental eligibility record date bore to the balance of
all deposit accounts in the Savings Bank on each of such respective dates.
If, however, on any December 31 annual closing date of the Savings Bank,
the amount in any deposit account is less than the lesser of (i) the amount in
such deposit account on any other annual closing date subsequent to the
eligibility record date or the supplemental eligibility record date, as the case
may be, or (ii) the qualifying deposit as of the eligibility record date or the
supplemental eligibility date, as the case may be, then the interest in the
liquidation account relating to such deposit account would be reduced from time
to time by the proportion of any such reduction, and such interest will cease to
exist if such deposit account is closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. 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
Savings Bank. If any Savings Account of an Eligible Account Holder or
Supplemental Eligible Account Holder is closed, the related subaccount shall be
reduced to zero.
The creation and maintenance of the liquidation account shall not operate
to restrict the use or application of any of the net worth accounts of the
Savings Bank.
TAX ASPECTS
The Savings Bank has received an opinion of its special counsel, Tucker
Arensberg, P.C., that for Federal income tax purposes, among other matters (i)
the Savings Bank'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 Savings
Bank 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 Savings Bank or the
Company upon the purchase of the Savings Bank'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 and Supplemental
Eligible Account Holders upon the issuance to them of deposit accounts in the
Savings Bank in its stock form plus their interests in the liquidation account
in exchange for their deposit accounts in the Savings Bank plus any related
interest in the residual equity of the Savings Bank; (iv) the tax basis of the
depositors' deposit accounts in the Savings Bank 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; and (vi) 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
generally begin on the date on which their subscription rights are exercised.
Tucker Arensberg, P.C., Savings Bank's special counsel, has also
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rendered an opinion that the foregoing tax effects of the Conversion under
Pennsylvania law are substantially the same as they are under Federal law.
Certain portions of the tax opinion are based upon the opinion of FinPro that
subscription rights issued in connection with the Conversion will have no value.
The tax opinion has been filed as an exhibit to the Registration Statement filed
with respect to the Common Stock offered hereby. See "Additional Information."
In the opinion of FinPro, which opinion is not binding on the IRS, 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 unsubscribed shares of Common Stock. If the
subscription rights granted to eligible subscribers are deemed to have an
ascertainable value, receipt of such rights would be taxable probably only to
those eligible subscribers who exercise the subscription rights (either as a
capital gain or ordinary income) in an amount equal to such value and the
Savings Bank could recognize gain on such distribution. Eligible subscribers are
encouraged to consult with their own tax advisors as to the tax consequences in
the event that such subscription rights are deemed to have an ascertainable
value.
Unlike private rulings, an opinion of counsel 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.
DELIVERY OF CERTIFICATES
Certificates representing Common Stock issued in the Conversion will be
mailed by the Company's transfer agent to the persons entitled thereto at the
addresses of such persons appearing on the stock order form as soon as
practicable following consummation of the Conversion. Any certificates returned
as undeliverable will be held by the Company until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for Common Stock are available and delivered to subscribers,
subscribers may not be able to sell the shares of Common Stock for which they
have subscribed, even though trading of the Common Stock may have commenced.
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 executive officer of the Company and the Savings Bank 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
executive officer or pursuant to a merger or similar transaction approved by the
OTS. 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 within this one year period as a
stock dividend, stock split, or otherwise, with respect to such restricted stock
will be subject to the same restrictions. The directors and executive officers
of the Company and the Savings Bank will also be subject to the insider trading
rules promulgated pursuant to the Exchange Act.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Company and the Savings Bank 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% of the
Company's outstanding Common Stock, the exercise of any options pursuant to an
approved stock option plan, or purchases of Common Stock of the Company made by
or held by any Tax-Qualified Employee Stock Benefit Plan or Non-Tax Qualified
Employee Stock Benefit Plan (as such terms are defined in the regulations of the
OTS) of the Savings Bank or the Company (including the ESOP) which may be
attributable to any officer or director, whether as a participant or trustee of
such plan.
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Unless approved by the OTS, if required, the Company will be prohibited
from repurchasing any shares of the Common Stock for three years except for an
offer to all stockholders on a pro rata basis or for the repurchase of
qualifying shares of a director, if any. Notwithstanding the foregoing, the
Company may repurchase its Common Stock from the date of its Conversion so long
as (i) the purchases 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. During the second and third year following a
conversion, the Regional Director may permit stock repurchases in amounts
greater than 5% during any twelve-month period.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE SAVINGS BANK
GENERAL
The Savings Bank's Plan of Conversion provides for the Conversion of the
Savings Bank from the mutual to the stock form of organization and, in
connection therewith, the Board of Directors have adopted articles of
incorporation and Bylaws for the stock institution. The Plan also provides for
the concurrent formation of a holding company. As described below, certain
provisions in the Company's articles of incorporation and Bylaws and in its
management remuneration entered into in connection with the Conversion may have
anti-takeover effects. In addition, applicable Pennsylvania corporate statutes
and regulatory restrictions may make it difficult for persons or companies to
acquire control of either the Company or the Savings Bank.
RESTRICTIONS IN THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
GENERAL. A number of provisions of the Company's articles of incorporation
and Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's articles of incorporation and Bylaws 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 stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have 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 articles of incorporation and Bylaws of the
Company is necessarily general and reference should be made in each case to such
articles 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. Article 6 of the Company's articles of
incorporation provides that for a period of five years from the date of
Conversion of the Savings Bank from the mutual to stock form, no person shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
(i) more than 10% of the issued and outstanding shares of any class of an equity
security of the Company, or (ii) any securities convertible into, or exercisable
for, any equity securities of the Company if, assuming conversion or exercise by
such person of all securities of which such person is the beneficial owner which
are convertible into, or exercisable for, such equity securities (but of no
securities convertible into, or exercisable for, such equity securities of which
such person is not the beneficial owner), such person would be the beneficial
owner of more than 10% of any class of an equity security of the Company. The
term "person" is broadly defined to prevent circumvention of this restriction.
The foregoing restrictions do not apply to (i) any offer with a view toward
public resale made exclusively to the Company by underwriters or a selling group
acting on its behalf, (ii) any tax-qualified employee benefit plan or
arrangement established by the Company or the Savings Bank and any trustee of
such a plan or arrangement, and (iii) any other offer or acquisition approved in
advance by the affirmative vote of two-thirds of the Company's entire Board of
Directors. In the event that shares are acquired in violation of Article 6 of
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the Company's articles of incorporation all shares beneficially owned by any
person in excess of 10% shall be considered "Excess Shares" and 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
stockholders for a vote, and the Board of Directors may cause such Excess Shares
to be transferred to an independent trustee for sale on the open market or
otherwise, with the expenses of such trustee to be paid out of the proceeds of
sale.
BOARD OF DIRECTORS. Article 8 of the articles of incorporation of the
Company contains provisions relating to the Board of Directors and provides,
among other things, that the Board of Directors shall be divided into three
classes as nearly equal in number as possible with the term of office of one
class expiring each year. See "Management of the Company". 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. Cumulative voting in the
election of directors is not permitted.
Directors may be removed only for cause at a duly constituted meeting of
stockholders called expressly for that purpose upon the vote of the holders of
at least a majority of the total votes eligible to be cast by stockholders. Any
vacancy occurring in the Board of Directors for any reason (including an
increase in the number of authorized directors) may be filled by the affirmative
vote of a majority of the remaining directors, and a director appointed to fill
a vacancy shall serve for a term expiring at the annual meeting of stockholders
at which the term of office of the class to which they have been chosen expires.
Article 13 of the articles of incorporation governs nominations for
election to the Board, and provides that nominations for election to the Board
of Directors may be made by, or at the direction of, (1) a majority of the Board
of Directors (or a nominating committee designated by such majority) or (2) by
any stockholder entitled to vote at such annual meeting who has complied with
the notice provisions in that section. Written notice of a stockholder
nomination must be delivered to, or mailed to and received at, the principal
executive offices of the Company not later than 60 days prior to the anniversary
date of the immediately preceding annual meeting, provided that, with respect to
the first scheduled annual meeting following completion of the Conversion,
notice must be received no later than the close of business on the 10th day
following the date on which notice of such meeting is first given to
stockholders, and provided further that the notice by the stockholder must be
delivered or received no later than the close of business on the fifth day
preceding the date of the meeting. Each such notice shall set forth: (a) as to
each person whom the stockholder proposes to nominate as a director, and as to
the stockholder giving the notice, (i) the name, age, business address and
residence address of such person; (ii) the principal occupation or employment of
such person; (iii) the class and number of shares of the Company's stock
beneficially owned by such person on the date of the stockholder notice; and
(iv) such other information regarding such person as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the SEC; and
(b) to the extent known by the stockholder giving the notice, (i) the name and
address of any other stockholders supporting such nominees; and (ii) the class
and number of shares of the Company's stock beneficially owned by any other
stockholders supporting such nominees on the date of such stockholder notice.
The provisions regarding director elections and other provisions in the
articles of incorporation and Bylaws discussed herein are generally designed to
protect the ability of the Board of Directors to negotiate with the proponent of
an unfriendly or unsolicited proposal to take over or restructure the Company by
making it more difficult and time-consuming to change majority control of the
Board, whether by proxy contest or otherwise. The general effect of these
provisions will be to generally require two annual stockholders meetings,
instead of one, to effect a change in control of the Board of Directors of the
Company even if holders of a majority of the Company's capital stock believed
that a change in the composition of the Board of Directors was desirable.
Because a majority of the directors at any given time will have prior experience
as directors, these requirements will help to ensure continuity and stability of
the Company's management and policies and facilitate long-range planning for the
Company's business. The provisions relating to removal of directors and filling
of vacancies are consistent with and supportive of a classified board of
directors.
The procedures regarding stockholder nominations will provide the Board of
Directors with sufficient time and information to evaluate a stockholder nominee
to the Board and other relevant information, such as
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existing stockholder support for the nominee. The proposed procedures, however,
will provide incumbent directors advance notice of a dissident slate of nominees
for directors, and will make it easier for the Board to solicit proxies
resisting such nominees. This may make it easier for the incumbent directors to
retain their status as directors, even when certain stockholders view the
dissident nominations as in the best interests of the Company or its
stockholders.
Article 11 of the articles of incorporation of the Company provides that a
director of the Company will not be personally liable to the Company or any of
its stockholders for monetary damages for any action taken as a Director (or
failure to act) unless (1) the director has breached or failed to perform the
duties of his office, and (2) the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness; provided that the above shall
not apply to the responsibility or liability of a director pursuant to any
criminal statute or the liability of a director for the payment of taxes
pursuant to Federal, state or local law. This provision will, in effect,
preclude certain stockholder derivative actions and may be construed to preclude
other third party claims against the directors of the Company, even if such
actions would otherwise be beneficial to stockholders of the Company. This
provision applies to actions taken by a director only in that capacity. Article
11 also provides that any amendment or repeal of these provisions will not
adversely affect any right of a director of the Company with respect to any acts
or omissions of such director or officer occurring prior to such amendment or
repeal. If the Pennsylvania Business Corporation Law ("PaBCL") is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Company shall be
eliminated or limited to the fullest extent permitted by the PaBCL.
These provisions are permitted by Pennsylvania corporate law and are
designed to ensure that the Company will be able to attract and retain qualified
directors and that such directors will be able to exercise their best business
judgment in managing the Company and its subsidiaries, in a manner which is not
unreasonably impeded by exposure to the potentially high personal costs or other
uncertainties of litigation. The nature of the tasks and responsibilities
undertaken by directors of publicly held corporations, such as the Company will
be, often require such persons to make difficult judgments of great importance
which can expose such persons to personal liability, but from which they will
acquire no personal benefit. In recent years, litigation against publicly held
corporations and their directors, challenging good faith business judgments and
involving no allegations of personal wrongdoing, has become common. Such
litigation regularly involves damage claims in amounts which bear no
relationship to the amount of compensation received by the directors,
particularly in the case of directors who are not employees of the corporation.
The provisions relating to director liability are intended to reduce, in
appropriate cases, the risk incident to serving as a director of the Company.
The Company's bylaws also provide that the Company shall indemnify every
director and officer of the Company and any wholly owned subsidiary of the
Company against expenses and any liability actually and in good faith paid or
incurred by such director or officer in connection with any threatened, pending
or completed claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative (including any investigation, claim, action,
suit or proceeding brought by or in the right of the Company or a wholly owned
subsidiary) in which he or she may be involved, as a party, witness or
otherwise, by reason of such director or officer being or having been a director
and officer of the Company or by reason of the fact that such director and
officer is or was serving at the request of the Company as a director, officer,
employee, fiduciary or other representative of a subsidiary or another
Corporation, partnership, joint venture, trust, employee benefit plan or other
entity (such investigation, claim, action, suit or proceeding hereinafter being
referred to as "Action"). No such right or indemnification shall exist where
prohibited by law or where the director's or officer's act(s) or failure to act
giving rise to an Action and claim for indemnification is determined by a court
to have constituted willful misconduct or recklessness. In addition no such
right of indemnification shall exist with respect to an Action brought by a
director as such against the Company unless (i) such action is brought to
enforce a claim for indemnification for expenses legally cognizable under the
By-Laws or under any agreement or vote of shareholders or Directors providing
for indemnification of the Director as such; or (ii) such action is other than a
claim for indemnification for expenses and the director is successful in whole
or in part upon the merits in such Action, or (iii) the indemnification is
included in a settlement of, or is awarded by a court in, such Action. Persons
who are not directors or officers of the Company may be similarly indemnified in
respect
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of service to the Company or to another such entity at the request of the
Company to the extent the Board of Directors at any time denominates any of such
persons as entitled to the benefits of such indemnification.
All expenses incurred in good faith by or on behalf of an indemnitee
identified above in defending an Action (including a derivative Action brought
in the right of the Company, but not including an Action determined by a court
to constitute willful misconduct or recklessness) shall upon written request
submitted to the secretary of the Company, be paid by the Company in advance of
the final disposition of such Action. Any such written request for advancement
of expenses shall be accompanied by such supporting documentation as is
reasonably available to the indemnitee and reasonably necessary for a
determination of whether and to what extent the indemnitee is entitled to
indemnification and advancement of expenses. Any such written request for
advancement of expenses shall further be accompanied by a written undertaking by
or on behalf of such claiming indemnitee to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by the
Company. These reimbursement rights of an indemnitee apply even in the case of a
derivative Action brought in the right of the Company. If in any Action a court
shall determine that the conduct of the proposed indemnitee constituted willful
misconduct or recklessness, the right of reimbursement and indemnity shall be
lost by such proposed indemnitee.
The rights of indemnification provided in the Company's By-Laws are not
exclusive of any other rights which may be available under any insurance or
other agreement, by vote of stockholders or disinterested directors or
otherwise. In addition, the By-Laws authorize the Company to maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Company, whether or not the Company would have the power to provide
indemnification to such person.
The above-described provisions have been included in the Company's By-Laws
in recognition of the need to reduce, in appropriate cases, the risks incident
to serving as a director or officer and to enable the Company to attract and
retain the best personnel available as directors, officers, employees and
agents.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
AUTHORIZED SHARES. Article 5 of the articles of incorporation authorizes
the issuance of 10 million shares of Common Stock and 5 million shares of
preferred stock (the "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 flexibility to
effect, among other transactions, financing, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its fiduciary
duty to deter future attempts to gain control of the Company. The Board of
Directors also has sole authority to determine the terms of any one or more
series of Preferred Stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post-tender offer merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Company's Board currently has no plans
for the issuance of additional shares, other than the issuance of additional
shares upon exercise of stock options.
SPECIAL MEETINGS OF STOCKHOLDERS AND STOCKHOLDER PROPOSALS. Article 7 of
the articles of incorporation provides that except as otherwise required by the
PaBCL and subject to the rights of holders of any preferred stock, special
meetings of the Company's stockholders, for any purpose or purposes, may only be
called by the Board of Directors pursuant to a resolution adopted by a majority
of the Board of Directors then in office or as otherwise provided in the Bylaws.
At the time of Conversion the Bylaws contain no separate provisions which permit
the calling of a special meeting of the shareholders. The articles of
incorporation also provides that any action to be taken or which may be taken at
a meeting of stockholders may be taken without a meeting if a consent in
writing, setting forth the actions so taken, is given by the holders of all
outstanding shares entitled to vote.
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Article 14 of the Company's articles of incorporation provides that only
such business as shall have been properly brought before an annual meeting of
stockholders shall be conducted at the annual meeting. In order to be properly
brought before an annual meeting following completion of the Conversion,
business must be (a) brought before the meeting by or at the direction of the
Board of Directors or (b) otherwise properly brought before the meeting by a
stockholder who has given timely notice thereof in writing to the Company. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Company not less than 60 days prior to
the anniversary date of the immediately preceding annual meeting; provided,
however, that with respect to the first scheduled annual meeting following
completion of the Conversion, such written notice must be received by the
Company not later than the close of business on the tenth day following the day
on which notice of the meeting was first mailed to stockholders; and provided
further, that the written notice must be received by the Company not later than
the close of business on the fifth day preceding the date of the meeting. A
stockholder's notice shall set forth as to each matter the stockholder proposes
to bring before the annual meeting (a) a brief description of the business
desired to be brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (b) the name and address, as they appear on
the Company's books, of the stockholder proposing such business, and, to the
extent known, any other stockholders known by such stockholder to be supporting
such proposal, (c) the class and number of shares of the Company which are
beneficially owned by the stockholder and, to the extent known, by any other
stockholders known by such stockholder to be supporting such proposal on the
date of such stockholder notice, and (d) any financial interest of the
stockholder in such business other than interests which all stockholders would
have. The presiding officer of an annual meeting shall determine and declare to
the meeting whether the business was properly brought before the meeting in
accordance with the provisions of Article 9.B and any such business not properly
brought before the meeting shall not be transacted.
The procedures regarding stockholder proposals are designed to provide the
Board with sufficient time and information to evaluate a stockholder proposal
and other relevant information, such as existing stockholder support for the
proposal. The proposed procedures, however, will give incumbent directors
advance notice of a stockholder proposal. This may make it easier for the
incumbent directors to defeat a stockholder proposal, even when certain
stockholders view such proposal as in the best interests of the Company or its
stockholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Article 15 of the
Company's articles of incorporation generally provides that the articles of
incorporation must be first approved by a majority of the Board of Directors and
then by the holders of a majority of the shares of the Company entitled to vote
in an election of directors, voting as a single class, as well as such
additional vote of any preferred stock as may be required by the terms thereof,
except that the approval of 75% of the shares of the Company entitled to vote in
an election of directors is required for any amendment to Articles 5 (capital
stock), 6 (restrictions on offers and acquisitions of the Company's equity
securities), 8 (directors), 9 (amendments of bylaws), 11 (liability of
directors), 12 (no cumulative voting), 13 (nominations of directors) and 14
(stockholder proposals).
The Company's articles of incorporation also set forth that the Board of
Directors is expressly empowered to adopt, amend or repeal Bylaws of the Company
to the extent permitted by law. Any adoption, amendment or repeal of the Bylaws
of the Company by the Board of Directors shall require the approval of a
majority of the entire Board then in office. The stockholders shall also have
power to adopt, amend or repeal the Bylaws of the Company; provided, however,
that, in addition to any vote of the holders of any class or series of stock of
this Company required by law or by the articles of incorporation, the
affirmative vote of the holders of at least 75 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Company entitled
to vote generally in the election of Directors, voting together as a single
class, shall be required to adopt, amend or repeal any provisions of the Bylaws
of the Company.
CONSIDERATIONS OF THE BOARD. The Board of Directors of the Company, when
evaluating any offer of another Person to (A) make a tender or exchange offer
for any equity security of the Company, (B) merge or consolidate the Company
with another corporation or entity or (C) 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 the best
interest of the Company and its stockholders, give due consideration
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to all relevant factors, including, without limitation those factors that
Directors of any subsidiary of the Company may consider in evaluating any action
that may result in a change or potential change in the control of the
subsidiary, and the social and economic effect of acceptance of such offer on
the Company's present and future customers and employees and those of its
Subsidiaries; on the communities in which the Company and its Subsidiaries
operate or are located; on the ability of the Company to fulfill its corporate
objective as a savings bank holding company under applicable laws and
regulations; and on the ability of its subsidiary savings bank to fulfill the
objectives of a Federally chartered stock form savings bank under applicable
statutes and regulations. As used in this paragraph (i) the term "Person" shall
mean any individual, partnership, corporation, association, trust, group or
other entity, and when two or more Persons act as a partnership, limited
partnership, syndicate, association or other group for the purpose of acquiring,
holding or disposing of shares of stock, such partnership, syndicate, associate
or group shall be deemed a "Person"; and (ii) the term "Subsidiary" means any
corporation of which a majority of any class of equity security is owned,
directly or indirectly, by the Person in question.
ANTI-TAKEOVER EFFECTS OF THE ARTICLES OF INCORPORATION AND BYLAWS AND MANAGEMENT
REMUNERATION ADOPTED IN THE CONVERSION
The foregoing provisions of the articles of incorporation and Bylaws of the
Company could have the effect of discouraging an acquisition of the Company or
stock purchases in furtherance of an acquisition, and could accordingly, under
certain circumstances, discourage transactions which might otherwise have a
favorable effect on the price of the Company's Common Stock.
In addition, the Savings Bank has entered into agreements with certain of
its officers which provide such officers with additional payments upon the
officers' termination in connection with a change in control of the Company or
the Savings Bank. See "Management of the Savings Bank--Employment Agreements".
Such provisions and limitations may make it more difficult for companies or
persons to acquire control of the Savings Bank. Additionally, the provisions
could deter offers to the shareholders which might be viewed by such
shareholders to be in their best interests.
The Board of Directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated with and approved by the Board of Directors
of the Company. The Board of Directors believes that these provisions are in the
best interests of the Company and its future stockholders. In the Board of
Directors' judgment, the Board of Directors is in the best position to determine
the true value of the Company and to negotiate more effectively for what may be
in the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interests of the Company and its future
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors and that these provisions will encourage such negotiations
and discourage hostile 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 prices reflective of the true value of the Company and
where the transaction is in the best interests of all stockholders.
Despite the Board of Directors' belief as to the benefits to the Company's
stockholders of the foregoing provisions, these provisions also may have the
effect of discouraging a future takeover attempt in which stockholders might
receive a substantial premium for their shares over then current market prices
and may tend to perpetuate existing management. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. The Board of Directors, however, has concluded that the potential
benefits of these provisions outweigh their possible disadvantages.
The Board of Directors of the Company and the Savings Bank are not aware of
any effort that might be made to acquire control of the Savings Bank or the
Company.
PENNSYLVANIA CORPORATE LAW
In addition to provisions which may be contained in the Company's Articles
of Incorporation, the PaBCL includes certain provisions applicable to
Pennsylvania corporations, such as the Company, which may be deemed to have an
anti-takeover affect. Such provisions include (i) rights of stockholders to
receive the fair
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value of their shares of stock following a control transaction from a
controlling person or group and (ii) requirements relating to certain business
combinations.
The PaBCL authorizes the board of directors of Pennsylvania business
corporations to create and issue (whether or not in connection with the issuance
of any of its shares or other securities) option rights or securities having
conversion or option rights entitling the holders thereof to purchase or acquire
(i) shares, option rights, securities having conversion or option rights, or
obligations of any class or series, or assets of the corporation; or (ii)
shares, option rights or securities having conversion or option rights, or
obligations of any class or series, owned by the corporation and issued by any
other person. The securities, contracts, warrants or other instruments
evidencing any shares, option rights, securities having conversion or option
rights, or obligations of a corporation may contain such terms as are fixed by
the Board of Directors.
The PaBCL also includes anti-takeover provisions which allow holders of
voting shares of a business corporation that become the subject of a control
transaction to object to such transaction and demand they be paid the fair value
of their shares unless: (1) the articles or bylaws (in specified circumstances)
of such corporation explicitly provided otherwise; or (2) the articles of such
corporation are amended prior to the control transaction to provide that such
anti-takeover provisions are not applicable, which amendment would require the
affirmative vote of the holders of at least 80% of the outstanding stock (or, if
the board of directors has approved the amendment, by the holders of at least
50% of the outstanding stock). "Fair value" for purposes of these provisions
means an amount not less than the highest price per share paid by the
controlling person or group at any time during the 90-day period ending on and
including the date of the control transaction plus any incremental value that
may not be reflected in such price. A "control transaction" for purposes of
these provisions means the acquisition by a person or group of persons acting in
concert of at least 20% of the outstanding voting stock of the corporation.
The PaBCL defines a "Business Combination" generally to include, with
respect to a corporation, certain sales, purchases, exchanges, leases,
mortgages, pledges, transfers or dispositions of assets, mergers or
consolidations, certain issuances or reclassifications of securities,
liquidations or dissolutions or certain loans, guarantees or financial
assistance, pursuant to an agreement or understanding between such corporation
or any subsidiaries, on the one hand, and an Interested Shareholder or an
"Affiliate" or "Associate" thereof, on the other hand. An "Interested
Shareholder" is defined generally to include any individual, partnership,
association or corporation which is the beneficial owner (as defined) of at
least 20% of the outstanding voting stock of the corporation or which is an
affiliate or associate of such corporation and at any time within the five year
period prior to the date in question was the beneficial owner of at least 20% of
the outstanding voting stock.
Under the PaBCL, a Pennsylvania corporation may not engage in a Business
Combination with an Interested Shareholder except for the following types of
Business Combinations: (i) a Business Combination approved by the corporation's
Board of Directors prior to the date on which the Interested Shareholder became
an Interested Shareholder ("Share Acquisition Date"), (ii) a Business
Combination approved by the affirmative vote of the holders of at least a
majority of the outstanding voting stock, not including any shares owned by the
Interested Shareholder or affiliate or associate thereof, at a meeting called
for such purpose no earlier than three months after the Interested Shareholder
became an Interested Shareholder, and provided that at the time of such meeting
the Interested Shareholder is the Beneficial Owner of at least 80% of the
outstanding voting stock, and provided that the Business Combination satisfies
the requirements of clauses (a) through (e) of clause (iv) below; (iii) a
Business Combination approved by the holders of at least a majority of the
outstanding voting stock, not including any voting shares owned by the
Interested Shareholder, at a meeting called for such purpose no earlier than
five years after the Share Acquisition Date; or (iv) a Business Combination
approved at a stockholders meeting called for such purpose no earlier than five
years after the Share Acquisition Date that meets all of the following
conditions: (a) the consideration received per share by holders of the
outstanding common stock is at least equal to the higher of (I) the highest
price per share paid by the Interested Shareholder after he became a 5%
stockholder within five years prior to the earlier of the date of the public
announcement of the Business Combination ("Announcement Date") or the Share
Acquisition Date, plus interest less dividends paid during such period up to the
amount of such interest, or (II) the market value per common share on the
Announcement Date or the Interested Shareholder's Share
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Acquisition Date, whichever is higher, plus interest and less dividends up to
the amount of such interest; (b) similar conditions to those set forth in clause
(iv)(a) above in the case of classes of stock other than common stock; (c) the
consideration to be received in the Business Combination by the holders of any
class of the Corporation's stock must be in cash or the same form as the
consideration used by the Interested Shareholder to acquire the largest number
of shares of such class previously acquired by it; (d) the holders of all
outstanding shares not beneficially owned by the Interested Shareholder are
entitled to receive in the Business Combination consideration meeting the
requirements of clauses (iv)(a), (b) and (c) above; and (e) after the Share
Acquisition Date and prior to the consummation of the Business Combination, the
Interested Shareholder has not acquired any additional voting shares except as
part of the transaction in which the Interested Shareholder became an Interested
Shareholder, stock dividends or stock splits which apply equally to all
stockholders or certain other specified conditions.
Under the PaBCL, directors can take into consideration a number of factors
in evaluating a proposed business combination, including specifically (unless
the bylaws or articles of incorporation provide otherwise), the short- and
long-term goals of the corporation and the potential effects of the
corporation's employees, suppliers and the community.
Furthermore, under the PaBCL, unless explicitly provided for otherwise in a
corporation's bylaws or articles of incorporation, shares acquired by a person
in excess of 20% of a class of securities of a qualified Pennsylvania
corporation ("control shares") cannot be voted until approval is received from a
majority of the disinterested stockholders. In addition, the BCL provides that
the voting rights may lapse in certain instances, and the corporation is also
given the option to redeem such control shares in certain instances.
The PaBCL further provides certain protection to qualified Pennsylvania
corporations from being exposed to and paying "greenmail" (generally defined as
offering to purchase at least 20% of the voting shares of a corporation or
threatening to wage or waging a proxy contest and thereafter disposing of such
securities at a profit prior to consummating the proposed transactions).
Generally, the BCL provides that a qualified corporation can recover any
"profit" realized by such controlling person or group due to the disposition of
the securities of the corporation within a certain time after obtaining the
control shares.
Furthermore, the PaBCL requires acquiring persons to pay a minimum
severance salary to any eligible employee, as defined, whose employment is
terminated, other than for willful misconduct, due to a business combination or
control-share acquisition.
REGULATORY RESTRICTIONS
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings association unless the OTS has been given 60 days' prior
written notice. The HOLA provides that no company may acquire "control" of a
savings association without the prior approval of the OTS. Any company that
acquires such control becomes a savings and loan holding company subject to
registration, examination and regulation by the OTS. Pursuant to Federal
regulations, control of a savings association 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 association or the ability to control the election
of a majority of the directors of an association. Moreover, control is presumed
to have been acquired, subject to rebuttal, upon the acquisition of more than
10% of any class of voting stock, or of more than 25% of any class of stock, of
a savings association, where certain enumerated "control factors" are also
present in the acquisition. The OTS may prohibit an acquisition if (i) it would
result in a monopoly or substantially lessen competition, (ii) the financial
condition of the acquiring person might jeopardize the financial stability of
the institution, or (iii) the competence, experience or integrity of the
acquiring person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of control by such person.
The foregoing restrictions do not apply to the acquisition of a savings
association'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 savings
association.
105
<PAGE> 106
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 10 million shares of Common Stock having
a par value of $1.00 per share and 5.0 million shares of Preferred Stock, par
value $1.00 per share. The Company currently expects to issue up to a maximum of
1.15 million shares of Common Stock (exclusive of any adjustment by 15% as
permitted by the Plan) and no shares of Preferred Stock in the Conversion. 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
of Conversion, all such stock will be duly authorized, fully paid and
nonassessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE 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 if, as and when declared by its
Board of Directors, subject to compliance with limitations which are imposed by
law. See "Dividend Policy". 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.
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 Pennsylvania law or the Company's articles 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
Savings Bank," 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.
As a Federally chartered mutual savings bank, corporate powers and control
of the Savings Bank are vested in its Board of Directors who elect the officers
of the Savings Bank and will 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 Savings Bank,
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 Savings Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Savings Bank, the Company, as holder of the Savings Bank's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Savings Bank (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and the Supplemental Eligible
Account Holders (see "The Conversion--Liquidation Rights"), all assets of the
Savings Bank 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,
106
<PAGE> 107
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 SAVINGS BANK
GENERAL
The articles of incorporation of the Savings Bank, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 10,000,000
shares of common stock, par value $1.00 per share and 5,000,000 shares of
preferred stock, par value $1.00 per share, of the Savings Bank. The Savings
Bank currently expects to issue up to a maximum of 1,150,000 shares of its
common stock and no shares of its preferred stock in the Conversion. Each share
of common stock of the Savings Bank 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 articles of
incorporation without the approval of the Savings Bank's stockholders. Upon
Conversion, all of the issued and outstanding common stock of the Savings Bank
will be held by the Company as the Savings Bank's sole stockholder. The capital
stock of the Savings Bank will represent nonwithdrawable capital, will not be an
account of an insurable type, and will not be insured by the FDIC.
DIVIDENDS
The holders of the Savings Bank'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 Savings Bank out of funds legally available therefore. See
"Dividend Policy" for certain restrictions on the payment of dividends.
VOTING RIGHTS
Immediately after the Conversion, the holders of the Savings Bank's common
stock will possess exclusive voting rights in the Savings Bank. The Company will
own all of the issued and outstanding common stock of the Savings Bank. If the
Savings Bank issues its preferred stock, holders of its preferred stock may also
possess voting rights.
LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the Savings
Bank, the holders of common stock will be entitled to receive, after payment of
all debts and liabilities of the Savings Bank (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 Savings Bank available for distribution in
cash or in kind. If additional 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 Savings Bank will not be entitled to
preemptive rights with respect to any shares of the Savings Bank which may be
issued. The common stock will not be subject to redemption. Upon receipt by the
Savings Bank of the full specified purchase price therefor, the common stock
will be fully paid and nonassessable.
PREFERRED STOCK
None of the shares of the Savings Bank's authorized preferred stock will be
issued in the Conversion. Such preferred stock may be issued with such
preferences and designations as the Board of Directors of the Savings Bank may
from time to time determine. The Board of Directors of the Savings Bank can,
without stockholder approval, issue preferred stock with voting, dividend,
liquidation and conversion rights which
107
<PAGE> 108
could dilute the voting strength of the holders of the common stock of the
Savings Bank and may assist management in impeding an unfriendly takeover or
attempted change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Chemical
Mellon Shareholder Services, L.L.C., a New Jersey limited liability company.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and is
included herein in reliance upon the authority of said firm as experts in giving
said report. Reference is made to said report, which includes an explanatory
paragraph with respect to the changes in the methods of accounting for loan
losses in 1995, investments in debt and equity securities in 1994 and income
taxes in 1993, as discussed in Notes 1 and 10 to the financial statements.
FinPro has consented to the publication herein of the summary of its report
to the Savings Bank and Company setting forth its opinion as to the estimated
pro forma market value of the Common Stock upon Conversion and its opinion with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the Federal and Pennsylvania income
tax consequences of the Conversion will be passed upon for the Savings Bank and
Company by Tucker Arensberg, P.C., Pittsburgh, Pennsylvania, special counsel to
the Savings Bank and the Company. Certain legal matters will be passed upon for
Ryan, Beck by Elias, Matz, Tiernan & Herrick, L.L.P., Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. Such information, including
the exhibits to the Registration Statement, can be examined without charge at
the public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the SEC
at prescribed rates. The 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 which
describe only the material provisions of such documents; each such statement is
qualified by reference to such contract or document.
The Savings Bank has filed an Application for Conversion with the OTS with
respect to the Conversion. 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, at the Office of the
Regional Director of the OTS located at 10 Exchange Place Centre, 18th Floor,
Jersey City, New Jersey 07302.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion.
A copy of the articles of incorporation and the Bylaws of the Company, the
charter and Bylaws of the Savings Bank and the Conversion Valuation Appraisal
Report of FinPro are available without charge from the Savings Bank. For a copy
of any of these documents, call the Savings Bank at (412) 655-1190.
108
<PAGE> 109
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Public Accountants............................................... F-2
Statements of Financial Condition--
December 31, 1995 and 1994........................................................... F-3
Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993..................................................... 28
Statements of Equity for the Years Ended
December 31, 1995, 1994 and 1993..................................................... F-4
Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993..................................................... F-5
Notes to Financial Statements.......................................................... F-6
</TABLE>
The financial statements of Prestige Bancorp, Inc. have been omitted
because Prestige Bancorp, Inc. has not yet issued any stock, has no assets and
no liabilities, and has not conducted any business other than of an
organizational nature.
All financial statement schedules are omitted because the required
information either is not applicable or is included in the financial statements
and notes thereto.
F-1
<PAGE> 110
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Prestige Bank, F.S.B.:
We have audited the accompanying statements of financial condition of
Prestige Bank, F.S.B. (a federally chartered mutual savings bank) as of December
31, 1995 and 1994, and the related statements of income, equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Bank'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 Prestige Bank, F.S.B. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective January 1,
1995, the Bank changed its method of accounting for loan losses. In addition, as
discussed in Notes 1 and 10 to the financial statements, effective January 1,
1994 and 1993, the Bank changed its method of accounting for investments in debt
and equity securities and income taxes, respectively.
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
February 26, 1996
F-2
<PAGE> 111
PRESTIGE BANK, F.S.B.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks.......................................... $ 779,397 $ 784,130
Interest-bearing deposits with banks............................. 3,614,270 756,101
Investment securities:
Available for sale............................................. 7,491,045 1,158,340
Held to maturity (market value $15,193,150 and $19,738,273,
respectively)............................................... 15,074,601 21,127,274
Loans............................................................ 61,737,509 60,990,397
Less--Unearned income.......................................... 42,204 52,077
Allowance for loan losses............................... 287,060 303,312
----------- -----------
Net loans.............................................. 61,408,245 60,635,008
----------- -----------
Federal Home Loan Bank stock, at cost............................ 733,700 693,700
Premises and equipment, net...................................... 1,868,569 1,871,907
Accrued interest receivable...................................... 573,548 509,748
Other assets..................................................... 297,280 209,051
----------- -----------
Total assets..................................................... $91,840,655 $87,745,259
=========== ===========
LIABILITIES AND EQUITY
Liabilities:
Noninterest-bearing deposits................................... $ 2,082,444 $ 1,309,779
Interest-bearing deposits...................................... 78,648,228 74,003,705
----------- -----------
Total deposits............................................ 80,730,672 75,313,484
Federal Home Loan Bank advances................................ 2,977,000 4,261,400
Advance payments by borrowers for taxes and insurance.......... 571,780 497,145
Income taxes payable........................................... 71,149 196,463
Deferred tax liability......................................... 45,317 21,422
Other liabilities.............................................. 266,762 406,235
----------- -----------
Total liabilities......................................... 84,662,680 80,696,149
----------- -----------
Commitments and contingent liabilities (Note 14)
Equity:
Retained earnings--substantially restricted.................... 7,245,432 7,084,573
Net unrealized holding gains (losses) on available for sale
securities, net of taxes.................................... (67,457) (35,463)
----------- -----------
Total equity.............................................. 7,177,975 7,049,110
----------- -----------
Total liabilities and equity..................................... $91,840,655 $87,745,259
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 112
PRESTIGE BANK, F.S.B.
STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
NET UNREALIZED
HOLDING GAINS
(LOSSES) ON
AVAILABLE FOR
SALE
RETAINED SECURITIES,
EARNINGS NET OF TAXES TOTAL
-------- ------------ -----
<S> <C> <C> <C>
BALANCE, December 31, 1992........................... $5,850,696 $ -- $5,850,696
Net income......................................... 685,449 -- 685,449
Net unrealized holding gains (losses) on available
for sale securities............................. -- (15,287) (15,287)
---------- -------- ----------
BALANCE, December 31, 1993........................... 6,536,145 (15,287) 6,520,858
Net income......................................... 548,428 -- 548,428
Change in net unrealized holding gains (losses) on
available for sale securities................... -- (20,176) (20,176)
---------- -------- ----------
BALANCE, December 31, 1994........................... 7,084,573 (35,463) 7,049,110
Net income......................................... 160,859 -- 160,859
Change in net unrealized holding gains (losses) on
available for sale securities................... -- (31,994) (31,994)
---------- -------- ----------
BALANCE, December 31, 1995........................... $7,245,432 $(67,457) $7,177,975
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 113
PRESTIGE BANK, F.S.B.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income....................................................... $ 160,859 $ 548,428 $ 685,449
----------- ----------- -----------
Adjustments to reconcile net income to net cash (used) provided
by operating activities--
Depreciation of premises and equipment....................... 155,618 112,641 116,778
Amortization of premiums and discounts, net.................. (2,791) (44,230) (17,289)
Loss on sale of premises and equipment....................... 32,675 -- --
Loss on sale of mutual fund shares........................... -- -- 13,515
Provision for loan losses.................................... 36,000 36,000 36,000
(Decrease) increase in other liabilities..................... (139,473) 280,093 (59,509)
(Decrease) increase in income taxes payable.................. (81,736) 60,928 (114,760)
(Increase) decrease in accrued interest receivable........... (63,991) (14,745) 21,963
(Increase) decrease in other assets.......................... (88,230) (67,896) 38,631
Other, net................................................... (13,862) 8,626 (8,130)
----------- ----------- -----------
Total adjustments.......................................... (165,790) 371,417 27,199
----------- ----------- -----------
Net cash (used) provided by operating activities........... (4,931) 919,845 712,648
----------- ----------- -----------
Investing activities:
Loan originations................................................ (8,875,462) (15,090,193) (14,481,340)
Proceeds from sale of mutual fund shares......................... -- -- 2,999,000
Proceeds from maturity of held to maturity investment
securities..................................................... 500,000 2,000,000 --
Purchases of held to maturity investment securities.............. (1,502,422) (2,479,184) (1,996,250)
Purchases of mutual fund shares.................................. -- -- (111,311)
Purchases of available for sale securities....................... (67,785) (48,261) --
Principal payments on held to maturity mortgage-backed
securities..................................................... 1,719,761 2,147,600 2,620,000
Principal payments on loans...................................... 8,080,275 9,513,168 14,101,728
Purchases of mortgage-backed securities.......................... (978,469) (989,688) (9,321,023)
Purchases of premises and equipment.............................. (275,007) (791,266) (50,683)
Proceeds from sale of premises and equipment..................... 90,053 -- --
(Purchase) redemption of Federal Home Loan Bank stock............ (40,000) (66,700) 138,900
----------- ----------- -----------
Net cash used by investing activities...................... (1,349,056) (5,804,524) (6,100,979)
----------- ----------- -----------
Financing activities:
Net change in advance payments by borrowers for taxes and
insurance...................................................... 74,635 (7,158) 90,356
Proceeds from Federal Home Loan Bank advances.................... 2,027,000 9,700,000 461,400
Payments on Federal Home Loan Bank advances...................... (3,311,400) (5,900,000) --
Net (decrease) increase in money market, NOW and passbook savings
accounts....................................................... (2,519,341) (2,446,269) 4,061,125
Net increase (decrease) in certificate accounts.................. 7,936,529 3,033,140 (884,159)
----------- ----------- -----------
Net cash provided by financing activities.................. 4,207,423 4,379,713 3,728,722
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents............... 2,853,436 (504,966) (1,659,609)
Cash and cash equivalents at beginning of year..................... 1,540,231 2,045,197 3,704,806
----------- ----------- -----------
Cash and cash equivalents at end of year........................... $ 4,393,667 $ 1,540,231 $ 2,045,197
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes....................... $ 129,770 $ 290,000 $ 565,174
=========== =========== ===========
Cash paid during the year for interest on deposits and
borrowings..................................................... $ 3,408,936 $ 2,619,414 $ 2,635,210
=========== =========== ===========
Supplemental schedule of noncash investing activity:
Loans transferred to real estate owned........................... $ 80,716 $ 9,156 $ --
=========== =========== ===========
Investment securities transferred from held to maturity to
available
for sale....................................................... $ 6,316,596 $ 1,155,506 $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 114
PRESTIGE BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
Prestige Bank, F.S.B. (the Bank or Prestige), a federally chartered savings
bank, is primarily engaged in the business of attracting deposits in the form of
savings accounts and investing such funds in the origination or purchase of
commercial loans, residential mortgage loans and consumer loans, including
credit card services, and in mortgage-backed and other securities. The Bank
conducts its business through three offices located in the Greater Pittsburgh
Metropolitan Area.
The following comprise the significant accounting policies which the Bank
follows in preparing and presenting its financial statements:
Cash and Cash Equivalents
Cash and cash equivalents in the accompanying statements of cash flows
include cash and due from banks and interest-bearing deposits with banks.
Interest-bearing deposits are on deposit with domestic banks and are due within
three months. The Bank had no deposits in foreign banks or in foreign branches
of United States banks. In addition, cash and due from banks at December 31,
1995 and 1994, included $117,000 and $113,000, respectively, of reserves
required to be maintained under Federal Reserve Bank regulations.
Investment Securities
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," which specifies a methodology for the classification of
such securities as either held to maturity, available for sale or as trading
assets. Securities are classified at the time of purchase as investment
securities held to maturity if it is management's intent and the Bank has the
ability to hold the securities until maturity. Debt securities classified as
held to maturity are carried on the Bank's books at cost, adjusted for
amortization of premium and accretion of discount using the interest method.
Alternatively, investments are classified as available for sale if it is
management's intent at the time of purchase to hold the securities for an
indefinite period of time and/or to use the investments as part of the Bank's
asset/liability management strategy. Investments classified as available for
sale include securities which may be sold to effectively manage interest rate
risk exposure, prepayment risk and other factors (such as liquidity
requirements). These available for sale securities are reported at fair value
with unrealized aggregate appreciation (depreciation) excluded from income and
credited (charged) to a separate component of equity on a net of tax basis. The
Bank presently is not authorized to and does not engage in trading activity.
Gains or losses on the sale of available for sale securities are recognized in
income upon realization using the specific identification method.
Prior to 1994, it was the general policy of the Bank to hold investment
securities until maturity and, therefore, all securities were classified as
being held to maturity. Debt securities were recorded at amortized cost and
equity securities were carried at the lower of cost or market with the market
adjustment reflected as a reduction to equity.
Loans Receivable
Loans receivable are stated at their unpaid principal balances, including
any allowances for anticipated loss.
Interest on loans is credited to income as earned. Accrual of interest
income is discontinued when reasonable doubt exists regarding collectibility,
generally when payment of principal or interest is 90 days or
F-6
<PAGE> 115
more past due and repayment is less than assured. For loans which have been
placed on a nonaccrual basis, previously accrued but unpaid interest is reversed
and subsequently recognized only to the extent payment is received and recovery
of principal is assured.
Allowance for Loan Losses and Real Estate Owned
The allowance for loan losses is based on estimates, and ultimate losses
may vary from current estimates. These estimates are continually reviewed and,
as adjustments become necessary, they are reported in earnings in the period in
which they become known. The allowance for possible loan losses is established
through a provision charged to expense and recoveries.
Effective January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," which was subsequently amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures." SFAS No. 114 addresses the treatment and disclosure of certain
loans where it is probable that the creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. This
standard defines the term "impaired loan" and indicates the method used to
measure the impairment. The measurement of impairment may be based upon (a) the
present value of expected future cash flows discounted at the loan's effective
interest rate; (b) the observable market price of the impaired loan; or (c) the
fair value of the collateral of a collateral dependent loan. Additionally, SFAS
No. 118 requires the disclosure of how the creditor recognizes the interest
income related to these impaired loans.
The Bank's policy is to review separately each of its commercial loans in
order to determine if a loan is impaired. The Bank also has identified two pools
of small-dollar-value homogeneous loans which are evaluated collectively for
impairment. These separate pools are for residential mortgage loans and for
consumer loans. As facts such as a significant delinquency in payments of 90
days or more, a bankruptcy or other circumstances become known on specific loans
within either loan pool, individual loans are reviewed and are removed from the
pool if deemed to be impaired.
The Bank considers its specifically identified impaired loans to be
collateral dependent; therefore, the fair value of the collateral of the
impaired loans is evaluated in measuring the impairment. For its two loan pools,
the Bank calculates expected loan losses using a formula approach based
primarily upon historical experience and current economic conditions. The Bank's
policy is to recognize interest on a cash basis for impaired loans and to charge
off impaired loans when deemed uncollectible.
The adoption of these standards at January 1, 1995, resulted in loans
totaling $391,000 being specifically identified as impaired and an allocation
being made of the existing allowance for loan losses of approximately $27,000.
At December 31, 1995, the Bank had loans totaling $306,000 specifically
identified as impaired. No specific allocation of the allowance for loan losses
was deemed necessary for these impaired loans.
The average recorded balance for impaired loans during 1995 was $406,000,
and $34,000 of interest income was recognized during the time within the period
that the loans were impaired. For these same loans, the interest income
recognized on a cash basis during the period of impairment was $34,000.
The Bank records real estate owned at the lower of fair value or carrying
cost based upon appraisals less estimated selling costs. The Bank had real
estate owned assets of $41,872 and $-0- at December 31, 1995 and 1994,
respectively.
Origination Fees
The Bank defers all nonrefundable fees and capitalizes all material direct
costs associated with each loan originated. The deferred fees and capitalized
costs are accreted or amortized as an adjustment to interest income using the
interest method over the contractual life of the loans, adjusted for estimated
prepayments based on the Bank's historical prepayment experience.
F-7
<PAGE> 116
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization which is computed using the straight-line method over the estimated
useful lives of the related assets which are from 2 to 50 years.
Deposits
Interest on deposits is accrued and charged to expense monthly and is paid
or credited in accordance with the terms of the respective accounts.
Employee Benefits
The Bank has a noncontributory pension plan covering substantially all
employees of the Bank. Pension cost is charged to expense. Additionally, the
Bank maintains a 401(k) plan for employees. The Bank does not match any employee
contributions. The Bank has no other postemployment benefit plans in effect.
Income Taxes
As discussed in Note 10, the Bank adopted SFAS No. 109, "Accounting for
Income Taxes," in the first quarter of 1993. Under SFAS No. 109, deferred tax
assets or liabilities are computed based on the difference between the financial
statement and income tax bases of assets and liabilities using the enacted
marginal tax rate. Deferred income tax expenses or credits are based on the
changes in the asset or liability from period to period.
Risk Management Overview
Risk identification and management are essential elements for the
successful management of the Bank. In the normal course of business, the Bank is
subject to various types of risk, including interest rate, credit and liquidity
risk. The Bank controls and monitors these risks with policies, procedures and
various levels of managerial and Board oversight.
Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the magnitude, direction and frequency of
changes in interest rates. Interest rate risk results from various repricing
frequencies and the maturity structure of assets and liabilities. The Bank uses
its asset liability management policy to manage interest rate risk. During 1995,
the Bank's adjustable rate one-to-four family residential mortgages repriced
with an index which lagged behind market conditions. Additionally, the Bank had
a shift in its deposit base from demand deposits to certificates of deposit.
Thus, since the net interest margin has decreased, the Bank's profitability has
also decreased.
Credit risk represents the possibility that a customer may not perform in
accordance with contractual terms. Credit risk results from extending credit to
customers and purchasing securities. The Bank's primary credit risk occurs in
the loan portfolio. The Bank uses its credit policy and evaluation of the
adequacy of the allowance for loan losses to control and manage credit risk. The
Bank's investment policy indicates the amount of credit risk that may be assumed
in the investment portfolio.
Liquidity risk represents the inability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers, as well as
the obligations to depositors and the Federal Home Loan Bank (FHLB). The Bank
uses its asset liability management policy and its FHLB line of credit to manage
liquidity risk.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from these estimates.
F-8
<PAGE> 117
Future Accounting Standard
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The Bank
will adopt SFAS No. 121 in 1996 and, based on current circumstances, does not
believe the effect of adoption will be material.
Reclassifications
Certain reclassifications have been made to the prior year to conform to
the current year presentation.
2. INVESTMENT SECURITIES:
The cost and market values of investment securities are summarized as
follows:
Investment securities held to maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ ----
<S> <C> <C> <C> <C>
U.S. government and government agency
obligations due within one year.............. $ 1,500,128 $ -- $ 4,737 $ 1,495,391
U.S. government and government agency
obligations due within five years............ 2,002,152 37,581 3,327 2,036,406
Federal Home Loan Mortgage Corporation (FHLMC)
certificates................................. 9,840,500 78,425 20,706 9,898,219
Government National Mortgage Association (GNMA)
certificates................................. 1,584,387 27,971 -- 1,612,358
Federal National Mortgage Association (FNMA)
certificates................................. 147,434 3,342 -- 150,776
----------- -------- ------- -----------
$15,074,601 $147,319 $28,770 $15,193,150
=========== ======== ======= ===========
</TABLE>
Investment securities available for sale:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S government and government agency obligations
due within one year............................ $1,998,958 $ -- $ 38,646 $1,960,312
Federal Home Loan Mortgage Corporation (FHLMC)
certificates................................... 2,930,459 18,287 20,403 2,928,343
Federal National Mortgage Association (FNMA)
certificates................................... 1,387,217 -- 42,322 1,344,895
Mutual fund investment........................... 1,286,839 -- 29,344 1,257,495
---------- ------- -------- ----------
$7,603,473 $18,287 $130,715 $7,491,045
========== ======= ======== ==========
</TABLE>
F-9
<PAGE> 118
Investment securities held to maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ ------
<S> <C> <C> <C> <C>
U.S. government and government agency
obligations due within one year............. $ 498,512 $394 $ -- $ 498,906
U.S. government and government agency
obligations due within five years........... 3,995,814 -- 324,876 3,670,938
Federal Home Loan Mortgage Corporation (FHLMC)
certificates................................ 13,221,672 -- 889,557 12,332,115
Government National Mortgage Association
(GNMA) certificates......................... 1,782,976 438 15,235 1,768,179
Federal National Mortgage Association (FNMA)
certificates................................ 1,628,300 -- 160,165 1,468,135
----------- ---- ------- -----------
$21,127,274 $832 $1,389,833 $19,738,273
=========== ==== ========== ===========
</TABLE>
Investment available for sale:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mutual fund investment........................... $1,219,054 $ -- $60,714 $1,158,340
========== ==== ======= ==========
</TABLE>
Effective January 1, 1994, the Bank adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The adoption of this
accounting pronouncement had no material impact on the financial statements;
however, all U.S. government and government agency obligations along with
mortgage-backed securities were classified as investments held to maturity. The
mutual fund investment was classified as available for sale at January 1, 1994,
with a carrying value of $1,155,506.
In the fourth quarter of 1995, concurrent with the adoption of its
implementation guide on SFAS No. 115, the Financial Accounting Standards Board
allowed a one-time reassessment of the SFAS No. 115 classifications of all
securities currently held. Any reclassifications would be accounted for at fair
value in accordance with SFAS No. 115 and any reclassifications from the held to
maturity portfolio that resulted from this one-time reassessment would not call
into question the intent of the Bank to hold other debt securities to maturity
in the future. The Bank used the opportunity on December 28, 1995, under this
one-time reassessment to reclassify $6,316,596 in mortgage-backed and other
securities from held to maturity to the available for sale portfolio. In
connection with this reclassification, gross unrealized gains of $18,329 and
gross unrealized losses of $107,180 were recorded in available for sale
securities and in equity (on a net of tax basis).
Additionally, as of December 31, 1995 and 1994, the Bank has in its
available for sale holdings an investment in the Ivy Short-Term Bond Fund, a
diversified mutual fund, which invests in Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation certificates which are backed by
adjustable rate mortgages and other bonds. The majority of these certificates
reprice annually.
F-10
<PAGE> 119
The activity of the net unrealized holding gains (losses) (net of tax
basis) on available for sale securities for the year ended December 31, 1995, is
as follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Beginning balance in equity....................................... $(35,463)
Unrealized gains (losses) on securities transferred into available
for sale during the reassessment period......................... (53,311)
Net change in unrealized gains (losses) on securities held as
available for sale during the period............................ 21,317
-------
Ending balance in equity.......................................... $(67,457)
========
</TABLE>
Approximately two-thirds of the Bank's mortgage-backed securities have
fixed rates. Mortgage-backed securities include net unamortized discounts of
$50,716 and $47,490 at December 31, 1995 and 1994, respectively.
3. LOANS RECEIVABLE:
Loans receivable at December 31, 1995 and 1994, are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Commercial, including commercial secured by real
estate................................................. $ 814,893 $ 733,363
----------- -----------
Real estate loans:
1-4 family............................................. 55,366,847 55,303,647
Construction........................................... -- 715,400
----------- -----------
55,366,847 56,019,047
Less--Undisbursed loan proceeds........................ -- 231,414
Deferred loan fees.............................. 42,204 52,077
----------- -----------
55,324,643 55,735,556
----------- -----------
Consumer loans:
Share.................................................. 477,793 439,492
Automobile............................................. 713,435 253,231
Home equity............................................ 2,052,826 1,693,804
Student................................................ 2,220,329 2,079,758
Credit cards........................................... 90,557 --
Other.................................................. 829 3,116
----------- -----------
5,555,769 4,469,401
----------- -----------
61,695,305 60,938,320
Less--Allowance for loan losses........................ 287,060 303,312
----------- -----------
$61,408,245 $60,635,008
=========== ===========
</TABLE>
In late 1995, the Bank began offering credit card accounts to its
customers. The credit cards are currently being serviced by Equifax.
At December 31, 1995 and 1994, the majority of the Bank's net loan
portfolio was secured by properties located in Western Pennsylvania. As of
December 31, 1995, loans to customers engaged in similar activities and having
similar economic characteristics, as defined by standard industrial
classifications, did not exceed 10% of total loans. As of December 31, 1995 and
1994, the Bank had approximately $306,000 and $391,000 of nonaccrual loans. The
Bank does not have any other off-balance sheet risk except for the commitments
referenced in Note 14.
F-11
<PAGE> 120
4. ALLOWANCE FOR LOAN LOSSES:
Activity with respect to the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year....................... $303,312 $267,811 $233,009
Provision for loan losses.......................... 36,000 36,000 36,000
Charge-offs........................................ (52,884) (1,192) (3,303)
Recoveries......................................... 632 693 2,105
-------- -------- --------
Balance at end of year............................. $287,060 $303,312 $267,811
======== ======== ========
</TABLE>
5. FEDERAL HOME LOAN BANK STOCK:
The Bank is a member of the Federal Home Loan Bank System. As a member, the
Bank maintains an investment in the capital stock of the Federal Home Loan Bank
of Pittsburgh, at cost, in an amount not less than 1% of its outstanding
mortgage loans or 1/20 of its outstanding notes payable, if any, to the Federal
Home Loan Bank of Pittsburgh, whichever is greater, as calculated at December 31
of each year.
6. PREMISES AND EQUIPMENT:
Office premises and equipment at December 31, 1995 and 1994, are summarized
by major classification as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land....................................................... $ 224,817 $ 224,817
Building and improvements.................................. 1,694,348 1,489,360
Furniture, fixtures and equipment.......................... 775,414 540,487
Construction-in-progress................................... -- 596,775
---------- ----------
Total, at cost........................................ 2,694,579 2,851,439
Less--Accumulated depreciation............................. 826,010 979,532
---------- ----------
Premises and equipment, net................................ $1,868,569 $1,871,907
========== ==========
</TABLE>
Depreciation and amortization expense was $155,618, $112,641 and $116,778
for the fiscal years ended December 31, 1995, 1994 and 1993, respectively.
F-12
<PAGE> 121
7. DEPOSITS:
Deposits at December 31, 1995 and 1994, are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST RATE AMOUNT INTEREST RATE AMOUNT
------------- ------ ------------- ------
<S> <C> <C> <C> <C>
Total noninterest-bearing deposits....... $ 2,082,444 $ 1,309,779
=========== ===========
Interest-bearing deposits:
Money market demand accounts........... 2.98% $9,085,052.. 2.79% $10,663,217
NOW accounts........................... 1.65 7,325,268 1.79 7,382,319
Passbook and club accounts............. 2.49 16,396,110 2.65 18,052,898
----------- -----------
32,806,430 36,098,434
----------- -----------
Certificate accounts:
Due within one year.................... 5.49 29,200,798 4.93 32,153,271
Due after one but within three years... 6.43 11,107,000 5.62 4,838,000
Thereafter............................. 6.22 5,534,000 6.20 914,000
----------- -----------
45,841,798 37,905,271
----------- -----------
Total interest-bearing deposits.......... $78,648,228 $74,003,705
=========== ===========
Deposits of $100,000 or more............. 5.61 $ 6,071,027 2.61 $ 5,069,315
=========== ===========
</TABLE>
Deposits in excess of $100,000 are not Federally insured.
Interest expense associated with deposits for each of the years ended is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest on certificates of deposit........... $2,379,871 $1,523,005 $1,498,904
Interest on savings accounts.................. 428,583 517,943 646,501
Money market demand accounts.................. 294,353 309,890 342,099
Interest on NOW accounts...................... 121,322 123,560 148,941
Early withdrawal penalties.................... (10,641) (10,709) (5,060)
---------- ---------- ----------
$3,213,488 $2,463,689 $2,631,385
========== ========== ==========
</TABLE>
8. FEDERAL HOME LOAN BANK ADVANCES:
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
- ---------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
MATURITY AVERAGE RATE BALANCE MATURITY AVERAGE RATE BALANCE
- -------- ------------ ------- -------- ------------ -------
<S> <C> <C> <C> <C> <C>
1996 6.04% $1,000,000 1995 3.96% $ 461,400
1997 6.60 1,000,000 1996 6.41 2,800,000
2000 6.11 977,000 1997 6.60 1,000,000
----------
$2,977,000 $4,261,400
==========
</TABLE>
As of December 31, 1995 and 1994, the Bank had an available balance under
its line of credit of approximately $8,605,600 and $6,400,000, respectively, in
connection with the Federal Home Loan Bank of Pittsburgh's Cash Management
Advance Program. Of the total advances above, $-0- and $1,800,000 represent
previous borrowings against the line of credit as of December 31, 1995 and 1994,
respectively.
The Bank had a "blanket" agreement with the Federal Home Loan Bank of
Pittsburgh whereby the Bank pledged as collateral for these advances its
investments in U.S. government and agency securities and U.S.
F-13
<PAGE> 122
government and agency mortgage-backed securities and 100% of its unencumbered
home mortgage loan portfolio.
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires all entities to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Bank, as for most financial
institutions, approximately 98% of its assets and liabilities are considered
financial instruments, as defined in SFAS No. 107. Many of the Bank's financial
instruments, however, lack an available trading market as characterized by a
willing buyer and willing seller engaging in an exchange transaction. Therefore,
significant estimations and present value calculations were used by the Bank for
the purpose of this disclosure.
Estimated fair values have been determined by the Bank using the best
available data and an estimation methodology suitable for each category of
financial instruments.
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the balance sheets for cash and various
interest-bearing deposits approximates those assets' fair values.
INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
NET LOANS AND ACCRUED INTEREST RECEIVABLE
The fair values for one-to-four family residential loans are estimated
using discounted cash flow analyses, using yields from similar products in the
secondary markets. The fair values of consumer and commercial loans are
estimated using discounted cash flow analyses, using interest rates reported in
various government releases and the Bank's own product pricing schedule for
loans with terms similar to the Bank's. The fair values of multi-family and
nonresidential mortgages are estimated using discounted cash flow analysis,
using interest rates based on a national survey of similar loans. The carrying
amount of accrued interest approximates its fair value.
DEPOSIT LIABILITIES
The fair values disclosed for deposits with no stated maturities (e.g.,
passbook savings accounts) are, by definition, equal to the amount payable on
demand at the repricing date (i.e., their carrying amounts). Fair values of
deposits with stated maturities (e.g., certificates of deposit) are estimated
using a discounted cash flow calculation that applies a comparable Federal Home
Loan Bank advance rate to the aggregated weighted average maturity on time
deposits.
FEDERAL HOME LOAN BANK ADVANCES
The fair values disclosed for Federal Home Loan Bank advances are estimated
using a discounted cash flow calculation that applies a comparable Federal Home
Loan Bank advance rate to the aggregated weighted average maturity on advances.
F-14
<PAGE> 123
The estimated fair values and recorded book balances at December 31, 1995,
are as follows:
<TABLE>
<CAPTION>
1995
----------------------------
ESTIMATED RECORDED
FAIR VALUE BOOK BALANCE
----------- ------------
<S> <C> <C>
Cash and cash equivalents................................ $ 4,393,667 $ 4,393,667
Investment securities.................................... 22,684,195 22,565,646
Net loans................................................ 61,830,000 61,408,245
Accrued interest receivable.............................. 573,548 573,548
Deposits with no stated maturities....................... 34,888,874 34,888,874
Deposits with stated maturities.......................... 46,122,000 45,841,798
Federal Home Loan Bank advances.......................... 3,012,000 2,977,000
Commitments to originate loans........................... 1,500,000 1,500,000(1)
</TABLE>
(1) As discussed in Note 14 at December 31, 1995, the Bank had various
commitments to extend credit approximating $1,500,000.
10. INCOME TAXES:
Effective January 1, 1993, the Bank adopted SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 utilizes the liability method and deferred taxes are
determined based on the estimated future tax effects of differences between the
financial statement and income tax bases of assets and liabilities given the
provisions of the enacted tax laws. The cumulative effect of this new standard
on deferred income taxes as of January 1, 1993, was not material.
The provision for income taxes for each of the years ended is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal:
Current........................................... $30,940 $265,695 $356,701
Deferred.......................................... 43,615 17,359 16,793
------- -------- --------
74,555 283,054 373,494
State:
Current........................................... 8,514 63,069 78,786
------- -------- --------
Total income tax expense............................ $83,069 $346,123 $452,280
======= ======== ========
</TABLE>
Deferred income taxes result from timing differences in the recognition of
revenue and expense for tax and financial reporting purposes. The following
table presents the impact on income tax expense of the principal timing
differences and the tax effect of each for the years ended:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Deferred tax expense (benefit):
Deferred loan fees.................................. $17,706 $ 6,381 $(2,898)
Prepaid pension..................................... 35,206 9,985 13,958
Vacation accrual.................................... (3,670) (381) --
Deferred lease accrual.............................. -- 5,304 11,492
Provision for loan losses........................... (8,097) 8,251 30,964
Tax depreciation in excess of book depreciation..... 5,192 (2,290) (20,580)
Other, net.......................................... (2,722) (9,891) (16,143)
------- ------- -------
$43,615 $17,359 $16,793
======= ======= =======
</TABLE>
The Bank qualifies to be taxed under special income tax rules applicable to
thrift institutions and is entitled to a special bad debt deduction. The special
bad debt deduction is limited generally to 8% of otherwise taxable income
subject to certain limitations based on aggregate loans and savings deposits at
the end of the
F-15
<PAGE> 124
periods. The cumulative amount of bad debt deductions constitutes a restriction
for tax purposes of the Bank's use of retained income. If any portion of this
amount is subsequently used for purposes other than to absorb
loan losses, the amount so charged will be subject to federal income tax at the
then prevailing tax rate.
Until the Bank adopted SFAS No. 109, no deferred tax liability related to
the excess of bad debt deductions for federal income tax purposes over the
provisions for losses recorded for financial reporting purposes had been
recorded. In accordance with SFAS No. 109, the Bank recorded the deferred tax
associated with the temporary differences related to the bad debt reserve
arising in tax years after December 31, 1987. For the period before December 31,
1987, there is an unrecognized deferred tax liability of approximately $565,000
at December 31, 1995.
A reconciliation from the expected federal statutory income tax rate to the
effective rate expressed as a percentage of pretax income for each of the years
ended is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate..................................... 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit.......... 2.3 4.7 4.6
Effect of graduated federal tax rates.......................... (2.2) -- --
Other.......................................................... -- -- 1.2
---- ---- ----
34.1% 38.7% 39.8%
==== ==== ====
</TABLE>
Net deferred tax liabilities (assets) as of December 31, 1995 and 1994, are
as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred loan fees............................................ $ -- $(17,706)
Prepaid pension............................................... 27,884 (7,322)
Vacation accrual.............................................. (13,863) (10,193)
Allowance for loan losses..................................... 29,795 37,892
Valuation allowance for investments........................... (44,971) (25,251)
Tax depreciation in excess of book depreciation............... 46,472 42,836
Other, net.................................................... -- 1,166
-------- --------
Net deferred tax liability.................................... $ 45,317 $ 21,422
======== ========
</TABLE>
11. PENSION PLAN:
The Bank maintains a noncontributory defined benefit pension plan covering
all eligible employees. The following table sets forth the plan's funded status
and amounts recognized in the Bank's statements of financial condition at
December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $310,409 and $259,616............................... $ 314,005 $ 261,319
========= =========
Projected benefit obligation for service rendered to date... $(623,455) $(551,601)
Plan assets at fair value................................... 482,870 310,269
--------- ---------
Projected benefit obligation in excess of plan assets....... (140,585) (241,332)
Unrecognized net obligation at transition................... 63,972 68,744
Unrecognized net loss....................................... 158,625 205,920
--------- ---------
Prepaid pension cost........................................ $ 82,012 $ 33,332
========= =========
</TABLE>
Approximately 92% of the plan's assets is primarily invested either
directly or through mutual funds in common stocks, bonds, U.S. government and
agency, and foreign securities. The remaining plan assets are on deposit with
the Bank.
F-16
<PAGE> 125
The Bank's funding policy is to contribute annually the maximum amount that
can be deducted for federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future.
The components of pension expense are as follows for each of the years
ended:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost....................................... $ 43,078 $ 42,076 $ 25,073
Interest cost...................................... 39,991 36,197 21,993
Actual return on plan assets....................... (63,071) 10,907 (14,069)
Amortization of transition asset................... 49,037 (22,148) 3,153
-------- -------- --------
Net periodic pension cost.......................... $ 69,035 $ 67,032 $ 36,150
======== ======== ========
</TABLE>
For both reported periods, the rate of increase in future compensation
levels was assumed to be 4.75%. The weighted average discount rate used in
determining the actuarial present value of the projected benefit obligation was
7.25% for each of the years ended December 31, 1995 and 1994. The expected
long-term rate of return on assets was 7.25% for each of the years ended
December 31, 1995 and 1994. Additionally, the Bank maintains a 401(k) plan for
employees. The Bank does not match any employee contributions. The Bank does not
provide any other postemployment benefits.
12. RETAINED EARNINGS AND REGULATORY CAPITAL:
As part of federal legislation known as the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Office of Thrift Supervision (OTS)
became the Bank's primary regulator and issued three minimum capital standards
for savings banks. The first standard is the tangible capital requirement which
requires an institution to maintain a 1.5% ratio of tangible capital
(stockholders' equity less intangible assets) to total assets. The second
standard is a 3.0% ratio of core capital (stockholders' equity less certain
intangible assets) to total assets. The third standard is an 8.0% ratio of total
capital to total risk-weighted assets.
In management's opinion, the Bank complied with all three capital
requirements at their inception and continues to comply with such requirements.
The Bank is also subject to other capital ratios as required by FDICIA. In
management's opinion, the Bank is in compliance with these ratios.
The capital of the Bank may be affected in the near term by the
under-capitalization of the Savings Association Insurance Fund (the SAIF) of the
Federal Deposit Insurance Corporation (FDIC). Proposals introduced by regulators
and legislators have included provisions for one-time special assessments of
$.80 to $.85 per $100 of deposits held by the SAIF insured institutions to
replenish the SAIF up to the statutorily required reserve level of 1.25% of
insured deposits. As of December 31, 1995, based upon deposits as of that date,
such an assessment would reduce the net income of the Bank by $420,000 to
$446,000, net of tax, and have a corresponding reduction in equity.
Legislative proposals have provided for the merger of the Bank Insurance
Fund and SAIF, with such merger being conditioned upon the prior elimination of
the thrift charter. If such legislation is adopted, the Bank, as a federal
savings bank, may be required to covert to a commercial bank charter. Such a
requirement could cause the Bank to loose certain favorable tax treatment for
its bad debt reserve that it currently is entitled to (see Note 10).
13. RELATED PARTY TRANSACTIONS:
Certain directors and executive officers of the Bank, including their
immediate families and companies in which they are principal owners, are loan
customers of the Bank. In management's opinion, such loans are made in the
normal course of business and were granted on substantially the same terms and
conditions as loans to other individuals and businesses of comparable
creditworthiness at the time. Total loans to these persons at December 31, 1995
and 1994, amounted to $192,018 and $178,646, respectively.
F-17
<PAGE> 126
An analysis of these related party loans is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Balance at January 1................................ $ 178,646 $ 354,696
New loans........................................... 132,249 52,890
Payments............................................ (118,877) (30,903)
Change in Board composition......................... -- (198,037)
--------- ---------
Balance at December 31.............................. $ 192,018 $ 178,646
========= =========
</TABLE>
The change in Board composition amount represents a loan to an acting Board
member in 1993 who resigned his membership in 1994.
Additionally, the Bank has approved a loan for a director in the amount of
$250,000, subject to this director's acceptance, which is not included in the
aforementioned disclosures.
In addition, the Bank from time to time has conducted business with certain
directors, officers or companies in which they are related. During 1995, 1994
and 1993, such activity was as follows:
- A member of the Board of Directors leases office space from the Bank. The
Bank's rental income was $11,100, $8,500 and $7,200 for the years ended
December 31, 1995, 1994 and 1993, respectively. This director also
provides professional services to the Bank and his fees were $4,950,
$4,950 and $4,500 for the years ended December 31, 1995, 1994 and 1993,
respectively.
- A member of the Board of Directors is employed by a law firm retained by
the Bank in December 1995.
- The Bank retained media services from a company owned by the brother of
one of the Bank's officers. The total costs for such services in 1995,
1994 and 1993 was $24,765, $26,320 and $31,160, respectively.
14. COMMITMENTS AND CONTINGENT LIABILITIES:
The Bank incurs off-balance sheet risks in the normal course of business in
order to meet the financing needs of its customers. These risks derive from
commitments to extend credit. Such commitments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the financial
statements.
Commitments to extend credit are obligations to lend to a customer as long
as there is no violation of any condition established in the loan agreement.
Commitments generally have fixed expiration dates or other termination clauses.
A portion of the commitments is not expected to be drawn upon; thus, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to these commitments to extend credit is represented by their
contractual amounts. The Bank uses the same credit and collateral policies in
making commitments as for all other lending. The Bank has outstanding various
commitments to extend credit approximating $1,500,000 and $925,000 as of
December 31, 1995 and 1994, respectively. As of December 31, 1995, $292,000 of
these commitments had fixed rates which ranged from 6.75% to 8.00%, while at
December 31, 1994, the Bank had $424,000 of fixed rate commitments with interest
rates ranging from 7.00% to 8.25%. In the opinion of management, the funding of
these credit commitments will not have a material adverse effect on the Bank's
financial position or results of operations.
Additionally, the Bank is also subject to asserted and unasserted potential
claims encountered in the normal course of business. In the opinion of
management and legal counsel, the resolution of these claims will not have a
material adverse effect on the Bank's financial position or results of
operations.
F-18
<PAGE> 127
15. SUBSEQUENT EVENT:
On February 14, 1996, the Bank's Board of Directors adopted a Plan of
Conversion (the Plan) from a federally chartered mutual savings bank to a
federally chartered stock savings bank and the issuance of its stock to a
to-be-formed holding company, Prestige Bancorp, Inc., a Pennsylvania
corporation. The Plan provides that the holding company will offer
nontransferable subscription rights to purchase common stock of the holding
company. The rights will be offered first to eligible account holders of record,
a tax-qualified employee stock ownership plan to be adopted by the Bank,
supplemental eligible account holders, certain other depositors and borrowers,
and directors, officers and employees. Rights remaining unsold after the
subscription offering, if any, will be offered for sale to the public. The costs
of issuing the common stock will be deducted from the proceeds of the stock
offering. If the offering is unsuccessful for any reason, such costs will be
charged to operations. The Bank had incurred no costs at December 31, 1995.
At the date of the conversion, the Bank will establish a liquidation
account in an amount equal to retained earnings reflected in the statement of
financial condition appearing in the final prospectus. The liquidation account
will be maintained for the benefit of eligible savings account holders and
supplemental eligible account holders who continue to maintain their accounts at
the Bank after the conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation distribution
may be made with respect to the common shares. Except for the repurchase of
stock and payment of dividends by the Bank, the existence of the liquidation
account will not restrict the use or further application of such retained
earnings.
The Bank may not declare or pay a cash dividend on, or repurchase any of
its common shares if the effect thereof would cause the Bank's equity to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements for insured institutions.
The Bank will continue to be regulated by the Office of Thrift Supervision
and by the Federal Deposit Insurance Corporation (FDIC), which insures the
Bank's deposits. In addition, the Bank will continue to be a member of the
Federal Home Loan Bank System and all insured savings deposits will continue to
be insured by the FDIC up to the maximum provided by law.
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<PAGE> 128
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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 PRESTIGE BANCORP, INC. 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 PRESTIGE BANCORP, INC., SINCE ANY OF
THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary................................... 4
Selected Financial and Other Data......... 11
Summary of Recent Developments............ 12
Risk Factors.............................. 14
Prestige Bancorp, Inc..................... 20
Prestige Bank, A Federal Savings Bank..... 20
Use of Proceeds........................... 21
Dividend Policy........................... 21
Market for the Common Stock............... 22
Capitalization............................ 23 -----------------------------------------------------
Pro Forma Data............................ 24 -----------------------------------------------------
Regulatory Capital Requirements........... 27
Prestige Bank, A Federal Savings Bank
Statements of Income.................... 28
Management's Discussion and 1,150,000 SHARES
Analysis of Financial Condition and
Results of Operations................... 29
Business of the Savings Bank.............. 40 PRESTIGE BANCORP, INC.
Regulation................................ 58 (PROPOSED HOLDING COMPANY FOR PRESTIGE BANK,
Federal and State Taxation................ 68 A FEDERAL SAVINGS BANK)
Management of the Company................. 71
Management of the Savings Bank............ 71
The Conversion............................ 82 COMMON STOCK
Restrictions on Acquisition of the Company --------------------
and the Savings Bank...................... 98 PROSPECTUS
Description of Capital Stock of the --------------------
Company................................. 106
Description of Capital Stock of the
Savings Bank............................ 107
Transfer Agent and Registrar.............. 108 LOGO
Experts................................... 108 MAY 13, 1996
Legal and Tax Opinions.................... 108
Additional Information.................... 108 -----------------------------------------------------
Index to Financial Statements............. F-1 -----------------------------------------------------
</TABLE>
UNTIL JUNE 17, 1996, OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED COMMUNITY
OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. 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.
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