<PAGE>
PROSPECTUS PURSUANT TO RULE 424b(3)
File No. 333-30231
[LOGO of SHS BANCORP, INC.]
(Proposed Holding Company for Spring Hill Savings Bank, F.S.B.)
713,000 Shares (Anticipated Maximum) of Common Stock
$10.00 per share purchase price
SHS Bancorp, Inc. (the "Holding Company"), a Pennsylvania corporation, is
offering between 527,000 and 713,000 shares of its common stock, $0.01 par
value per share (the "Common Stock"), in connection with the
(cover continued on following page)
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FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE
STOCK INFORMATION CENTER AT (412) 323-3750.
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION INSURANCE
FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS,
THE FDIC OR ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
<TABLE>
<CAPTION>
ESTIMATED
UNDERWRITING
COMMISSIONS AND
PURCHASE OTHER FEES ESTIMATED NET
PRICE(1) AND EXPENSES(2) PROCEEDS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share.................... $ 10.00 $ .84 $ 9.16
- -------------------------------------------------------------------------------
Midpoint Per Share................... $ 10.00 $ .73 $ 9.27
- -------------------------------------------------------------------------------
Maximum Per Share.................... $ 10.00 $ .65 $ 9.35
- -------------------------------------------------------------------------------
Maximum Per Share, as adjusted(3).... $ 10.00 $ .56 $ 9.44
- -------------------------------------------------------------------------------
Minimum Total........................ $5,270,000 $445,000 $4,825,000
- -------------------------------------------------------------------------------
Midpoint Total....................... $6,200,000 $450,000 $5,750,000
- -------------------------------------------------------------------------------
Maximum Total........................ $7,130,000 $463,000 $6,667,000
- -------------------------------------------------------------------------------
Maximum Total, as adjusted(3)........ $8,199,500 $463,000 $7,736,500
</TABLE>
===============================================================================
(1) Determined in accordance with an independent appraisal prepared by Feldman
Financial Advisors, Inc. ("Feldman Financial") as of June 23, 1997, which
states that the estimated aggregate pro forma market value of the Holding
Company and the Savings Bank, as converted, ranged from $5,270,000 to
$7,130,000, with a midpoint of $6,200,000 ("Estimated Valuation Range").
See "THE CONVERSION--Stock Pricing and Number of Shares to be Issued."
(2) Consists of estimated costs to the Holding Company and the Savings Bank
arising from the Conversion, including fees to be paid to Ryan, Beck &
Co., Inc. ("Ryan, Beck") in connection with the Offerings. Such fees may
be deemed to be underwriting fees and Ryan, Beck may be deemed to be an
underwriter. The Holding Company and the Savings Bank have agreed to
indemnify Ryan, Beck against certain liabilities, including liabilities
that may arise under the Securities Act of 1933, as amended ("Securities
Act"). See "USE OF PROCEEDS" and "THE CONVERSION--Marketing and
Underwriting Arrangements."
(3) Gives effect to the sale of up to an additional 15% of the shares offered,
without the resolicitation of subscribers or any right of cancellation,
due to an increase in the pro forma market value of the Holding Company
and the Savings Bank, as converted. The ESOP shall have a first priority
right to subscribe for such additional shares up to an aggregate of 8% of
the Common Stock issued in the Conversion. See "THE CONVERSION--Stock
Pricing and Number of Shares to be Issued."
----------------
Ryan, Beck & Co.
----------------
The date of this Prospectus is August 12, 1997.
<PAGE>
(cover continued from previous page)
conversion of Spring Hill Savings Bank, F.S.B. (the "Savings Bank") from a
federally chartered mutual savings bank to a federally chartered capital stock
savings bank and the simultaneous issuance of the Savings Bank's capital stock
to the Holding Company. The simultaneous conversion of the Savings Bank to
stock form, the issuance of the Savings Bank's capital stock to the Holding
Company and the offer and sale of the Common Stock by the Holding Company are
being undertaken pursuant to a plan of conversion ("Plan" or "Plan of
Conversion") and are referred to herein as the "Conversion." In certain
circumstances, the Holding Company may increase the amount of Common Stock
offered hereby to 819,950 shares. See Footnote 3 to the table above.
Pursuant to the Plan of Conversion, nontransferable rights to subscribe for
the Common Stock ("Subscription Rights") have been granted, in order of
priority, to (i) depositors with $50.00 or more on deposit at the Savings Bank
as of December 31, 1995 ("Eligible Account Holders"), (ii) the Savings Bank's
employee stock ownership plan ("ESOP"), a tax-qualified employee benefit plan,
(iii) depositors with $50.00 or more on deposit at the Savings Bank as of June
30, 1997 ("Supplemental Eligible Account Holders"), and (iv) depositors of the
Savings Bank as of July 31, 1997 ("Voting Record Date") and borrowers of the
Savings Bank with mortgage loans outstanding as of the Voting Record Date
("Other Members"), subject to the priorities and purchase limitations set
forth in the Plan of Conversion ("Subscription Offering"). SUBSCRIPTION RIGHTS
ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE TRANSFERRING THEIR RIGHTS TO
SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION OFFERING OR SUBSCRIBING FOR
COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE SUBJECT TO FORFEITURE OF SUCH
RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF
THRIFT SUPERVISION ("OTS") OR ANOTHER AGENCY OF THE U.S. GOVERNMENT. See "THE
CONVERSION--The Subscription, Direct Community and Syndicated Community
Offerings" and "--Limitations on Purchases of Shares."
Concurrently, but subject to the prior rights of holders of Subscription
Rights, the Holding Company is offering the Common Stock to certain members of
the general public through a direct community offering ("Direct Community
Offering") with preference being given to natural persons and trusts of
natural persons who are residents of Allegheny, Beaver, Butler, Washington,
Westmoreland and Armstrong Counties of Pennsylvania ("Local Community"),
subject to the right of the Holding Company to accept or reject orders in the
Direct Community Offering in whole or in part. The Subscription Offering and
the Direct Community Offering are referred to herein as the "Subscription and
Direct Community Offering." It is anticipated that shares of Common Stock not
subscribed for or purchased in the Subscription and Direct Community Offering,
if any, will be offered to eligible members of the general public in a best
efforts syndicated offering ("Syndicated Community Offering") (the
Subscription Offering, Direct Community Offering and Syndicated Community
Offering are referred to collectively as the "Offerings").
With the exception of the ESOP, which is expected to purchase 8% of the
shares of Common Stock issued in the Conversion, NO PERSON OR ENTITY MAY
PURCHASE MORE THAN $50,000 OF COMMON STOCK (OR 5,000 SHARES BASED ON THE
$10.00 PRICE PER SHARE ("PURCHASE PRICE")); AND NO PERSON OR ENTITY, TOGETHER
WITH ASSOCIATES OF AND PERSONS ACTING IN CONCERT WITH SUCH PERSON OR ENTITY,
MAY PURCHASE IN THE AGGREGATE MORE THAN $85,000 OF COMMON STOCK (OR 8,500
SHARES BASED ON THE PURCHASE PRICE) IN THE CONVERSION. Under certain
circumstances, the maximum purchase limitation may be increased or decreased
at the sole discretion of the Savings Bank and the Holding Company subject to
any required regulatory approval. See "THE CONVERSION--The Subscription,
Direct Community and Syndicated Community Offerings," "--Limitations on
Purchases of Shares" and "--Procedure for Purchasing Shares in the
Subscription and Direct Community Offering" for other purchase and sale
limitations. The minimum order is 25 shares.
THE SUBSCRIPTION OFFERING WILL EXPIRE AT 11:00 A.M., EASTERN TIME, ON
SEPTEMBER 16, 1997 ("EXPIRATION DATE"), UNLESS EXTENDED BY THE SAVINGS BANK
AND THE HOLDING COMPANY FOR UP TO 20 DAYS TO OCTOBER 6, 1997. SUCH EXTENSION
MAY BE GRANTED WITHOUT ADDITIONAL NOTICE TO SUBSCRIBERS. THE DIRECT COMMUNITY
OFFERING WILL ALSO TERMINATE AT 11:00 A.M., EASTERN TIME, ON THE EXPIRATION
DATE UNLESS EXTENDED BY THE HOLDING COMPANY AND THE SAVINGS BANK, WITH
APPROVAL OF THE OTS, IF NECESSARY. The Holding Company must receive a properly
completed and signed stock order form and certification ("Order
<PAGE>
Form") along with full payment (or appropriate instructions authorizing a
withdrawal of the full payment from a deposit account at the Savings Bank) of
$10.00 per share for all shares subscribed for or ordered. Funds so received
will be placed in a segregated account created for this purpose at the Savings
Bank, and interest will be paid at the Savings Bank's passbook rate from the
date payment is received until the Conversion is consummated or terminated;
these funds will be otherwise unavailable to the subscriber until such time.
Payments authorized by withdrawals from deposit accounts will continue to earn
interest at the contractual rate until the Conversion is consummated or
terminated, although such funds will be unavailable for withdrawal until the
Conversion is consummated or terminated. ONCE TENDERED, SUBSCRIPTION ORDERS
CANNOT BE REVOKED OR MODIFIED WITHOUT THE CONSENT OF THE SAVINGS BANK AND THE
HOLDING COMPANY. The Holding Company is not obligated to accept orders
submitted on photocopied or telecopied Order Forms. If the Conversion is not
consummated within 45 days after the last day of the Subscription Offering
(which date will be no later than November 20, 1997) and the OTS consents to
an extension of time to complete the Conversion, subscribers will be given the
right to increase, decrease or rescind their orders. Such extensions may not
go beyond September 18, 1999.
The Savings Bank and the Holding Company have engaged Ryan, Beck, a
registered broker-dealer, to consult with and advise them in the sale of the
Common Stock in the Offerings. In addition, in the event the Common Stock is
not fully subscribed for in the Subscription and Direct Community Offering,
Ryan, Beck will manage the Syndicated Community Offering. Neither Ryan, Beck
nor any other registered broker-dealer is obligated to take or purchase any
shares of Common Stock in the Offerings. The Holding Company and the Savings
Bank reserve the right, in their absolute discretion, to accept or reject, in
whole or in part, any or all orders in the Direct Community or Syndicated
Community Offerings either at the time of receipt of an order or as soon as
practicable following the termination of the Offerings. See "THE CONVERSION--
Marketing and Underwriting Arrangements."
Prior to the Offerings, the Holding Company has not issued any capital stock
and accordingly there has been no market for the shares offered hereby. There
can be no assurance that an active and liquid trading market for the Common
Stock will develop or, if developed, will be maintained. The Holding Company
has received conditional approval to have its Common Stock listed on the
Nasdaq SmallCap Market under the symbol "SHSB." Ryan, Beck has advised the
Holding Company that it intends to act as a market maker for the Common Stock
following consummation of the Conversion. See "RISK FACTORS--Absence of Active
Market for the Common Stock" and "MARKET FOR COMMON STOCK."
<PAGE>
SPRING HILL SAVINGS BANK, F.S.B.
[MAP SHOWING MAIN AND BRANCH OFFICES]
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE SAVINGS BANK'S PLAN OF
CONVERSION BY ITS ELIGIBLE VOTING MEMBERS, THE SALE OF A LEAST 527,000 SHARES
OF COMMON STOCK PURSUANT TO THE PLAN OF CONVERSION, AND RECEIPT OF ALL
REGULATORY APPROVALS.
<PAGE>
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE BIF, THE SAIF OR ANY OTHER GOVERNMENT
AGENCY.
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Consolidated
Financial Statements (including the Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See
"RISK FACTORS."
SHS Bancorp, Inc.
The Holding Company is a Pennsylvania corporation organized in June 1997 at
the direction of the Savings Bank for the purpose of serving as the holding
company of the Savings Bank upon consummation of the Conversion. The Holding
Company has not engaged in any significant business to date. The Holding
Company has received the approval of the OTS to become a savings and loan
holding company and to acquire 100% of the capital stock of the Savings Bank.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the capital stock of the Savings Bank, that portion of the net
investable proceeds of the Offerings permitted by the OTS to be retained by the
Holding Company, and a note receivable from the ESOP evidencing a loan from the
Holding Company to fund the Savings Bank's ESOP. Funds retained by the Holding
Company will be used for general business activities, including a loan by the
Holding Company directly to the ESOP to enable the ESOP to purchase 8% of the
Common Stock issued in the Conversion. See "USE OF PROCEEDS." Management
believes that the holding company structure and retention of proceeds may
facilitate the expansion and diversification of its operations, should it decide
to do so. The holding company structure will also enable the Holding Company to
repurchase its stock without adverse tax consequences, subject to applicable
regulatory restrictions and waiting periods. There are no present plans,
arrangements, agreements, or understandings, written or oral, regarding any such
activities or repurchases. The main office of the Holding Company is located at
112 Federal Street, Pittsburgh, Pennsylvania 15212, and its telephone number is
(412) 231-0809.
Spring Hill Savings Bank, F.S.B.
The Savings Bank, founded in 1893, is a federally chartered mutual savings
bank located in Pittsburgh, Pennsylvania. The Savings Bank, which was formed as
a Pennsylvania mutual savings and loan association, converted to a federal
mutual savings bank in 1991. In connection with the Conversion, the Savings
Bank will convert to a federally chartered capital stock savings bank and will
become a subsidiary of the Holding Company. The Savings Bank is currently
regulated by the OTS, its primary regulator, and by the FDIC, the insurer of its
deposits. The Savings Bank's deposits are insured by the FDIC's Savings
Association Insurance Fund ("SAIF") to the maximum extent permitted by law. The
Savings Bank has been a member of the Federal Home Loan Bank ("FHLB") System
since 1933. At March 31, 1997, the Savings Bank, which operates three full-
service offices in the city of Pittsburgh, Pennsylvania, had total assets of
$82.8 million, total deposits of $64.8 million and total retained earnings of
$4.4 million on a consolidated basis. The main office of the Savings Bank is
located at 112 Federal Street, Pittsburgh, Pennsylvania 15212, and its telephone
number is (412) 231-0809.
Beginning in late 1988 and continuing through 1990, the Savings Bank
experienced a sharp increase in the level of nonperforming loans and real estate
owned ("REO"). REO increased from $173,000 at December 31, 1988 to $2.7 million
in December 1990. This accumulated REO and other distressed borrowers required
greater staff attention and resulted in increased costs and contributed to net
losses in 1989 through 1992. The Savings Bank's capital levels were
significantly affected from the establishment of reserves, expenses connected
with the acquisition, holding and disposal of REO, and lost earnings from under-
performing and nonperforming assets, including certain high-risk investments.
Numerous factors, including loan activities in the mid 1980s, loan
concentrations and
(i)
<PAGE>
deficiencies in documentation and underwriting influenced the level and severity
of the nonperforming loans and REO.
In the mid-1980s, the Savings Bank was actively engaged in originating and
selling mortgage loans. In 1987, as a result of accumulating a large portfolio
of fixed-rate mortgage loans whose interest rates were less than current market
rates, the Savings Bank established as a subsidiary, Spring Hill Funding
Corporation ("SHFC"), to issue a collateralized mortgage obligation ("CMO").
The Savings Bank's results of operations have been adversely affected by the
issuance of the CMO by SHFC. The CMO was comprised of three classes with a
total par value of $32.1 million and an original issue discount of $4.2 million
and was secured by a pool of mortgage-backed securities. As a result of the
lower interest rate environment in recent years and the resulting faster
prepayment speeds on the collateral, the paydown on the CMO was accelerated.
This resulted in SFHC recognizing the original issue discount and deferred debt
issuance costs faster than originally anticipated, causing significant charges
to the Savings Bank's operations. See "BUSINESS OF THE SAVINGS BANK -- Deposit
Activities and Other Sources of Funds -- Borrowings."
A portion of the proceeds from the CMO issued by SHFC was invested in
various CMO residuals of other issuers. As a result of lower market interest
rates in the years following the purchase of these CMO residuals and their
corresponding reduction in market value, the Savings Bank took charges against
earnings to write down the carrying value of these investments, which adversely
affected income primarily in 1992 and 1993. The last of these CMO residual
investments was redeemed during the quarter ended March 31, 1997. See Note 3 of
the Notes to Consolidated Financial Statements.
As a result of the Savings Bank's poor asset quality, marginal capital
level and continued operating losses, the Savings Bank entered into a
Supervisory Agreement with the OTS on March 7, 1991. This Supervisory Agreement
required the Savings Bank, among other things, to establish additional loan loss
reserves, develop a strategic plan and procedures to resolve problem assets,
discontinue investing in certain mortgage derivative products, limit the growth
of the Savings Bank, develop a capital plan to improve the Savings Bank's
capital position, develop an operating plan to increase net interest margin,
develop a compliance review program and correct certain compliance exceptions.
As a result of remedial actions taken by the Savings Bank and the improvement in
its financial condition, the OTS released the Savings Bank from the Supervisory
Agreement on May 26, 1995 at which time the Savings Bank was no longer subject
to growth restrictions.
The Savings Bank responded to the foregoing events by taking the following
actions to return the Savings Bank to profitability and to achieve the capital
levels required by applicable federal regulations:
. The Board of Directors elevated Thomas F. Angotti, who joined the Savings
Bank in 1987, to President in 1989 and hired Vincent C. Ashoff as Vice
President/Finance and Treasurer in 1990. More recently, the Board of
Directors added Paul F. Hoyson as Senior Vice President/Retail Banking.
. The Savings Bank ceased its loan sale activities and from 1989 to 1992
substantially restricted certain lending activities (generally higher risk
loans such as loans for real estate acquisition and development,
speculative construction loans and loans to borrowers with large loan
concentrations) so that it could focus on problem asset management and
disposition of REO. The Savings Bank initiated a formal asset quality
program and a more thorough risk analysis of its lending activities. As of
March 31, 1997, REO and other repossessed assets totalled $52,000, which is
down from $2.7 million in 1990. In connection therewith, the Savings Bank
focused its lending activities on residential real estate loans (including
investor owned one-to four-family properties) and improved its underwriting
procedures.
. The Savings Bank has managed its asset size in order to maintain
compliance with regulatory capital requirements. As a result of the losses
incurred in the early 1990s, the Savings Bank adopted a down-sizing
strategy to improve its regulatory capital ratios. From $148.2 million in
assets at December 31, 1988, the Savings Bank contracted to $81.7 million
in assets at December 31, 1995. Since that time the size of the
(ii)
<PAGE>
Savings Bank has remained essentially unchanged. As a result, at March 31,
1997, the Savings Bank had tangible, core and risk-based capital ratios of
5.4%, 5.4% and 12.5%, respectively. The reduction in size was accomplished
through asset repayments, prepayments and sales, which funded the run-off
of wholesale and brokered deposits and the repayment of borrowings.
. The Savings Bank has sought to aggressively control operating expenses.
Since 1992, the Savings Bank has sought to maintain non-interest expenses
near 2% of average total assets.
. The Savings Bank has sought to unwind SHFC. In the quarter ended March
31, 1997, the Savings Bank repurchased the outstanding $4.8 million par
value of the class C CMO bonds. The repurchase was funded through FHLB
advances. The Savings Bank anticipates that replacing the class C CMO
bonds with lower cost FHLB advances will improve the Savings Bank's
interest rate spread. As of March 31, 1997, $2.6 million par value of the
CMO remained outstanding and there was $107,000 in original issuance
discount and $26,000 in deferred debt issuance costs remaining to be
charged to operations.
Although the Savings Bank has improved its asset quality and financial
performance, its regulatory capital, while above the minimum requirements,
remains low relative to the Savings Bank's peers. Without increased capital,
the Savings Bank's ability to grow is limited. In recent years the Savings Bank
has considered a variety of means of increasing capital, including growth
through retained earnings, a merger/conversion, a merger with another mutual
savings association and a mutual-to-stock conversion. Having evaluated its
strategic options, the Savings Bank has determined to pursue the Conversion in
order to raise additional capital.
The Savings Bank operates as a community-oriented financial institution
that engages primarily in the business of attracting deposits from the general
public and using those funds to originate residential mortgage loans within the
Savings Bank's primary market area including in recent years an increased
emphasis on loans secured by investor-owned one- to four-family properties. At
March 31, 1997, one- to four-family residential mortgage loans totalled $42.7
million, or 76.2% of total loans receivable. To a lesser extent, the Savings
Bank also originates multi-family, construction, commercial real estate and
consumer loans. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities." In
1996, as part of its strategy to provide a fuller range of services to its
retail customers, the Savings Bank expanded its offering of consumer loans by
introducing home equity lines of credit and consumer installment loans.
The Conversion
The Savings Bank is in the process of converting from a federally chartered
mutual savings bank to a federally chartered capital stock savings bank and, in
connection with the Conversion, has formed the Holding Company. As part of the
Conversion, the Savings Bank will issue all of its capital stock to the Holding
Company in exchange for the lesser of 85% of the net proceeds of the Offerings
or the amount of net proceeds sufficient to increase the Savings Bank's tangible
capital to 10% of total assets. Simultaneously, the Holding Company will sell
its Common Stock in the Offerings. After consummation of the Conversion,
depositors and borrowers of the Savings Bank will have no voting rights in the
Holding Company unless they become stockholders.
Consummation of the Conversion is subject to the approval of the Plan of
Conversion by the Savings Bank's members and approval by the OTS of the Plan of
Conversion and the Holding Company's acquisition of the Savings Bank.
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Savings Bank as converted. Feldman Financial has advised the Savings Bank that
in its opinion, at June 23, 1997, the aggregate estimated pro forma market value
of the Holding Company and the Savings Bank as converted ranged from $5,270,000
to $7,130,000. The appraisal of the pro forma market value of the Holding
Company and the Savings Bank as converted is based on a number of factors and
should not be considered a
(iii)
<PAGE>
recommendation to buy shares of the Common Stock or any assurance that after the
Conversion shares of Common Stock will be able to be resold at or above the
Purchase Price. The appraisal will be updated or confirmed prior to
consummation of the Conversion.
The Board of Directors and management believe that the Conversion is in the
best interests of the Savings Bank's members and its communities. The
Conversion is intended: (i) to improve the competitive position of the Savings
Bank in its primary market area and support possible future expansion and
diversification of operations (currently, there are no specific plans,
arrangements or understandings, written or oral, regarding any such activities);
(ii) to afford members of the Savings Bank and others the opportunity to become
stockholders of the Holding Company and thereby participate more directly in,
and contribute to, any future growth of the Holding Company and the Savings
Bank; and (iii) to provide future access to capital markets. See "THE
CONVERSION."
The Subscription, Direct Community and Syndicated Community Offerings
The Holding Company is offering up to 713,000 shares of Common Stock at
$10.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders; and (iv) Other Members. In the event the
number of shares offered in the Conversion is increased above the maximum of the
Estimated Valuation Range, the Savings Bank's ESOP shall have a priority right
to purchase any such shares exceeding the maximum of the Estimated Valuation
Range up to an aggregate of 8% of the Common Stock issued in the Offerings.
Concurrently, but subject to the prior rights of holders of Subscription Rights,
the Holding Company is offering the Common Stock in the Direct Community
Offering to certain members of the general public with preference being given to
natural persons and trusts of natural persons who are permanent residents of the
Local Community. Once tendered, subscription orders cannot be revoked or
modified without the consent of the Savings Bank and the Holding Company. The
Savings Bank has engaged Ryan, Beck to consult with and advise the Holding
Company and the Savings Bank in the Offerings, and Ryan, Beck has agreed to use
its best efforts to assist the Holding Company with the solicitation of
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. If all shares of Common Stock to be issued in the Conversion are
not sold through the Subscription and Direct Community Offering, then the
Holding Company expects to offer the remaining shares in a Syndicated Community
Offering managed by Ryan, Beck, which would occur as soon as practicable
following the close of the Subscription and Direct Community Offering. All
shares of Common Stock will be sold at the same price per share in the
Syndicated Community Offering as in the Subscription and Direct Community
Offering. See "USE OF PROCEEDS," "PRO FORMA DATA" and "THE CONVERSION -- Stock
Pricing and Number of Shares to be Issued." The Subscription Offering will
expire at 11:00 a.m., Eastern Time, on the Expiration Date, unless extended by
the Savings Bank and the Holding Company for up to 20 days. The Direct
Community Offering will also terminate on the Expiration Date unless extended by
the Holding Company and the Savings Bank to no later than 45 days after the
expiration of the Subscription Offering, unless further extended with the
consent of the OTS. The Syndicated Community Offering, if one is held, will
terminate no later than 45 days after the expiration of the Subscription
Offering, unless extended with the consent of the OTS.
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 the Expiration Date or hand delivered any later
than two days prior to such date. Execution of the Order Form will confirm
receipt of the Prospectus in accordance with Rule 15c2-8. Order Forms will only
be distributed with a prospectus. The Savings Bank is not obligated to accept
for processing orders not submitted on original Order Forms. 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. The Savings Bank is prohibited from lending funds to any person or
entity for the purpose of purchasing shares of Common Stock in the Conversion.
See "THE CONVERSION -- Procedure for Purchasing Shares in the Subscription and
Direct Community Offering."
(iv)
<PAGE>
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 December 31, 1995 (the "Eligibility Record
Date"), June 30, 1997 (the "Supplemental Eligibility Record Date") or July 31,
1997 (the "Voting Record Date") and borrowers with mortgage loans outstanding as
of the Voting Record Date must list all deposit and/or loan accounts on the
Order Form, giving all names on each account and the account numbers. Failure
to list all account numbers may result in the inability of the Holding Company
or the Savings Bank to fill all or part of a subscription order. In addition,
registration of shares in a name or title different from the names or titles
listed on the account may adversely affect such subscriber's purchase priority.
See "THE CONVERSION -- Procedure for Purchasing Shares in the Subscription and
Direct Community Offering."
Restrictions on Transfer of Subscription Rights
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 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. The Holding 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 known by them to involve the
transfer of such rights.
Purchase Limitations
With the exception of the ESOP, which is expected to subscribe for 8% of
the shares of Common Stock issued in the Conversion, no person or entity may
purchase more than $50,000 of Common Stock (or 5,000 shares based on the
Purchase Price); and no person or entity, together with associates of and
persons acting in concert with such person or entity, may purchase in the
aggregate more than $85,000 of Common Stock (or 8,500 shares based on the
Purchase Price) in the Conversion. This maximum purchase limitation may be
increased or decreased as consistent with OTS regulations in the sole discretion
of the Holding Company and the Savings Bank subject to any required regulatory
approval. The minimum purchase is 25 shares. In addition, stock orders
received either through the Direct Community Offering or the Syndicated
Community Offering, if held, may be accepted or rejected, in whole or in part,
at the discretion of the Holding Company and the Savings Bank. See "THE
CONVERSION -- Limitations on Purchases of Shares." If an order is rejected in
part, the purchaser does not have the right to cancel the remainder of the
order. In the event of an oversubscription, shares will be allocated in
accordance with the Plan of Conversion. See "THE CONVERSION -- The
Subscription, Direct Community and Syndicated Community Offerings."
Stock Pricing and Number of Shares to be Issued in the Conversion
The Purchase Price in the Offerings is a uniform price for all subscribers,
including members of the Holding Company's and the Savings Bank's Boards of
Directors, their management and tax-qualified employee plans, and was set by the
Board of Directors. The number of shares to be offered at the Purchase Price is
based upon an independent appraisal of the aggregate pro forma market value of
the Holding Company and the Savings Bank as converted. The aggregate pro forma
market value was estimated by Feldman Financial to range from $5,270,000 to
$7,130,000 as of June 23, 1997. See "THE CONVERSION -- Stock Pricing and Number
of Shares to be Issued." The appraisal of the pro forma value of the Holding
Company and the Savings Bank as converted will be updated or confirmed at the
completion of the Offerings. The maximum of the Estimated Valuation Range may
be increased by up to 15% to $8,199,500 and the number of shares of Common Stock
to be issued in the Conversion may be increased to 819,950 shares due to
material changes in the financial condition or performance of the Savings Bank
or changes in market conditions or general financial and economic conditions.
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. The appraisal is not
intended to be and should not be construed as a recommendation of any kind as to
the advisability of purchasing Common Stock in the Offerings nor can
(v)
<PAGE>
assurance be given that purchasers of the Common Stock in the Offerings will be
able to sell such shares after consummation of the Conversion at a price that is
equal to or above the Purchase Price. Furthermore, the pro forma stockholders'
equity is not intended to represent the fair market value of the Common Stock
and may be greater than amounts that would be available for distribution to
stockholders in the event of liquidation.
Use of Proceeds
The net proceeds from the sale of the Common Stock are estimated to range
from $4.8 million to $6.7 million, or up to $7.7 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion. The Holding Company has received the
approval of the OTS to purchase all of the capital stock of the Savings Bank to
be issued in the Conversion in exchange for the lesser of 85% of the net
proceeds of the Offerings or that amount of net proceeds sufficient to increase
the Savings Bank's tangible capital to 10% of total assets. Net proceeds to be
used to purchase the capital stock of the Savings Bank are estimated to be
between $4.1 million and $4.2 million. The remainder of the net proceeds will
be retained by the Holding Company.
Receipt of up to 85% of the net proceeds of the sale of the Common Stock
will increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the
funds contributed to it for general corporate purposes, including increased
local lending and purchases of investments, and possible future acquisitions of
branches. The Savings Bank may also use a portion of the funds contributed to
it to retire outstanding borrowings. Pending deployment of funds, the Savings
Bank plans initially to invest the net proceeds in short- to intermediate-term
U.S. Government and agency securities and mortgage-backed securities. Shares of
Common Stock may be purchased with funds on deposit at the Savings Bank, which
will reduce deposits by the amounts of such purchases. As a result, the net
amount of funds available to the Savings Bank for investment following receipt
of the Conversion proceeds will be reduced by the amount of deposit withdrawals
used to fund stock purchases.
A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the Savings Bank's ESOP to enable it to
purchase 8% of the shares of Common Stock issued in the Conversion. Such loan
would fund the entire purchase price of the ESOP shares ($570,400 at the maximum
of the Estimated Valuation Range) and would be repaid principally from the
Savings Bank's contributions to the ESOP and from dividends payable on the
Common Stock held by the ESOP. The remaining proceeds retained by the Holding
Company initially will be invested in short- to intermediate-term U.S.
Government and agency securities and mortgage-backed securities. Such proceeds
will be available for additional contributions to the Savings Bank in the form
of debt or equity, to support future growth and diversification activities, as a
source of dividends to the stockholders of the Holding Company and for future
repurchases of Common Stock (including possible repurchases to fund the
Management Recognition Plan ("MRP") or to provide shares to be issued upon
exercise of stock options) to the extent permitted under Pennsylvania law and
OTS regulations. Currently, as discussed below under "USE OF PROCEEDS," there
are no specific plans, arrangements, agreements or understandings, written or
oral, regarding any such activities.
Market for Common Stock
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
Nasdaq SmallCap Market under the symbol "SHSB." Although under no obligation to
do so, Ryan, Beck has indicated its intention to act as a market maker for the
Common Stock following consummation of the Conversion. No assurance can be
given that an active and liquid trading market for the Common Stock will
develop. Further, no assurance can be given that purchasers will be able to
sell their shares at or above the Purchase Price after the Conversion. See
"RISK FACTORS -- Absence of Active Market for the Common Stock" and "MARKET FOR
COMMON STOCK."
(vi)
<PAGE>
Dividends
The Board of Directors of the Holding Company has not formulated a dividend
policy, but intends to develop a policy of paying cash dividends in the future.
Declarations and payments of dividends by the Board of Directors will depend
upon a number of factors, including the amount of the net proceeds retained by
the Holding Company, capital requirements, regulatory limitations, the Savings
Bank's and the Holding Company's financial condition and results of operations,
tax considerations and general economic conditions. No assurances can be given
that any dividends will be declared or, if declared, what the amount of
dividends will be or whether such dividends, once declared, will continue. The
Holding Company may pay stock dividends in lieu of or in addition to cash
dividends. See "DIVIDEND POLICY."
Risk Factors
See "RISK FACTORS" beginning on page 1 for a discussion of certain risks
related to the Offerings that should be considered by all prospective investors.
(vii)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Savings Bank
and its subsidiary at the dates and for the periods indicated. This information
is qualified in its entirety by reference to the detailed information contained
in the Consolidated Financial Statements and Notes thereto presented elsewhere
in this Prospectus. The selected financial and operating data and financial
ratios at and for the three months ended March 31, 1997 and 1996 are derived
from the unaudited consolidated financial statements of the Savings Bank, which
in the opinion of management, reflect all adjustments (consisting only of normal
recurring accruals except the extraordinary item discussed in Note 19 to the
Consolidated Financial Statements) necessary for a fair presentation. Results
of interim periods are not necessarily indicative of results to be expected for
the full year.
<TABLE>
<CAPTION>
At At December 31,
March 31, ------------------------------------------
1997 1996 1995 1994 1993 1992
--------- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets.................................. $82,809 $81,688 $81,656 $83,920 $92,476 $108,076
Loans receivable, net......................... 55,268 54,789 52,526 54,888 49,963 55,229
Cash and cash equivalents..................... 3,030 2,101 1,703 617 6,637 5,051
Mortgage-backed securities.................... 19,679 19,557 21,291 22,382 28,682 34,595
Investment securities......................... 1,993 2,744 3,286 3,138 4,592 9,012
Deposits...................................... 64,776 64,294 65,160 60,836 68,709 77,713
Collateralized mortgage obligation............ 2,454 6,937 8,251 9,546 14,107 18,407
Borrowed funds................................ 9,254 3,772 1,778 7,313 2,500 4,500
Total retained earnings....................... 4,449 4,840 4,441 4,212 4,226 4,225
<CAPTION>
Three
Months Ended
March 31, Year Ended December 31,
------------- -------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income............................... $ 1,596 $ 1,617 $ 6,314 $ 6,503 $ 6,386 $ 6,777 $ 7,763
Interest expense.............................. 1,018 1,088 4,155 4,460 4,663 5,424 7,040
------- ------- ------- ------- ------- -------- -------
Net interest income........................... 578 529 2,159 2,043 1,723 1,353 723
Provision for loan losses..................... 28 30 239 64 61 -- 253
------- ------- ------- ------- ------- -------- -------
Net interest income
after provision for loan losses............. 550 499 1,920 1,979 1,662 1,353 470
Non-interest income........................... 148 29 1,024 124 202 598 941
Non-interest expense.......................... 414 425 2,320 1,760 1,718 2,052 2,435
------- ------- ------- ------- ------- -------- -------
Income (loss) before income taxes,
extraordinary items and cumulative
effect of accounting change................. 284 103 624 343 146 (101) (1,024)
Income taxes (benefit)........................ 109 43 231 112 46 (39) (328)
------- ------- ------- ------- ------- -------- -------
Income (loss) before extraordinary items and
cumulative effect of accounting change...... 175 60 393 231 100 (62) (696)
Extraordinary items, net of tax(1)............ (562) -- -- -- -- (86) (49)
Cumulative effect of accounting change(2)..... -- -- -- -- -- 148 --
------- ------- ------- ------- ------- -------- -------
Net income (loss)............................. $ (387) $ 60 $ 393 $ 231 $ 100 $ 0 $ (745)
======= ======= ======= ======= ======= ======== =======
- -------------
</TABLE>
(1) Reflects losses recorded upon the extinguishment of the Savings Bank's class
C CMO bonds in the three months ended March 31, 1997 and early extinguishment of
FHLB advances in the years ended December 31, 1993 and 1992.
(2) Reflects adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
(viii)
<PAGE>
<TABLE>
<CAPTION>
At At December 31,
March 31, --------------------------------------
1997 1996 1995 1994 1993 1992
--------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding.................. 976 965 916 929 872 925
Deposit accounts............................... 8,802 8,762 8,849 8,586 9,327 10,404
Full-service offices........................... 3 3 3 3 3 3
<CAPTION>
At or For
the Three Months At or For the
Ended March 31, Year Ended December 31,
---------------- ---------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
KEY FINANCIAL RATIOS:
Performance Ratios (1):
Return (loss) on average assets (2)............. (1.88)% 0.29% 0.49% 0.28% 0.12% 0.00% (0.64)%
Return (loss) on average retained earnings (3).. (32.31) 5.36 8.54 5.31 2.40 0.00 (15.38)
Average retained earnings to
average assets (4)............................ 5.82 5.41 5.68 5.18 4.88 4.30 4.18
Retained earnings to
total assets at end of period................. 5.37 5.49 5.93 5.44 5.02 4.57 3.91
Interest rate spread (5)........................ 2.64 2.40 2.49 2.32 1.89 1.33 0.55
Net interest margin (6)......................... 2.87 2.63 2.73 2.51 2.07 1.42 0.66
Average interest-earning assets
to average interest-bearing liabilities....... 104.60 104.22 104.69 103.51 103.16 101.63 101.68
Non-interest expense as a
percent of average total assets............... 2.01 2.06 2.86 2.10 2.01 2.06 2.11
Capital Ratios:
Core capital.................................... 5.38 5.50 5.93 5.44 5.13 4.53 3.88
Tangible capital................................ 5.38 5.50 5.93 5.44 5.13 4.53 3.88
Risk-based capital.............................. 12.46 12.56 13.39 12.37 11.24 10.20 9.03
Asset Quality Ratios:
Nonaccrual and 90 days or more past due
loans as a percent of loans receivable, net... 2.03 1.84 2.03 1.43 0.37 4.46 3.54
Nonperforming assets as a
percent of total assets....................... 1.42 1.35 1.41 2.10 1.55 2.99 3.12
Allowance for loan losses as a
percent of total loans receivable............. 0.75 0.57 0.75 0.52 0.48 0.69 0.66
Allowance for loan losses as a
percent of nonperforming loans................ 37.40 31.12 37.39 36.70 132.67 15.63 18.87
Net charge-offs to average
loans outstanding............................. 0.04 0.02 0.19 0.10 0.26 0.04 0.30
- ------------------
</TABLE>
(1) Ratios for the three-month periods are annualized.
(2) Net income (loss) divided by average total assets.
(3) Net income (loss) divided by average retained earnings.
(4) Average total retained earnings divided by average total assets.
(5) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(ix)
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth selected financial condition data for the
Savings Bank at June 30, 1997, March 31, 1997 and December 31, 1996, selected
operating data for the Savings Bank for the three and six months ended June 30,
1997 and 1996 and selected financial ratios for the Savings Bank at and for the
three and six months ended June 30, 1997 and 1996. The selected financial and
operating data and financial ratios at and for the three and six months ended
June 30, 1997 and 1996 are derived from the unaudited consolidated financial
statements of the Savings Bank, which, in the opinion of management, reflect all
adjustments (consisting only of normal recurring accruals except the
extraordinary item discussed in Note 19 to the Consolidated Financial
Statements) necessary for a fair presentation. Results of interim periods are
not necessarily indicative of results to be expected for the full year. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At At At
June 30, March 31, December 31,
1997 1997 1996
------------ -------------- --------------
(In Thousands)
<S> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets........................ $82,981 $82,809 $81,688
Loans receivable, net............... 56,845 55,268 54,789
Cash and cash equivalents........... 1,389 3,030 2,101
Mortgage-backed securities.......... 19,034 19,679 19,557
Investment securities............... 3,245 1,993 2,744
Deposits............................ 65,309 64,776 64,294
Collateralized mortgage obligation.. 2,039 2,454 6,937
Borrowed funds...................... 9,609 9,254 3,772
Total retained earnings............. 4,584 4,449 4,840
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income..................... $1,620 $ 1,545 $ 3,216 $ 3,162
Interest expense.................... 1,003 1,039 2,021 2,127
------ ------- ------- -------
Net interest income................. 617 506 1,195 1,035
Provision for loan losses........... 42 17 70 47
------ ------- ------- -------
Net interest income after
provision for loan losses......... 575 489 1,125 988
Non-interest income................. 41 74 189 103
Non-interest expense................ 408 425 822 850
------ ------- ------- -------
Income before income taxes
and extraordinary item............ 208 138 492 241
Income taxes........................ 81 50 190 93
------ ------- ------- -------
Income before extraordinary item.... 127 88 302 148
Extraordinary item, net of tax...... -- -- (562) --
------ ------- ------- -------
Net income (loss)................... $ 127 $ 88 $ (260) $ 148
====== ======= ======= =======
</TABLE>
(footnotes on following page)
(x)
<PAGE>
<TABLE>
<CAPTION>
For the For the
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
KEY OPERATING RATIOS:
Performance Ratios (1):
Return (loss) on average assets (2).................... 0.62% 0.43% (0.63)% 0.36%
Return (loss) on average retained earnings (3)......... 11.25 7.74 (11.11) 6.56
Average retained earnings to average assets (4)........ 5.48 5.62 5.68 5.52
Retained earnings to total assets at end of period..... 5.52 5.71 5.52 5.71
Interest rate spread (5)............................... 2.93 2.33 2.79 2.37
Net interest margin (6)................................ 3.08 2.56 2.98 2.59
Average interest-earning assets
to average interest-bearing liabilities............... 103.00 104.33 103.80 104.27
Non-interest expense as a
percent of average total assets....................... 1.98 2.10 2.00 2.08
<CAPTION>
At At
June 30, March 31,
1997 1997
-------- ---------
<S> <C> <C>
Capital Ratios:
Core capital........................................ 5.53 5.38
Tangible capital.................................... 5.53 5.38
Risk-based capital.................................. 12.65 12.46
Asset Quality Ratios:
Nonaccrual and 90 days or more
past due loans as a percent
of loans receivable, net........................... 2.02 2.03
Nonperforming assets as a
percent of total assets............................ 1.41 1.42
Allowance for loan losses as a
percent of total loans receivable.................. 0.74 0.75
Allowance for loan losses as a
percent of nonperforming loans..................... 37.31 37.40
Net charge-offs to average
outstanding loans.................................. 0.06 0.04
- ------------------
</TABLE>
(1) Ratios for the three- and six-month periods are annualized.
(2) Net income (loss) divided by average total assets.
(3) Net income (loss) divided by average retained earnings.
(4) Average total retained earnings divided by average total assets.
(5) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(xi)
<PAGE>
Comparison of Financial Condition at June 30, 1997 and March 31, 1997
Total assets changed little during the second quarter, increasing $172,000,
or 0.2%, from $82.8 million at March 31, 1997 to $83.0 million at June 30, 1997.
Loans receivable increased $1.5 million from $55.3 million at March 31, 1997 to
$56.8 million at June 30, 1997. Loan growth was funded primarily from cash and
cash equivalents, which declined $1.6 million. Mortgage-backed securities
declined $645,000 from $19.7 million to $19.0 million. Investment securities
increased $1.2 million from $2.0 million to $3.2 million.
Total liabilities increased by $37,000 during the quarter. Deposits
increased $533,000 from $64.8 million at March 31, 1997 to $65.3 million at June
30, 1997 entirely as a result of increases in certificates of deposit. The
balance on the CMO declined $415,000 from $2.4 million to $2.0 million.
Borrowed funds in the form of FHLB advances increased $355,000 from $9.2 million
to $9.6 million.
Total retained earnings increased $135,000 from $4.4 million at March 31,
1997 to $4.6 million at June 30, 1997 primarily as a result of the $127,000 of
net income earned for the three months ended June 30, 1997.
Nonperforming Assets and Delinquencies
The Savings Bank's total nonperforming assets declined $5,000 to $1.2
million at June 30, 1997. Nonaccruing loans and loans 90 days or more past due
increased $24,000 to $1.1 million while REO and other repossessed assets
declined $29,000 to $23,000 at June 30, 1997. REO and other repossessed assets
consisted of one building and one mobile home.
Total delinquent loans increased $1.0 million from $2.2 million at March
31, 1997 to $3.2 million at June 30, 1997. This was primarily due to an
increase in loans delinquent 30 to 59 days of $789,000. During the quarter the
Savings Bank had a reduction in lending personnel which hampered its normal
collection efforts.
Total loan related charge-offs for the three months ended June 30, 1997
were $34,000. The allowance for loan losses increased to $428,000 at June 30,
1997 from $420,000 at March 31, 1997 as a result of the higher balance of loans
receivable and higher level of delinquencies.
Comparison of Operating Results for the Three Months Ended June 30, 1997 and
1996
Net Income. Net income increased $39,000, or 44.3%, to $127,000 for the
three months ended June 30, 1997 from $88,000 for the same period in 1996. The
return on average assets increased from 0.43% to 0.62% for the three months
ended June 30, 1996 and 1997, respectively.
Net Interest Income. Net interest income increased $111,000, or 21.9%,
from $506,000 for the three months ended June 30, 1996 to $617,000 for the same
period in 1997. The improvement in net interest income was the result of an
increase in the interest rate spread from 2.33% for the three months ended June
30, 1996 to 2.93% for the three months ended June 30, 1997. This increase in
the interest rate spread was the result of an increase in the yield on interest-
earning assets and a decrease in the cost of interest-bearing liabilities.
Interest Income. Total interest income increased $75,000 for the three
months ended June 30, 1997 compared to the three months ended June 30, 1996.
This 4.9% increase in interest income was the result of both an increase in the
yield on interest-earning assets and a slight increase in the level of interest-
earning assets. The balance of average interest-earning assets increased 1.3%
for the three months ended June 30, 1997 to $80.1 million as compared to $79.0
million in 1996. The yield on interest-earning assets for the three months
ended June 30, 1997 increased 27 basis points to 8.09% from 7.82% for the same
period in 1996. This resulted primarily from a shift in the mix of interest-
earning assets to include a larger percentage of loans and, to a lesser extent,
from an extension of the term of the investment portfolio for the three month
period ending June 30, 1997 as compared to the same period in 1996.
(xii)
<PAGE>
Interest Expense. Total interest expense declined $36,000, or 3.5%, for
the three months ended June 30, 1997 to $1.0 million as compared to the same
period in 1996. This decline in interest expense was the result of a decrease
in the average rate paid on interest-bearing liabilities as the average balance
of interest-bearing liabilities increased $2.0 million, or 2.6%, between the two
periods. The average rate paid on interest-bearing liabilities declined 33
basis points to 5.16% for the three months ended June 30, 1997 as compared to
5.49% for the same period in 1996. This resulted primarily from an increase in
balances of deposits and other borrowed funds in replacement of the higher cost
CMO debt issuance. The balance of the CMO was reduced by regular principal
amortization and through the repurchase of one class of bonds of the CMO during
the first quarter of 1997. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Notes 11 and 19 of the Notes
to the Consolidated Financial Statements.
Provision for Loan Losses. Provisions for loan losses totalled $42,000
during the three months ended June 30, 1997 compared to $17,000 during the same
period in 1996. Higher provisions were made in 1997 as a result of management's
reevaluation of loans to a borrower in bankruptcy, the higher level of
delinquencies, the increase in loans receivable, and the higher level of net
loan charge-offs. Net loan charge-offs during the three months ended June 30,
1997 were $34,000 compared to $7,000 for the same period in 1996. The net
charge-offs for 1997 included the settlement on certain lease pools. See
"BUSINESS OF THE SAVINGS BANK -- Lending Activities -- Commercial Loans."
Non-interest Income. Non-interest income decreased $33,000 to $41,000 for
the three months ended June 30, 1997 compared to $74,000 for the same period in
1996. The decrease was the result of a one-time gain of $38,000 that was
realized on the sale of two CMO residual investments in the three month period
ending June 30, 1996. See Note 3 of the Notes to the Consolidated Financial
Statements.
Non-interest Expense. Total non-interest expense declined by $17,000 to
$408,000 in 1997 compared to $425,000 in 1996. This decline was due primarily
to a reduction in federal deposit insurance premiums of $32,000. Deposit
insurance premiums decreased between the periods primarily as a result of the
change in the deposit premium costs for savings associations following the
recapitalization of the SAIF and, to a lesser extent, due to an improvement in
the Saving's Bank's risk classification.
Income Taxes. Income tax expense increased $31,000 to $81,000 in 1997 as a
result of higher levels of pre-tax income.
Comparison of Operating Results for the Six Months Ended June 30, 1997 and 1996
Net Income. The Savings Bank incurred a net loss for the six months ended
June 30, 1997 of $260,000, compared to net income of $148,000 for the first six
months of 1996. The loss in 1997 was the result of an extraordinary charge of
$562,000 (net of related income tax benefit of $401,000) that was recorded in
the first quarter of 1997. The extraordinary charge was recorded upon the
purchase and extinguishment of a significant portion of the Savings Bank's CMO
debt issuance. To fund this purchase, the Savings Bank borrowed from the FHLB
at a rate significantly lower than the cost of the CMO. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
Note 19 of the Notes to the Consolidated Financial Statements.
Net Interest Income. Net interest income increased $160,000, or 15.5%, to
$1.2 million for the six months ended June 30, 1997 compared to the first six
months of 1996. The improvement in net interest income was the result of an
increase in the interest rate spread from 2.37% for the six months ended June
30, 1996 to 2.79% for the six months ended June 30, 1997. This increase in the
interest rate spread was the result of an increase in the yield on interest-
earning assets and a decrease in the cost of interest-bearing liabilities.
Interest Income. Total interest income increased $54,000, or 1.7%, for the
six months ended June 30, 1997 compared to the six months ended June 30, 1996.
The increase in interest income was the result of both an increase
(xiii)
<PAGE>
in the yield on interest-earning assets and an increase in the level of
interest-earning assets. The yield on interest-earning assets for the six
months ended June 30, 1997 increased 8 basis points to 8.01% from 7.93% for the
same period in 1996. The average balance of interest-earning assets increased
to $80.3 million for the six months ended June 30, 1997 from $79.8 million in
1996.
Interest Expense. Total interest expense declined $106,000, or 5.0%, for
the six months ended June 30, 1997 to $2.0 million from $2.1 million for the
first six months of 1996. The decline in interest expense was the result of a
decrease in the average rate paid on interest-bearing liabilities, which offset
an increase of $811,000, or 1.1%, in the average balance of interest-bearing
liabilities between the two periods. The average rate paid on interest-bearing
liabilities declined 33 basis points to 5.23% for the six months ended June 30,
1997 as compared to 5.56% for the same period in 1996. This resulted primarily
from a larger balance of borrowed funds, which replaced the higher cost CMO
debt issuance. The CMO balance was reduced from regular principal amortization
and the extinguishment of a portion of the debt through the repurchase of one
class of bonds in the first quarter of 1997. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Note 19 of Notes
to the Consolidated Financial Statements.
Provision for Loan Losses. Provisions for loan losses totalled $70,000
during the six months ended June 30, 1997 compared to $47,000 during the same
period in 1996. Larger provisions were made in 1997 as a result of management's
reevaluation of loans to a borrower in bankruptcy, the higher level of
delinquencies, the increase in loans receivable, and the higher level of net
loan charge-offs. Net loan charge-offs during the six months ended June 30,
1997 were $58,000 compared to $17,000 for the first six months of 1996. The net
charge-offs for 1997 included the settlement on certain lease pools. See
"BUSINESS OF THE SAVINGS BANK -- Lending Activities -- Commercial Loans."
Non-interest Income. Non-interest income increased $86,000 to $189,000 for
the six months ended June 30, 1997 compared to $103,000 for the same period in
1996. The increase was the result of a one-time gain of $121,000 from the
disposition of a CMO residual security in 1997. A similar gain of $38,000 was
realized on the sale of two CMO residual investments in the six month period
ending June 30, 1996. See Note 3 of the Notes to the Consolidated Financial
Statements.
Non-interest Expense. Total non-interest expense declined by $28,000 to
$822,000 for the first six months of 1997 compared to $850,000 for the first six
months of 1996. This decline was primarily the result of a reduction in federal
deposit insurance premiums of $65,000. Deposit insurance premiums decreased
between the periods primarily as a result of the change in the deposit premium
costs for savings associations following the recapitalization of the SAIF and,
to a lesser extent, due to an improvement in the Savings Bank's risk
classification. The six month period ending June 30, 1997 was adversely
affected by the net loss on the sale of REO and other repossessed assets of
$8,000 compared to a gain of $16,000 for the same period in 1996.
Income Taxes. Income tax expense increased $97,000 to $190,000 in 1997 as
a result of higher levels of pre-tax income.
Extraordinary Charge. Net income during the six months ended June 30, 1997
was adversely affected by a $963,000 charge ($562,000 net of related income tax
benefit) taken in connection with the extinguishment of the class C bond of the
Savings Bank's CMO debt issuance. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Note 19 of the Notes to the
Consolidated Financial Statements.
(xiv)
<PAGE>
RISK FACTORS
Before investing in shares of the Common Stock offered hereby, prospective
investors should carefully consider the matters presented below, in addition to
matters discussed elsewhere in this Prospectus.
Prior Operating Difficulties
The Savings Bank's results of operations and financial condition were
adversely affected in the early 1990s and, to a lesser extent, in more recent
years, by lending activities undertaken in the late 1980s. As a result of the
Savings Bank's asset quality problems, reduced capital levels and continued
operating losses, the Savings Bank entered into a Supervisory Agreement with the
OTS in 1991. As a result of corrective actions taken by the Savings Bank and
the improvement in its financial condition, the OTS released the Savings Bank
from the Supervisory Agreement in 1995. For a discussion of the problems faced
by the Savings Bank and the remedial actions taken by management, see
"PROSPECTUS SUMMARY -- Spring Hill Savings Bank, F.S.B."
Interest Rate Risk Exposure
The financial condition and operations of the Savings Bank, and of savings
institutions in general, are influenced significantly by general economic
conditions, by the related monetary and fiscal policies of the federal
government and by the regulations of the OTS and the FDIC. The Savings Bank's
profitability, like that of most financial institutions, is dependent to a large
extent on its net interest income, which is the difference between its interest
income on interest-earning assets, such as loans and investments, and its
interest expense on interest-bearing liabilities, such as deposits and
borrowings. The interest earned by the Savings Bank on such loans and paid by
the Savings Bank on such accounts and borrowings are significantly impacted by
market interest rates. Accordingly, the Savings Bank's results of operations
are significantly influenced by movements in market interest rates and the
Savings Bank's ability to manage its assets and liabilities in response to such
movements.
To manage the impact of changes in interest rates, the Savings Bank has
sought to improve the match between asset and liability maturities or repricing
periods and rates by (i) shortening the life of its fixed-rate loan portfolio by
offering fixed-rate loans with terms to maturity of no more than 20 years on
owner-occupied residential properties and 15 years on investment properties,
(ii) offering adjustable-rate loans on investment properties, (iii) emphasizing
adjustable-rate investment and shorter term mortgage-backed securities, and (iv)
extending the life of its liabilities by emphasizing longer term certificates of
deposit during periods of low market interest rates and utilizing longer term
borrowings. Unlike many savings institutions, the Savings Bank does not offer
adjustable-rate mortgage ("ARM") loans for the purchase of owner-occupied,
residential real estate. However, the Savings Bank does offer ARM loans for the
purchase of non-owner-occupied, one- to four-family real estate, multi-family
real estate and commercial real estate. At March 31, 1997, out of total
interest-earning assets of $79.9 million, the Savings Bank had $16.7 million of
ARM loans and adjustable-rate mortgage-backed securities and floating-rate
investments. As a result of its asset and liability structure, the Savings
Bank's results of operations would be adversely affected by a material or
prolonged increase in market interest rates. For further information regarding
the Savings Bank's asset and liability management, see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and
Liability Management."
Changes in the level of interest rates affect the market value of the
Savings Bank's investment securities and other interest-earning assets. Changes
in interest rates also can affect the average life of loans. Decreases in
interest rates may result in increased prepayments of loans, as borrowers
refinance 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 that are comparable to the rates on the
maturing loans or securities. Moreover, volatility in interest rates also can
result in disintermediation, or the flow of funds away from savings institutions
into direct investments, such as U.S. Government and corporate securities and
other investment vehicles which, because of the absence of federal insurance
premiums and reserve requirements, generally pay higher rates of return than
savings institutions.
1
<PAGE>
Risks of Dependence on Local Economy
The Savings Bank has been and intends to continue to operate as a
community-oriented financial institution, with a focus on servicing customers in
its primary market area. At March 31, 1997, most of the Savings Bank's loan
portfolio consisted of loans made to borrowers and collateralized by properties
located in its primary market area. As a result of this concentration, a
downturn in the economy of the Savings Bank's primary market area could increase
the risk of loss associated with the Savings Bank's loan portfolio; however, the
Savings Bank does not perceive there to be undue risk as a result of this credit
concentration.
Competition Within Market Area
The Savings Bank faces competition both in originating loans and attracting
deposits. Its most direct competition for savings deposits has historically
come from commercial banks, credit unions and other thrifts operating in its
primary market area. The Savings Bank's competitors include large regional and
superregional banks. These institutions are significantly larger than the
Savings Bank and therefore have greater financial and marketing resources than
the Savings Bank. In recent years, the Savings Bank has experienced an
increased level of competition for deposits from securities firms, insurance
companies and other investment vehicles, such as money market and mutual funds.
This competition could adversely affect the Savings Bank's future growth
prospects. The Savings Bank's competition for loans comes from commercial banks
and other thrifts operating in its market as well as from mortgage bankers and
brokers and consumer finance companies. The market for attracting savings
deposits and originating loans is very competitive, which may limit the ability
of the Savings Bank to originate loans and attract savings deposits that provide
a desirable interest rate margin. See "BUSINESS OF THE SAVINGS BANK -- Market
Area" and "-- Competition."
Certain Lending Risks
At March 31, 1997, the Savings Bank's loan portfolio included an aggregate
of $16.1 million of loans secured by non-owner-occupied one- to four-family real
estate, multi-family real estate or commercial real estate. These loans are
generally viewed as exposing the lender to greater credit risk than residential
loans secured by owner-occupied residences and, with respect to multi-family and
commercial real estate loans, typically involve higher loan principal amounts.
Repayment of loans secured by investment property is dependent, in large part,
on sufficient income from the property to cover operating expenses and debt
service. In addition, repayment of such loans may be subject to a greater
extent to adverse conditions in the real estate market or the economy. Economic
events and government regulations, which are outside the control of the borrower
or lender, could impact the value of the security for such loans or the future
cash flow of the affected properties. Furthermore, with respect to such loans
that have adjustable interest rates, it is possible that during periods of
rising interest rates the risk of default on such loans may increase as a result
of repricing and the increased payments required by the borrower. See "BUSINESS
OF THE SAVINGS BANK -- Lending Activities."
At March 31, 1997, the Savings Bank's loan portfolio also included $2.3
million of mobile home loans. Mobile home loans generally entail greater risk
than do residential mortgage loans, as they are secured by rapidly depreciating
assets. Accordingly, any repossessed collateral for a defaulted mobile home
loan may not provide an adequate source of repayment of the outstanding loan
balance. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans.
Anti-takeover Considerations
Provisions in the Holding Company's Governing Instruments and Pennsylvania
and Federal Law. Certain provisions included in the Holding Company's Articles
of Incorporation and in the Pennsylvania Business Corporation Law ("PBCL") might
discourage potential proxy contests and other potential takeover attempts,
particularly those that have not been negotiated with the Board of Directors.
As a result, these provisions might preclude takeover attempts that certain
stockholders may deem to be in their best interest and might tend to
2
<PAGE>
perpetuate existing management. These provisions include, among other things, a
provision limiting voting rights of beneficial owners of more than 10% of the
Common Stock, supermajority voting requirements for certain business
combinations, staggered terms for directors, non-cumulative voting for
directors, the removal of directors without cause only upon the vote of holders
of 75% of the outstanding voting shares, limitations on the calling of special
meetings, and specific notice requirements for stockholder nominations and
proposals. Certain provisions of the Articles of Incorporation of the Holding
Company cannot be amended by stockholders unless a 75% stockholder vote is
obtained. The existence of these anti-takeover provisions could result in the
Holding Company being less attractive to a potential acquiror and in
stockholders receiving less for their shares than otherwise might be available
in the event of a takeover attempt. Furthermore, federal regulations prohibit
for three years after consummation of the Conversion the ownership of more than
10% of the Savings Bank or the Holding Company without prior OTS approval.
Federal law also requires regulatory approval prior to the acquisition of
"control" (as defined in federal regulations) of an insured institution. For a
more detailed discussion of these provisions, see "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
Voting Control by Insiders. Directors and executive officers of the
Savings Bank and the Holding Company expect to purchase 37,200 shares of Common
Stock, or 7.1% and 5.2% of the shares issued in the Offerings at the minimum and
the maximum of the Estimated Valuation Range, respectively. Directors and
officers are also expected to control indirectly the voting of approximately 8%
of the shares of Common Stock issued in the Conversion through the ESOP. Under
the terms of the ESOP, the unallocated shares will be voted by the ESOP trustees
in the same proportion as the votes cast by participants with respect to the
allocated shares.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Conversion, the Holding Company expects to
seek approval of the Holding Company's MRP, which is a non-tax-qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Savings Bank. Assuming the receipt of stockholder
approval, the Holding Company expects to acquire common stock of the Holding
Company on behalf of the MRP in an amount equal to 4% of the Common Stock issued
in the Conversion, or 21,080 and 28,520 shares at the minimum and the maximum of
the Estimated Valuation Range, respectively. These shares will be acquired
either through open market purchases or from authorized but unissued shares of
Common Stock. Under the terms of the MRP, the MRP committee or the MRP trustees
will have the power to vote unallocated and unvested shares.
Assuming (i) the receipt of stockholder approval for the MRP, (ii) the open
market purchase of shares on behalf of the MRP, and (iii) the purchase by the
ESOP of 8% of the Common Stock sold in the Offerings, directors, officers and
employees of the Holding Company and the Savings Bank would have voting control
of 19.1% and 17.2% of the Common Stock, based on the issuance of Common Stock at
the minimum and maximum of the Estimated Valuation Range, respectively.
Management's potential voting control alone, as well as together with additional
stockholder support, might preclude or make more difficult takeover attempts
that certain stockholders deem to be in their best interest and might tend to
perpetuate existing management.
Severance Payments Upon Change in Control. The proposed employment
agreements with the Chief Executive Officer and Chief Financial Officer provide
for cash severance payments in the event of involuntary termination of
employment in connection with a change in control of the Holding Company or the
Savings Bank. Severance payments also will be provided in connection with a
voluntary termination of employment following a change in control in certain
circumstances. Such agreements also provide for the continuation of certain
employee benefits following the change in control. Assuming a change in control
occurred as of March 31, 1997, the aggregate amounts payable under these
agreements would have been approximately $353,000. In connection with the
Conversion, the Board of Directors of the Savings Bank intends to adopt an
Employee Severance Compensation Plan ("Severance Plan") to provide benefits to
eligible employees in the event of a change in control of the Holding Company or
the Savings Bank. Officers who enter into separate employment agreements with
the Holding Company and the Savings Bank will not be eligible to participate in
the Severance Plan. Assuming that a change in control had occurred at March 31,
1997 and the termination of all eligible employees, the maximum aggregate
payment due under the Severance Plan would be approximately $389,000. These
provisions may have the effect of increasing
3
<PAGE>
the cost of acquiring the Holding Company, thereby discouraging future attempts
to take over the Holding Company or the Savings Bank.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits," "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY" and "DESCRIPTION OF CAPITAL STOCK OF THE
HOLDING COMPANY."
Absence of Active Market for the Common Stock
The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq SmallCap
Market under the symbol "SHSB," there can be no assurance that the Holding
Company will meet Nasdaq SmallCap Market listing requirements, which currently
include a minimum number of publicly held shares, a minimum market
capitalization, at least two market makers and a minimum number of holders of
record. Furthermore, because The Nasdaq Stock Market has filed proposed rule
changes with the SEC that strengthen the listing requirements for the Nasdaq
SmallCap Market, there can be no assurance that if the Holding Company initially
meets the Nasdaq SmallCap Market listing requirements that it will be able to
maintain its listing. In the event that the Holding Company is unable to obtain
or maintain the listing of the Common Stock on the Nasdaq SmallCap Market, it is
anticipated that the Common Stock will be quoted on the OTC Bulletin Board.
Although under no obligation to do so, Ryan, Beck has indicated its intention to
act as a market maker. While Ryan, Beck will assist the Holding Company in
encouraging another market maker to establish and maintain a market in the
Common Stock, there can be no assurance that another market maker will 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 Holding 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.
Furthermore, there can be no assurance that purchasers will be able to sell
their shares at or above the Purchase Price. See "MARKET FOR COMMON STOCK."
Possible Dilutive Effect of Benefit Programs
At a meeting to be held no earlier than six months following consummation
of the Conversion, the Holding Company intends to seek stockholder approval of
the MRP. If approved, the MRP intends to acquire an amount of Common Stock
equal to 4% of the shares issued in the Conversion. Such shares of Common Stock
may be acquired by the Holding Company in the open market or from authorized but
unissued shares of Common Stock. In the event that the MRP acquires authorized
but unissued shares of Common Stock from the Holding Company, the voting
interests of existing stockholders will be diluted and net income per share and
stockholders' equity per share will be decreased. See "PRO FORMA DATA" and
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management Recognition Plan."
At a meeting to be held no earlier than six months following consummation
of the Conversion, the Holding Company intends to seek stockholder approval of
the Stock Option Plan. If approved, the Stock Option Plan will provide for
options for up to a number of shares of Common Stock equal to 10% of the shares
issued in the Conversion. Such shares may be authorized but unissued shares of
Common Stock and, upon exercise of the options, will result in the dilution of
the voting interests of existing stockholders and may decrease net income per
share and stockholders' equity per share. See "MANAGEMENT OF THE SAVINGS BANK --
Benefits -- Stock Option Plan."
If the ESOP is not able to purchase 8% of the shares of Common Stock issued
in the Offerings, the ESOP may purchase newly issued shares from the Holding
Company. In such event, the voting interests of existing stockholders will be
diluted and net income per share and stockholders' equity per share will be
decreased. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock
Ownership Plan."
4
<PAGE>
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Savings Bank are
deemed to have an ascertainable value, receipt of such rights may be a taxable
event (either as capital gain or ordinary income) to those Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members who receive
and/or exercise the Subscription Rights in an amount equal to such value.
Additionally, the Savings Bank could be required to recognize a gain for tax
purposes on such distribution. Whether Subscription Rights are considered to
have ascertainable value is an inherently factual determination. The Savings
Bank has been advised by Feldman Financial that such rights have no value;
however, Feldman Financial's conclusion is not binding on the Internal Revenue
Service ("IRS"). See "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Savings Bank -- Tax Effects."
Possible Increase in Estimated Price Range and 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 Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription and Direct Community Offering. In the event that the Estimated
Price Range is so increased, it is expected that the Holding Company will issue
up to 819,950 shares of Common Stock at the Purchase Price for an aggregate
price of up to $8,199,500. An increase in the number of shares will decrease
pro forma net earnings per share and stockholders' equity per share and will
increase the Holding Company's pro forma consolidated stockholders' equity and
net earnings. Such an increase will also increase the Purchase Price as a
percentage of pro forma stockholders' equity per share and net earnings per
share.
Potential Operational Restrictions Associated with Regulatory Oversight
The Savings Bank is, and the Holding Company upon consummation of the
Conversion will be, subject to extensive government regulation and oversight.
Such regulation and supervision govern the activities in which an institution
can engage and is designed primarily to protect the federal deposit insurance
fund and depositors. Regulatory authorities have extensive discretion in
connection with their supervisory and enforcement activities, including the
imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the determination of the
adequacy of an institution's allowance for loan losses. See "REGULATION."
SHS BANCORP, INC.
The Holding Company is a Pennsylvania corporation organized in June 1997 at
the direction of the Savings Bank for the purpose of serving as the holding
company of the Savings Bank upon consummation of the Conversion. The Holding
Company has not engaged in any significant business to date. The Holding
Company has received the approval of the OTS to become a savings and loan
holding company and to acquire 100% of the capital stock of the Savings Bank.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the capital stock of the Savings Bank, that portion of the net
proceeds of the Offerings permitted by the OTS to be retained by the Holding
Company and a note receivable from the ESOP evidencing a loan from the Holding
Company to fund the Savings Bank's ESOP. See "BUSINESS OF THE HOLDING COMPANY."
The holding company structure will allow the Holding Company to expand the
financial services currently offered through the Savings Bank should it choose
to do so. Management believes that the holding company structure and retention
of a portion of the proceeds of the Offerings will facilitate the expansion and
diversification of its operations. The holding company structure also will
enable the Holding Company to repurchase its stock without adverse tax
consequences. There are no present plans, arrangements, agreements, or
understandings, written or oral, regarding any such activities or repurchases.
See "REGULATION -- Savings and Loan Holding Company Regulation."
5
<PAGE>
SPRING HILL SAVINGS BANK, F.S.B.
The Savings Bank, founded in 1893, is a federally chartered mutual savings
bank located in Pittsburgh, Pennsylvania. The Savings Bank, which was formed
as a Pennsylvania mutual savings and loan association, converted to a federal
mutual savings bank in 1991. In connection with the Conversion, the Savings
Bank will convert to a federally chartered capital stock savings bank and will
become a subsidiary of the Holding Company. The Savings Bank is currently
regulated by the OTS, its primary regulator, and by the FDIC, the insurer of its
deposits. The Savings Bank's deposits are insured by the SAIF to the maximum
extent permitted by law. The Savings Bank has been a member of the FHLB System
since 1933. At March 31, 1997, the Savings Bank had total assets of $82.8
million, total deposits of $64.8 million and total retained earnings of $4.4
million on a consolidated basis.
The Savings Bank operates as a community-oriented financial institution
that engages primarily in the business of attracting deposits from the general
public and using those funds to originate residential mortgage loans within the
Savings Bank's primary market area. At March 31, 1997, one- to four-family
residential mortgage loans totalled $42.7 million, or 76.2% of total loans
receivable. The Savings Bank also originates multi-family, construction,
commercial real estate and consumer loans. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities." In 1996, as part of its strategy to provide a fuller range
of services to its retail customers, the Savings Bank expanded its offering of
consumer loans, introducing home equity lines of credit and consumer installment
loans.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $4.8 million to $6.7 million, or up to $7.7 million if
the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for the
assumptions used to arrive at such amounts. The Holding Company has received
the approval of the OTS to purchase all of the capital stock of the Savings Bank
to be issued in the Conversion in exchange for the lesser of 85% of the net
proceeds of the Offerings or that amount of net proceeds sufficient to increase
the Savings Bank's tangible capital to 10% of total assets.
The following table presents the estimated net proceeds of the Offering
based on the number of shares set forth below together with the amount to be
retained by the Holding Company and the amount to be contributed to the Savings
Bank.
<TABLE>
<CAPTION>
527,000 620,000 713,000 819,950
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
Per Share Per Share Per Share Per Share
--------- --------- ------------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Gross proceeds......... $ 5,270 $ 6,200 $ 7,130 $ 8,200
Less expenses.......... 445 450 463 463
-------- -------- -------- --------
Net proceeds........... $ 4,825 $ 5,750 $ 6,667 $ 7,737
======== ======== ======== ========
Amount retained by
Holding Company....... $ 724 $ 1,501 $ 2,418 $ 3,488
Amount contributed to
Savings Bank.......... $ 4,101 $ 4,249 $ 4,249 $ 4,249
</TABLE>
6
<PAGE>
Receipt of up to 85% of the net proceeds of the sale of the Common Stock
will increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the
funds contributed to it for general corporate purposes, including increased
local lending and purchases of investments, and possible future acquisitions of
branches. The Savings Bank may also use a portion of the funds contributed to
it to retire outstanding borrowings. Pending deployment of funds, the Savings
Bank plans initially to invest the net proceeds in short- to intermediate-term
U.S. Government and agency securities and mortgage-backed securities. Shares of
Common Stock may be purchased with funds on deposit at the Savings Bank, which
will reduce deposits by the amount of such purchases. As a result, the net
amount of funds available to the Savings Bank for investment following receipt
of the Conversion proceeds will be reduced by the amount of deposit withdrawals
used to fund stock purchases.
In connection with the Conversion and the establishment of the ESOP, the
Holding Company intends to loan the ESOP the amount necessary to purchase 8% of
the shares of Common Stock sold in the Conversion. The Holding Company's loan
to fund the ESOP may range from $421,600 to $570,400 based on the sale to the
ESOP of 42,160 shares (at the minimum of the Estimated Valuation Range) and
57,040 shares (at the maximum of the Estimated Valuation Range), respectively,
at $10.00 per share. If 15% above the maximum of the Estimated Valuation Range,
or 819,950 shares, are sold in the Conversion, the Holding Company's loan to the
ESOP would be approximately $655,960. It is anticipated that the ESOP loan will
have a ten-year term with interest payable at the prime rate as published in The
Wall Street Journal on the closing date of the Conversion. The loan will be
repaid principally from the Savings Bank's contributions to the ESOP and from
any dividends paid on shares of Common Stock held by the ESOP.
The remaining proceeds retained by the Holding Company initially will be
invested in short- to intermediate-term U.S. Government and agency securities
and mortgage-backed securities. Such proceeds will be available for additional
contributions to the Savings Bank in the form of debt or equity, to support
future diversification or acquisition activities, as a source of dividends to
the stockholders of the Holding Company and for future repurchases of Common
Stock to the extent permitted under Pennsylvania law and federal regulations.
Currently, there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any diversification activities.
Following consummation of the Conversion, the Board of Directors will have
the authority to adopt plans for repurchases of Common Stock or other returns of
capital to stockholders, subject to statutory and regulatory requirements.
Since the Holding Company has not yet issued stock, there currently is
insufficient information upon which an intention to repurchase stock could be
based. The facts and circumstances upon which the Board of Directors may
determine to repurchase stock in the future may include but are not limited to:
(i) market and economic factors, such as the price at which the stock is trading
in the market, the volume of trading, the attractiveness of other investment
alternatives in terms of the rate of return and risk involved in the investment,
the ability to increase the book value and/or earnings per share of the
remaining outstanding shares, and the ability to improve the Holding Company's
return on equity; (ii) the avoidance of dilution to stockholders by not having
to issue additional shares to cover the exercise of stock options or to fund
employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Holding Company and its
stockholders. Any stock repurchases or return of capital will be subject to a
determination by the Board of Directors that both the Holding Company and the
Savings Bank will be capitalized in excess of all applicable regulatory
requirements after any such repurchases or return of capital and that capital
will be adequate, taking into account, among other things, the level of
nonperforming and classified assets, the Holding Company's and the Savings
Bank's current and projected results of operations and asset/liability
structure, the economic environment and tax and other regulatory considerations.
See "THE CONVERSION -- Restrictions on Repurchase of Stock."
7
<PAGE>
DIVIDEND POLICY
General
The Board of Directors of the Holding Company has not formulated a dividend
policy, but intends to develop a policy of paying cash dividends in the future.
The payment of dividends on the Common Stock will be subject to the requirements
of applicable law and the determination by the Board of Directors of the Holding
Company that the net income, capital and financial condition of the Holding
Company, industry trends and general economic conditions justify the payment of
dividends. The rate of such dividends and the initial or continued payment
thereon will depend upon various factors at the intended time of declaration and
payment, including the Savings Bank's profitability and liquidity, alternative
investment opportunities, and regulatory restrictions on dividend payments and
on capital levels applicable to the Savings Bank. Accordingly, there can be no
present assurance that any dividends will be paid. Periodically, the Board of
Directors, if market, economic and regulatory conditions permit, may combine or
substitute periodic special dividends with or for regular dividends. In
addition, since the Holding Company initially will have no significant source of
income other than dividends from the Savings Bank and earnings from investment
of the net proceeds of the Conversion retained by the Holding Company, the
payment of dividends by the Holding Company will depend in part upon the amount
of the net proceeds from the Conversion retained by the Holding Company and the
Holding Company's earnings thereon and the receipt of dividends from the Savings
Bank, which are subject to various tax and regulatory restrictions on the
payment of dividends. Dividend payments by the Holding Company are subject to
applicable provisions of Pennsylvania corporate law. Under Pennsylvania law,
dividends may be paid unless, after giving effect thereto, the Holding Company
would be unable to pay its debts as they become due in the usual course of its
business, or the Holding 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. For additional information,
see "REGULATION."
Current Regulatory Restrictions
Dividends from the Holding Company may depend, in part, upon receipt of
dividends from the Savings Bank because the Holding Company initially will have
no source of income other than dividends from the Savings Bank and earnings from
the investment of the net proceeds from the Offerings retained by the Holding
Company. OTS regulations require savings associations to give the OTS 30 days'
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends.
The OTS imposes certain limitations on the payment of dividends which utilizes a
three-tiered approach that permits various levels of distributions based
primarily upon a savings association's capital level. In addition, the Savings
Bank may not declare or pay a cash dividend on its capital stock if the effect
thereof would be to reduce the regulatory capital of the Savings Bank below the
amount required for the liquidation account to be established pursuant to the
Savings Bank's Plan of Conversion. The Savings Bank currently meets the
criteria to be designated a Tier 1 association, as hereinafter defined, and
consequently could at its option (after prior notice to and no objection made by
the OTS) distribute up to 100% of its net income during the calendar year plus
50% of its surplus capital ratio at the beginning of the calendar year less any
distributions previously paid during the year. See "REGULATION -- Federal
Regulation of Savings Banks -- Limitations on Capital Distributions," "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and Borrowers of
the Savings Bank --Liquidation Account" and Note 19 of the Notes to the
Consolidated Financial Statements included elsewhere herein.
Additionally, in connection with the Conversion, the Holding Company and
the Savings Bank have committed to the OTS that during the one-year period
following consummation of the Conversion, the Holding Company will not take any
action, including any preliminary action, to declare an extraordinary dividend
to stockholders that would be treated by recipients as a tax-free return of
capital for federal income tax purposes.
8
<PAGE>
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq SmallCap
Market under the symbol "SHSB," there can be no assurance that the Holding
Company will meet Nasdaq SmallCap Market listing requirements, which currently
include a minimum number of publicly held shares, a minimum market
capitalization, at least two market makers and a minimum number of record
holders. Furthermore, because The Nasdaq Stock Market has filed proposed rule
changes with the SEC that strengthen the listing requirements for the Nasdaq
SmallCap Market, there can be no assurance that if the Holding Company initially
meets the Nasdaq SmallCap Market listing requirements that it will be able to
maintain its listing. In the event that the Holding Company is unable to obtain
or maintain the listing of the Common Stock on the Nasdaq SmallCap Market, it is
anticipated that the Common Stock will be quoted on the OTC Bulletin Board.
Although under no obligation to do so, Ryan, Beck has indicated its intention to
make a market for the Holding Company's Common Stock following consummation of
the Conversion and will assist the Holding Company in seeking to encourage at
least one additional market maker to establish and maintain a market in the
Common Stock. Making a market involves maintaining bid and ask quotations and
being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. While the Holding Company anticipates that prior to the
completion of the Conversion it will be able to obtain the commitment from at
least one additional broker-dealer to act as market maker for the Common Stock,
there can be no assurance that there will be two or more market makers for the
Common Stock. 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 Holding 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. The number
of active buyers and sellers of the Common Stock at any particular time may be
limited. Under such circumstances, investors in the Common Stock could have
difficulty disposing of their shares on short notice and should not view the
Common Stock as a short-term investment. Furthermore, there can be no assurance
that purchasers will be able to sell their shares at or above the Purchase Price
or that quotations will be available on the Nasdaq SmallCap Market as
contemplated.
9
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Savings
Bank at March 31, 1997, and the pro forma consolidated capitalization of the
Holding Company after giving effect to the assumptions set forth under "PRO
FORMA DATA," based on the sale of the number of shares of Common Stock set forth
below in the Conversion at the minimum, midpoint and maximum of the Estimated
Valuation Range, and based on the sale of 819,950 shares (representing the
shares that would be issued in the Conversion after giving effect to an
additional 15% increase in the maximum valuation in the Estimated Valuation
Range, subject to receipt of an updated appraisal confirming such valuation and
OTS approval). A change in the number of shares to be issued in the Conversion
may materially affect pro forma consolidated capitalization.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
-------------------------------------------------------------
527,000 620,000 713,000 819,950
Capitalization Shares at Shares at Shares at Shares at
as of $10.00 $10.00 $10.00 $10.00
March 31, 1997 Per Share(1) Per Share(1) Per Share(1) Per Share(2)
-------------- ------------ ------------- --------- ---------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(3)........................ $64,776 $ 64,776 $ 64,776 $ 64,776 $ 64,776
Borrowed funds (including CMO)..... 11,708 11,708 11,708 11,708 11,708
-------------- -------- -------- -------- --------
Total deposits and borrowings...... $76,484 $ 76,484 $ 76,484 $ 76,484 $ 76,484
============== ======== ======== ======== ========
Stockholders' equity:
Preferred stock:
5,000,000 shares, $.01
par value per share,
authorized; none issued
or outstanding................ $ -- $ -- $ -- $ -- $ --
Common Stock:
10,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(4)................ -- 5 6 7 8
Additional paid-in capital...... -- 4,820 5,744 6,660 7,729
Retained earnings(5)............ 4,449 4,449 4,449 4,449 4,449
Less:
Common Stock acquired
by ESOP(6).................. -- (422) (496) (570) (656)
Common Stock to be acquired
by MRP(7)................... -- (211) (248) (285) (328)
-------------- -------- -------- -------- --------
Total stockholders' equity......... $ 4,449 $ 8,641 $ 9,455 $ 10,261 $ 11,202
============== ======== ======== ======== ========
</TABLE>
(footnotes on following page)
10
<PAGE>
_______________
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or performance of the
Savings Bank or changes in market conditions or general financial and
economic conditions, or the issuance of additional shares under the Stock
Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
in the event the aggregate number of shares of Common Stock issued in the
Conversion is 15% above the maximum of the Estimated Valuation Range. See
"PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof.
(4) The Savings Bank's authorized capital will consist solely of 1,000 shares of
common stock, par value $1.00 per share, 1,000 shares of which will be
issued to the Holding Company, and 9,000 shares of preferred stock, no par
value per share, none of which will be issued in connection with the
Conversion.
(5) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Savings Bank will be prohibited
from paying any dividend that would reduce its regulatory capital below the
amount in the liquidation account, which will be established for the benefit
of the Savings Bank's Eligible Account Holders and Supplemental Eligible
Account Holders at the time of the Conversion and adjusted downward
thereafter as such account holders reduce their balances or cease to be
depositors. See "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Savings Bank -- Liquidation Account."
(6) Assumes that 8% of the Common Stock sold in the Conversion will be acquired
by the ESOP in the Conversion with funds borrowed from the Holding Company.
In accordance with generally accepted accounting principles ("GAAP"), the
amount of Common Stock to be purchased by the ESOP represents unearned
compensation and is, accordingly, reflected as a reduction of capital. As
shares are committed to be released to ESOP participants' accounts, a
corresponding reduction in the charge against capital will occur. Since the
funds are borrowed from the Holding Company, the borrowing will be
eliminated in consolidation and no liability will be reflected in the
consolidated financial statements of the Holding Company. See "MANAGEMENT
OF THE SAVINGS BANK -- Benefits -- Employee Stock Ownership Plan."
(7) Assumes the purchase in the open market at the Purchase Price, pursuant to
the proposed MRP, of a number of shares equal to 4% of the shares of Common
Stock issued in the Conversion at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range. The issuance of an
additional 4% of the shares of Common Stock for the MRP from authorized but
unissued shares of Holding Company Common Stock would dilute the voting and
ownership interest of stockholders by 3.85%. The shares are reflected as a
reduction of stockholders' equity. See "RISK FACTORS -- Possible Dilutive
Effect of Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF THE SAVINGS
BANK -- Benefits -- Management Recognition Plan." The MRP is subject to
stockholder approval, which is expected to be sought at a meeting to be held
no earlier than six months following consummation of the Conversion.
11
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Savings Bank's historical and pro forma
capital position relative to the OTS capital requirements at March 31, 1997.
The amount of capital infused into the Savings Bank for purposes of the
following table is the lesser of 85% of the net proceeds of the Offerings or
that amount of net proceeds sufficient to increase the Savings Bank's tangible
capital to 10% of total assets. 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 MRP are deducted from pro forma regulatory capital. For a
discussion of the assumptions underlying the pro forma capital calculations
presented below, see "USE OF PROCEEDS," "CAPITALIZATION" and "PRO FORMA DATA."
The definitions of the terms used in the table are those provided in the capital
regulations issued by the OTS. For a discussion of the capital standards
applicable to the Savings Bank, see "REGULATION -- Federal Regulation of Savings
Banks -- Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT MARCH 31, 1997
----------------------------------------------------------------------------------
15% above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
------------------- -------------------- ------------------- -------------------
819,950 Shares
527,000 Shares 620,000 Shares 713,000 Shares at $10.00 Per
March 31, 1997 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share Share
------------------ ------------------- -------------------- ------------------- -------------------
Percent of
Percent of Percent of Percent of Percent of Total
Total Total Total Total Assets
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount (1)
------ ---------- ------- ---------- -------- ---------- ------- ---------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital........... $4,459 5.38% $8,560 9.85% $8,708 10.00% $8,708 10.00% $8,708 10.00%
Tangible capital
requirement............... 1,242 1.50 1,304 1.50 1,306 1.50 1,306 1.50 1,306 1.50
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess..................... $3,217 3.88% $7,256 8.35% $7,402 8.50% $7,402 8.50% $7,402 8.50%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Core capital............... $4,459 5.38% $8,560 9.85% $8,708 10.00% $8,708 10.00% $8,708 10.00%
Core capital requirement(2) 2,485 3.00 2,608 3.00 2,612 3.00 2,612 3.00 2,612 3.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess..................... $1,974 2.38% $5,952 6.85% $6,096 7.00% $6,096 7.00% $6,096 7.00%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Risk-based capital(3)...... $4,879 12.46% $8,980 21.79% $9,128 22.11% $9,128 22.11% $9,128 22.11%
Risk-based
capital requirement....... 3,132 8.00 3,296 8.00 3,302 8.00 3,302 8.00 3,302 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess..................... $1,747 4.46% $5,684 13.79% $5,826 14.11% $5,826 14.11% $5,826 14.11%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
___________________
(1) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of total adjusted assets. Risk
based capital levels are shown as a percentage of risk-weighted assets.
(2) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and soundness
and a core capital ratio of 4% to 5% for all other thrifts.
(3) Assumes net proceeds are invested in assets that carry a 50% risk-weighting.
12
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at an aggregate
price equal to the estimated pro forma market value of the Holding Company and
the Savings Bank as converted, based upon an independent valuation. The
Estimated Valuation Range as of June 23, 1997 is from a minimum of $5,270,000 to
a maximum of $7,130,000 with a midpoint of $6,200,000 or, at a price per share
of $10.00, a minimum number of shares of 527,000, a maximum number of shares of
713,000 and a midpoint number of shares of 620,000. The actual net proceeds
from the sale of the Common Stock cannot be determined until the Conversion is
completed. However, net proceeds set forth on the following table are based upon
the following assumptions: (i) Ryan, Beck will receive a fee equal to $25,000
plus 1.5% of the aggregate Purchase Price of shares sold in the Subscription and
Direct Community Offering, excluding shares purchased by directors, officers,
employees and any immediate family member thereof, and the ESOP, subject to a
minimum fee of $100,000 and a maximum fee equal to $25,000 plus 1.5% of the
aggregate gross proceeds at the midpoint of the Estimated Valuation Range; (ii)
all of the Common Stock will be sold in the Subscription and Direct Community
Offerings; and (iii) Conversion expenses, excluding the fees paid to Ryan, Beck,
will total approximately $345,000. Actual expenses may vary from those
estimated.
The following tables summarize the historical net income and retained
earnings of the Savings Bank and the pro forma consolidated net income and
stockholders' equity of the Holding Company for the periods and at the dates
indicated, based on the minimum, midpoint and maximum of the Estimated Valuation
Range and based on a 15% increase in the maximum of the Estimated Valuation
Range. The pro forma consolidated net income of the Savings Bank for the three
months ended March 31, 1997 and the year ended December 31, 1996 has been
calculated as if the Conversion had been consummated at the beginning of each
such period and the estimated net proceeds received by the Holding Company and
the Savings Bank had been invested at 6.02% at the beginning of each period,
which represents the one year U.S. Treasury Bill yield as of March 31, 1997.
While OTS regulations provide for the use of a yield representing the arithmetic
average of the weighted average yield earned by the Savings Bank on its
interest-earning assets and the rates paid on its deposits, the Holding Company
believes that the U.S. Treasury Bill represents a more realistic yield on the
Savings Bank's investments. As discussed under "USE OF PROCEEDS," the Holding
Company expects to retain up to 85% of the net proceeds of the Offerings from
which it will fund the ESOP loan. A pro forma after-tax return of 3.71% is used
for both the Holding Company and the Savings Bank for the three months ended
March 31, 1997 and the year ended December 31, 1996, after giving effect to an
incremental combined federal and state tax rate of 38.4%. Historical and pro
forma per share amounts have been calculated by dividing historical and pro
forma amounts by the number of shares of Common Stock indicated in the footnotes
to the table. Per share amounts have been computed as if the Common Stock had
been outstanding at the beginning of the period or at the dates indicated, but
without any adjustment of per share historical or pro forma stockholders' equity
to reflect the earnings on the estimated net proceeds. No effect has been given
to: (i) the shares to be reserved for issuance under the Holding Company's Stock
Option Plan, which is expected to be voted upon by stockholders at a meeting to
be held no earlier than six months following consummation of the Conversion;
(ii) withdrawals from deposit accounts for the purpose of purchasing Common
Stock in the Conversion; (iii) the issuance of shares from authorized but
unissued shares to the MRP, which is expected to be voted upon by stockholders
at a meeting to be held no earlier than six months following consummation of the
Conversion; or (iv) the establishment of a liquidation account for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Stock Option Plan" and "THE
CONVERSION -- Stock Pricing and Number of Shares Issued." Shares of Common
Stock may be purchased with funds on deposit at the Savings Bank, which will
reduce deposits by the amounts of such purchases. Accordingly, the net amount
of funds available for investment will be reduced by the amount of deposit
withdrawals used to fund stock purchases.
The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion actually
occurs and should not be taken as indicative of future results of operations.
Stockholders' equity represents the difference between the stated amounts of
consolidated assets and liabilities of the Holding Company computed in
accordance with GAAP. Stockholders' equity has not been increased or decreased
to reflect the difference between the carrying value of loans and
13
<PAGE>
other assets and market value. Stockholders' equity is not intended to
represent fair market value nor does it represent amounts that would be
available for distribution to stockholders in the event of liquidation.
<TABLE>
<CAPTION>
At or For the Three Months Ended March 31, 1997
----------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
----------- ------------ ----------- ------------------
527,000 620,000 713,000 819,950(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- ----------- ---------- ---------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 5,270 $ 6,200 $ 7,130 $ 8,200
Less: estimated expenses............................ 445 450 463 463
-------- -------- -------- --------
Estimated net proceeds.............................. 4,825 5,750 6,667 7,737
Less: Common Stock acquired by ESOP................. (422) (496) (570) (656)
Less: Common Stock to be acquired by MRP............ (211) (248) (285) (328)
-------- -------- -------- --------
Net investable proceeds........................... $ 4,192 $ 5,006 $ 5,812 $ 6,753
======== ======== ======== ========
Consolidated net income (loss):
Historical.......................................... $ (387) $ (387) $ (387) $ (387)
Pro forma income on net proceeds(2)................. 39 46 54 63
Pro forma ESOP adjustments(3)....................... (6) (8) (9) (10)
Pro forma MRP adjustments(4)........................ (6) (8) (9) (10)
-------- -------- -------- --------
Pro forma net income (loss)........................ $ (360) $ (357) $ (351) $ (344)
======== ======== ======== ========
Consolidated net income (loss) per share (5)(6):
Historical.......................................... $ (0.80) $ (0.68) $ (0.59) $ (0.51)
Pro forma income on net proceeds.................... 0.08 0.08 0.08 0.08
Pro forma ESOP adjustments(3)....................... (0.01) (0.01) (0.01) (0.01)
Pro forma MRP adjustments(4)........................ (0.01) (0.01) (0.01) (0.01)
-------- -------- -------- --------
Pro forma net income (loss) per share.............. $ (0.74) $ (0.62) $ (0.53) $ (0.45)
======== ======== ======== ========
Consolidated stockholders' equity (book value):
Historical.......................................... $ 4,449 $ 4,449 $ 4,449 $ 4,449
Estimated net proceeds.............................. 4,825 5,750 6,667 7,737
Less: Common Stock acquired by ESOP................. (422) (496) (570) (656)
Less: Common Stock to be acquired by MRP(4)......... (211) (248) (285) (328)
-------- -------- -------- --------
Pro forma stockholders' equity(7).................. $ 8,641 $ 9,455 $ 10,261 $ 11,202
======== ======== ======== ========
Consolidated stockholders' equity per share(6)(8):
Historical(6)....................................... $ 8.44 $ 7.18 $ 6.24 $ 5.43
Estimated net proceeds.............................. 9.16 9.27 9.35 9.43
Less: Common Stock acquired by ESOP................. (0.80) (0.80) (0.80) (0.80)
Less: Common Stock to be acquired by MRP(4)......... (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share(9)........ $ 16.40 $ 15.25 $ 14.39 $ 13.66
======== ======== ======== ========
Purchase Price as a multiple of pro forma
net income per share................................ NM NM NM NM
Purchase Price as a percentage of pro forma
stockholders' equity per share...................... 60.98% 65.57% 69.49% 73.21%
</TABLE>
(footnotes on page 16)
14
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
----------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
----------- ------------ ------------- ----------------
527,000 620,000 713,000 819,950(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
----------- ------------ ------------- ----------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds.......................................... $ 5,270 $ 6,200 $ 7,130 $ 8,200
Less: estimated expenses................................ 445 450 463 463
-------- -------- -------- -------
Estimated net proceeds.................................. 4,825 5,750 6,667 7,737
Less: Common Stock acquired by ESOP..................... (422) (496) (570) (656)
Less: Common Stock to be acquired by MRP................ (211) (248) (285) (328)
-------- -------- -------- -------
Net investable proceeds............................ $ 4,192 $ 5,006 $ 5,812 $ 6,753
======== ======== ======== =======
Consolidated net income:
Historical............................................. $ 393 $ 393 $ 393 $ 393
Pro forma income on net proceeds(2).................... 156 186 216 251
Pro forma ESOP adjustments(3).......................... (26) (31) (35) (40)
Pro forma MRP adjustments(4)........................... (26) (31) (35) (40)
-------- -------- -------- -------
Pro forma net income................................. $ 497 $ 517 $ 539 $ 564
======== ======== ======== =======
Consolidated net income per share (5)(6):
Historical............................................. $ 0.80 $ 0.68 $ 0.59 $ 0.52
Pro forma income on net proceeds....................... 0.32 0.32 0.33 0.33
Pro forma ESOP adjustments(3).......................... (0.05) (0.05) (0.05) (0.05)
Pro forma MRP adjustments(4)........................... (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- -------
Pro forma net income per share....................... $ 1.02 $ 0.90 $ 0.82 $ 0.75
======== ======== ======== =======
Consolidated stockholders' equity (book value):
Historical............................................. $ 4,840 $ 4,840 $ 4,840 $ 4,840
Estimated net proceeds................................. 4,825 5,750 6,667 7,737
Less: Common Stock acquired by ESOP.................... (422) (496) (570) (656)
Less: Common Stock to be acquired by MRP(4)............ (211) (248) (285) (328)
-------- -------- -------- -------
Pro forma stockholders' equity(7).................... $ 9,032 $ 9,846 $ 10,652 $11,593
======== ======== ======== =======
Consolidated stockholders' equity per share(6)(8):
Historical(6).......................................... $ 9.18 $ 7.81 $ 6.79 $ 5.90
Estimated net proceeds................................. 9.16 9.27 9.35 9.44
Less: Common Stock acquired by ESOP.................... (0.80) (0.80) (0.80) (0.80)
Less: Common Stock to be acquired by MRP(4)............ (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- -------
Pro forma stockholders' equity per share(9).......... $ 17.14 $ 15.88 $ 14.94 $ 14.14
======== ======== ======== =======
Purchase Price as a multiple of pro forma
net income per share................................... 9.80x 11.11x 12.20x 13.33x
Purchase Price as a percentage of pro forma
stockholders' equity per share......................... 58.34% 62.97% 66.93% 70.72%
</TABLE>
(footnotes on following page)
15
<PAGE>
___________________
(1) Gives effect to the sale of an additional 106,950 shares in the Conversion,
which may be issued to cover an increase in the pro forma market value of
the Holding Company and the Savings Bank as converted, without the
resolicitation of subscribers or any right of cancellation. The issuance
of such additional shares will be conditioned on a determination of the
independent appraiser that such issuance is compatible with its
determination of the estimated pro forma market value of the Holding
Company and the Savings Bank as converted. See "THE CONVERSION -- Stock
Pricing and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the prime
rate as published in The Wall Street Journal on the closing date of the
Conversion, which rate was 8.5% as of August 4, 1997) from the net proceeds
from the Offerings retained by the Holding Company. The amount of this
borrowing has been reflected as a reduction from gross proceeds to
determine estimated net investable proceeds. The Savings Bank intends to
make contributions to the ESOP in amounts at least equal to the principal
and interest requirement of the debt. As the debt is paid down,
stockholders' equity will be increased. The Savings Bank's payment of the
ESOP debt is based upon equal installments of principal over a ten-year
period, assuming a combined federal and state tax rate of 38.4%. Shares
purchased by the ESOP with the proceeds of the loan will be held in a
suspense account and released on a pro rata basis as the loan is repaid.
Interest income earned by the Holding Company on the ESOP debt offsets the
interest paid by the Savings Bank on the ESOP loan. No reinvestment is
assumed on proceeds contributed to fund the ESOP. The ESOP expense
reflects adoption of Statement of Position ("SOP") 93-6, "Employers'
Accounting for Employee Stock Ownership Plans," which will require
recognition of expense based upon shares committed to be released and the
exclusion of unallocated shares from earnings per share computations. The
valuation of shares committed to be released would be based upon the
average market value of the shares during the year, which, for purposes of
this calculation, was assumed to be equal to the $10.00 per share Purchase
Price. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock
Ownership Plan."
(4) Gives effect to the MRP expected to be adopted by the Holding Company
following the Conversion. If the MRP is approved by stockholders, the MRP
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. In calculating the
pro forma effect of the MRP, it is assumed that the required stockholder
approval has been received, that the shares were acquired by the MRP at the
beginning of the period presented in open market purchases at the Purchase
Price and that 20% of the amount contributed was an amortized expense
during such period. The issuance of authorized but unissued shares of the
Common Stock instead of open market purchases would dilute the voting and
ownership interests of existing stockholders by approximately 3.85% and pro
forma net income (loss) per share would be $(0.71), $(0.60), $(0.51) and
$(0.43) at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively, for the three months ended March
31, 1997, and $0.98, $0.87, $0.79 and $0.72 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, for the year ended December 31, 1996, and pro forma
stockholders' equity per share would be $15.77, $14.66, $13.84 and $13.14
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively, at March 31, 1997 and $16.48,
$15.27, $14.37 and $13.60 at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range, respectively, at December 31,
1996. Shares issued under the MRP vest over a five-year period at 20% per
year and, for purposes of this table, compensation expense is recognized on
a straight-line basis over each vesting period. In the event the fair
market value per share is greater than $10.00 per share on the date of
stockholder approval of the MRP, total MRP expense would increase. No
effect has been given to the shares reserved for issuance under the
proposed Stock Option Plan. If stockholders approve the Stock Option Plan
following the Conversion, the Holding Company will have reserved for
issuance under the Stock Option Plan authorized but unissued shares of
Common Stock representing an amount of shares equal to 10% of the shares
sold in the Conversion. If all of the options were to be exercised
utilizing these authorized but unissued shares rather than treasury shares
which
16
<PAGE>
could be acquired, the voting and ownership interests of existing
stockholders would be diluted by approximately 9.09%. See "MANAGEMENT OF
THE SAVINGS BANK -- Benefits -- Stock Option Plan" and "-- Management
Recognition Plan" and "RISK FACTORS -- Possible Dilutive Effect of Benefit
Programs."
(5) Per share amounts are based upon shares outstanding of 485,894, 571,640,
657,386 and 755,994 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively, for the three
months ended March 31, 1997 and 489,056, 575,360, 661,664, and 760,914 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively, for the year ended December 31, 1996, which
includes the shares of Common Stock sold in the Conversion less the number
of shares assumed to be held by the ESOP not committed to be released
within the first year following the Conversion.
(6) Historical per share amounts have been computed as if the shares of Common
Stock expected to be issued in the Conversion had been outstanding at the
beginning of the period or on the date shown, but without any adjustment of
historical net income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares in the
Conversion, the additional ESOP expense or the proposed MRP expense, as
described above.
(7) "Book value" represents the difference between the stated amounts of the
Savings Bank's assets and liabilities. The amounts shown do not reflect
the liquidation account which will be established for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in the
Conversion, or the federal income tax consequences of the restoration to
income of the Savings Bank's special bad debt reserves for income tax
purposes which would be required in the unlikely event of liquidation. See
"THE CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Savings Bank" and "TAXATION." The amounts shown for book
value do not represent fair market values or amounts distributable to
stockholders in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 527,000, 620,000,
713,000 and 819,950 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the Common Stock.
Based upon the assumptions set forth under "PRO FORMA DATA" and the
information presented above, the pro forma net income per share for the three
months ended June 30, 1997 would be $0.31, $0.28, $0.25 and $0.22 and the pro
forma stockholders' equity per share would be $16.65, $15.47, $14.58 and $13.83
at the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. Assuming the sale of 620,000 shares in the
Conversion at the midpoint of the Estimated Valuation Range, the Purchase Price
as a percent of pro forma stockholders' equity per share at June 30, 1997 would
be 64.6% and the Purchase Price as a multiple of net income per share for the
three months ended June 30, 1997 would be 8.9x (annualized). See "RECENT
DEVELOPMENTS."
17
<PAGE>
SPRING HILL SAVINGS BANK, F.S.B.
CONSOLIDATED STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations of Spring Hill Savings
Bank, F.S.B. and Subsidiary for the fiscal years ended December 31, 1996 and
1995 have been audited by S.R. Snodgrass A.C., Wexford, Pennsylvania,
independent auditors, whose report thereon appears elsewhere in this Prospectus.
These statements should be read in conjunction with the Consolidated Financial
Statements and related Notes included elsewhere herein. The Consolidated
Statements of Income for the three months ended March 31, 1997 and 1996 are
unaudited but, in the opinion of management, reflect all adjustments (consisting
only of normal recurring accruals except the extraordinary item discussed in
Note 19 of the Notes to the Consolidated Financial Statements) necessary for a
fair presentation of the results of such periods. The results for the three
month period ended March 31, 1997 are not necessarily indicative of the results
of the Savings Bank that may be expected for the entire fiscal year.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------------ -----------------------
1997 1996 1996 1995
-------------- -------------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable............................ $1,169,828 $1,133,569 $4,526,633 $4,580,733
Interest-bearing deposits with other banks.. 39,406 31,836 102,592 103,487
Investment securities....................... 30,768 56,044 162,043 189,362
Mortgage-backed securities.................. 347,164 386,499 1,485,049 1,590,183
Dividends on Federal Home
Loan Bank stock............................ 9,359 9,191 37,491 39,238
---------- ---------- ---------- ----------
Total interest and dividend income........ 1,596,525 1,617,139 6,313,808 6,503,003
---------- ---------- ---------- ----------
Interest Expense:
Deposits.................................... 758,374 804,368 3,040,296 3,075,480
Advances by borrowers for taxes
and insurance.............................. 3,164 3,764 13,080 15,514
Collaterized mortgage obligation............ 172,361 246,624 930,669 1,060,807
Borrowed funds.............................. 84,380 33,166 171,169 307,740
---------- ---------- ---------- ----------
Total interest expense..................... 1,018,279 1,087,922 4,155,214 4,459,541
---------- ---------- ---------- ----------
Net interest income....................... 578,246 529,217 2,158,594 2,043,462
Provision for loan losses..................... 27,943 29,528 239,370 64,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses................ 550,303 499,689 1,919,224 1,979,462
---------- ---------- ---------- ----------
Non-interest Income:
Service fees................................ 17,213 15,364 65,025 74,493
Net securities gains (losses)............... 116,541 -- 902,488 (7,971)
Other income................................ 14,609 13,045 56,706 56,677
---------- ---------- ---------- ----------
Total non-interest income................. 148,363 28,409 1,024,219 123,199
---------- ---------- ---------- ----------
Non-interest Expense:
Compensation and employee benefits.......... 187,687 201,354 869,422 744,922
Occupancy and equipment..................... 54,232 47,174 207,790 157,147
Federal insurance premiums.................. 10,143 42,806 577,941 173,172
Data processing............................. 27,832 24,180 89,092 91,713
Real estate operations, net................. 9,212 (12,443) 93,286 87,373
Other operating expenses.................... 125,320 122,035 481,921 505,570
---------- ---------- ---------- ----------
Total non-interest expense................ 414,426 425,106 2,319,452 1,759,897
---------- ---------- ---------- ----------
Income before income taxes and
extraordinary item......................... 284,240 102,992 623,991 342,764
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------------ -----------------------
1997 1996 1996 1995
-------------- -------------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Income tax expense............................ 109,104 42,843 231,247 111,703
---------- ---------- ---------- ----------
Income before extraordinary item.............. 175,136 60,149 392,744 231,061
Extraordinary item:
Loss on extinguishment of debt, net
of related income taxes of $400,537.......... 562,525 -- -- --
---------- ---------- ---------- ----------
Net income (loss)............................. $ (387,389) $ 60,149 $ 392,744 $ 231,061
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Savings Bank. The information contained in this
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes thereto and the other sections contained in this
Prospectus.
The profitability of the Savings Bank's operations depends primarily on its
net interest income, which is the difference between the income the Savings Bank
receives on its loan and investment portfolio and its cost of funds, which
consists of interest paid on deposits and borrowings. Net interest income is a
function of the Savings Bank's interest rate spread, which is the difference
between the yield earned on interest-earning assets and the rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to the average balance of interest-bearing
liabilities. The Savings Bank's net income is also affected by its level of
non-interest income and non-interest expenses. Non-interest income is comprised
of service fees, gain (loss) on the sale of securities and miscellaneous fees
and income. Non-interest expenses include compensation and employee benefits,
occupancy and equipment expenses, deposit insurance premiums, data processing
expenses, expenses associated with real estate operations, and other
miscellaneous operating costs.
Operating Strategy
The Savings Bank has been, and intends to continue to be, a community
oriented financial institution. The Savings Bank's goals include (i) serving
the borrowing and savings needs of the Savings Bank's communities, (ii)
maintaining strong asset quality, (iii) controlling the exposure of earnings to
fluctuations in interest rates, and (iv) maintaining a stable stream of earnings
to produce a competitive return on equity.
In the late 1980s, the Savings Bank suffered asset quality problems that
contributed to losses through 1992. In response, the Savings Bank temporarily
reduced its lending activities and devoted significant resources to resolving
its asset quality problems and reducing REO. Since 1993, the Savings Bank has
returned to, and maintained a competitive posture in, its residential and
consumer lending activities. These efforts, coupled with expense control,
allowed the Savings Bank to return to improved financial health. This is
reflected in the increase since 1992 in income before income taxes,
extraordinary items and cumulative effect of accounting changes. Despite these
improvements, the Savings Bank's operating performance has lagged behind
institutions of similar operations and size. This has partly been the result of
a CMO issued in 1987, which has had a material negative impact on operating
earnings. In March 1997, the Savings Bank extinguished a significant portion of
the remaining CMO through the repurchase of $4.8 million par value of the
remaining $7.4 million of bonds. With the recent extinguishment of much of this
debt, the Savings Bank anticipates that its earnings performance will improve.
See "BUSINESS OF THE SAVINGS BANK -- Deposit Activities and Other Sources of
Funds -- Borrowings."
Comparison of Financial Condition at March 31, 1997 and December 31, 1996
Total assets increased $1.1 million, or 1.3%, from $81.7 million at
December 31, 1996 to $82.8 million at March 31, 1997. Loans receivable
increased $479,000 from $54.8 million at December 31, 1996 to $55.3 million at
March 31, 1997 while investment securities held to maturity decreased $744,000.
A portion of these funds were invested in higher yielding loans. Cash and due
from banks and interest-bearing deposits with other banks increased by a total
of $929,000 as the Savings Bank kept available funds in short-term liquid
investments pending investment in loans.
Total liabilities increased $1.5 million, or 2.0%, from $76.9 million at
December 31, 1996 to $78.4 million at March 31, 1997. Deposits increased
$482,000 from $64.3 million to $64.8 million primarily as a result of interest
credited. The Savings Bank's CMO decreased from $6.9 million at December 31,
1996 to $2.5 million at March
20
<PAGE>
31, 1997 primarily as a result of the repurchase of the class C CMO bond. The
repurchase was funded with advances from the FHLB. Primarily as a result of the
CMO repurchase, borrowed funds increased from $3.8 million at December 31, 1996
to $9.3 million at March 31, 1997.
Total retained earnings decreased from $4.8 million at December 31, 1996 to
$4.4 million at March 31, 1997 as a result of the net loss incurred in the three
months ended March 31, 1997 primarily as a result of the CMO repurchase.
Comparison of Operating Results for the Three Months Ended March 31, 1997 and
1996
Net Income. The Savings Bank incurred a net loss for the three months
ended March 31, 1997 of $387,000, compared to net income of $60,000 for the same
period in 1996. The loss incurred in 1997 was the result of the Savings Bank
repurchasing from a third party the class C bond of the CMO issued by its
subsidiary. As a result of the transaction, the Savings Bank recorded an
extraordinary loss on the extinguishment of the class C bond amounting to
$562,000 (net of related income tax benefit of $401,000). Income for the three
months ended March 31, 1997 also reflected a gain of $121,000 from the
redemption of a CMO residual held by the Savings Bank. Without the repurchase
of the class C bond and the gain on the sale of the CMO residual, the Savings
Bank would have had net income of $91,000 for the three months ended March 31,
1997.
Net Interest Income. Net interest income increased by $49,000, or 9.3%,
from $529,000 for the three months ended March 31, 1996 to $578,000 for the same
period in 1997. This improvement resulted from an increase of 24 basis points
in the Savings Bank's interest rate spread from 2.40% in 1996 to 2.64% in 1997.
The Savings Bank's interest rate spread improved as the average rate paid on its
interest-bearing liabilities decreased more than the yield on its interest-
earning assets.
Interest Income. Total interest income decreased by $21,000, or 1.3%,
between the three months ended March 31, 1996 and the three months ended March
31, 1997. This slight decrease was the result of a $74,000 decrease in average
interest-earning assets coupled with a 10 basis point decline in the average
yield on interest-earning assets. In an effort to improve earnings, management
has been restructuring the Savings Bank's assets by reinvesting maturing
investments and principal repayments on mortgage-backed securities in higher
yielding assets such as loans. Interest income on loans increased $36,000
between the periods as the average balance of loans increased from $51.8 million
for the three months ended March 31, 1996 to $54.9 million for the three months
ended March 31, 1997. Most of the growth in the loan portfolio was in one- to
four-family residential mortgage loans. The average yield on loans receivable
declined 22 basis points from 8.75% for the three months ended March 31, 1996 to
8.53% for the three months ended March 31, 1997 as a result of decreases in
market interest rates. Interest income on investment and mortgage-backed
securities decreased a total of $64,000 between the periods primarily as the
result of smaller average balances.
Interest Expense. Total interest expense declined by $70,000, or 6.4%,
from $1.1 million for the three months ended March 31, 1996 to $1.0 million for
the three months ended March 31, 1997. This decline was the result of a
decrease of $358,000 in the average balance of interest-bearing liabilities and
a 34 basis point decrease in the average rate paid on interest-bearing
liabilities. In an effort to improve the Savings Bank's interest rate spread,
the Savings Bank extinguished the class C bond of the CMO on March 7, 1997
through the purchase of the bond from a third party for $4.9 million. To fund
this purchase, the Savings Bank borrowed $5.0 million from the FHLB at an
average rate of 6.53%, which was significantly lower than the cost of the
Savings Bank's CMO obligation. As a result of the repurchase of the class C
bond and the reduction in rates paid on FHLB advances, the total cost of the CMO
and borrowed funds decreased $24,000 between the periods. Total interest paid
on deposits decreased $46,000 between the periods primarily as a result of a
smaller average balance of time certificates of deposits in 1997 and a decrease
in the average rate paid on these deposits.
Provision for Loan Losses. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated losses based on management's
evaluation of individual loans, economic factors, past loan loss experience,
changes in the composition
21
<PAGE>
and volume of the portfolio, and other relevant factors. The Savings Bank's
provision for loan losses remained relatively constant for the three month
periods ended March 31, 1997 and 1996.
The Savings Bank's allowance for loan losses was $420,000, or 0.8% of total
loans receivable, at March 31, 1997, compared to $295,000, or 0.6% of total
loans receivable, at March 31, 1996. In 1996, the general level of the
allowance for loan losses was increased to reflect management of the Savings
Bank's reassessment of the risk within several loan categories including
primarily mobile home loans, construction loans and one- to four-family mortgage
loans. The higher level of the allowance for loan losses at March 31, 1997 as
compared to March 31, 1996 also reflects the increase of $3.5 million in loans
receivable between the two periods. Net loan charge-offs during the three
months ended March 31, 1997 were $23,000 compared to $10,000 during the same
period in 1996. Although management uses the best information available, future
adjustments to the allowance may be necessary due to changes in economic,
operating, regulatory and other conditions that may be beyond the Savings Bank's
control. While the Savings Bank maintains its allowance for loan losses at a
level which it considers to be adequate to provide for estimated losses, there
can be no assurance that further additions will not be made to the allowance for
loan losses and that actual losses will not exceed the estimated amounts.
Non-interest Income. Non-interest income increased by $120,000 almost
entirely as a result of gains associated with the redemption of a CMO residual
investment owned by the Savings Bank. During the time these securities were
held, the Savings Bank was required to estimate future cash flows for the
purpose of assessing the appropriate carrying value. Based on these estimates,
the Savings Bank incurred charges from time to time to write down these
securities to the present value of estimated future cash flows. In March 1997,
the Savings Bank collected cash payments from the sale of collateral held in
trust in which the Savings Bank had a residual interest. These proceeds
totalled $121,000, which was recorded as a gain on the sale of securities. See
Note 3 of the Notes to the Consolidated Financial Statements.
Non-interest Expense. Total non-interest expense declined by $11,000 to
$414,000 in 1997 compared to $425,000 in 1996. The decrease was primarily the
result of decreases in salaries and employee benefits of $14,000 and in federal
insurance premiums of $33,000, offset by an increase in real estate operations
of $22,000.
Salaries and employee benefits decreased by $14,000, or 6.8%. This decline
reflected an increase in deferred loan origination costs of $8,000, resulting
from higher levels of loan originations, and reduction in pension expense of
$6,000. Normal salary increases were offset by a temporary reduction of full
time equivalent employees.
Federal insurance premiums declined by $33,000 as a result of the decrease
in the Savings Bank's assessment rate. Following the recapitalization of the
SAIF in the fourth quarter of 1996, the FDIC reduced deposit insurance premiums.
As a result, the Savings Bank's deposit insurance assessment rate decreased from
0.23% of deposits to 0.065% of deposits beginning January 1, 1997.
Expenses for real estate operations (i.e., costs associated with
maintaining and selling real estate owned) increased $22,000 between the
periods. The Savings Bank recognized gains on the sale of real estate owned
amounting to $22,000 for the three months ended March 31, 1996, whereas there
were no such gains during the same period in 1997.
Income Taxes. Income tax expense increased $66,000 to $109,000 in 1997, as
a result of higher levels of pre-tax income.
Extraordinary Charge. Net income during the three months ended March 31,
1997 was adversely affected by a $963,000 charge ($562,000 net of related income
tax benefit) taken in connection with the extinguishment of the class C CMO
bond. Of this charge, $727,000 was for accelerated recognition of the remaining
unamortized original issue discount, $107,000 was for the accelerated
recognition of deferred debt issuance costs and $129,000 was the premium paid to
repurchase the bond. See Note 19 of the Notes to the Consolidated Financial
Statements for further discussion.
22
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
Net Income. The Savings Bank recorded net income for the year ended
December 31, 1996 of $393,000 compared to net income of $231,000 for 1995. The
increase in net income was the result of higher levels of net interest income of
$116,000 and net gains recognized on the sale or redemption of securities of
$902,000, partly offset by an increased provision for loan losses of $175,000,
increased salaries and benefits of $125,000, the one-time special assessment to
recapitalize the SAIF of $414,000, and increased income tax expense of $120,000.
Net Interest Income. Net interest income increased by $116,000, or 5.7%,
from $2.1 million for the year ended December 31, 1995 to $2.2 million for 1996.
This increase resulted from an increase in the Savings Bank's interest rate
spread of 17 basis points from 2.32% in 1995 to 2.49% in 1996, and an increase
in the ratio of average interest-earning assets to average interest-bearing
liabilities.
Interest Income. Total interest income decreased by $189,000, or 2.9%,
from $6.5 million in 1995 to $6.3 million in 1996. The decrease was the result
of a decline of $2.3 million in average interest-earning assets. The largest
decline in interest-earning assets was a $1.1 million, or 4.9%, reduction in the
average balance of mortgage-backed securities between the two periods. This
resulted from a paydown of $1.6 million in the mortgage-backed securities
collateralizing the Savings Bank's CMO during the year ended December 31, 1996.
The average balance for investment securities declined $592,000, or 18.4%, for
the year ended December 31, 1996 as compared to the year ended December 31,
1995, as principal repayments were used to repay a portion of the Savings Bank's
borrowed funds throughout this period. The average balance for loans receivable
also declined between the periods by $710,000, or 1.3%, as loan repayments and
prepayments of principal slightly exceeded loan originations for the period.
Interest income on loans decreased $54,000 from 1995 to 1996 as a result of a
slightly smaller average balance of loans in 1996. Interest income on
investment and mortgage-backed securities decreased a total $132,000 from 1995
to 1996 primarily as a result of smaller average balances.
Interest Expense. Total interest expense decreased by $305,000, or 6.8%,
from $4.5 million for 1995 to $4.2 million for 1996. This decrease was the
result of a combined reduction of $3.2 million in the average balance of the CMO
and borrowed funds and a 17 basis point decline in the average rate paid on
interest-bearing liabilities. As a result of excess liquidity, the Savings Bank
reduced its average borrowed funds in 1996 by $1.8 million using funds available
from maturing investments and mortgage-backed securities repayments. The
reduction of $1.4 million in the average CMO obligation of the Savings Bank was
a function of cash receipts on the underlying mortgage-backed securities during
the period. Interest paid on deposits decreased by a total of $38,000 from 1995
to 1996 as a decrease in the average rate paid offset a small increase in the
average balance of deposits. The decline in the Savings Bank's cost of funds
was the result of changes in market interest rates. The majority of the change
related to time certificates of deposit and borrowed funds. During 1996, the
Savings Bank had a significant volume of three and five year time certificates
of deposits mature and reprice at the current market rates which were below
those paid on the maturing deposits. Borrowed funds are comprised of short- and
long-term borrowings with the FHLB. Throughout 1995 and 1996 higher rate FHLB
borrowings were repaid at maturity so that the weighted average rate declined 53
basis points between the periods.
Provision for Loan Losses. The Savings Bank's provision for loan losses
increased by $175,000 from $64,000 in 1995 to $239,000 in 1996. The increase
reflected management's decision to increase the allowance for loan losses due to
increased charge-offs in 1996 and management's reassessment of the loan
portfolio. This reassessment resulted in variations to the risk percentages for
various loan categories including the mobile home loans, construction loans and
one- to four-family mortgage loans. The provision also increased as a result of
the increase in loans receivable. Total loans at December 31, 1996 totalled
$55.6 million compared to $52.9 million at December 31, 1995. The allowance for
loan losses was 0.75% of total loans at December 31, 1996 and 0.52% of total
loans at December 31, 1995.
Non-interest Income. Non-interest income increased by $901,000 as a result
of gains associated on the sale and redemption of CMO residuals owned by the
Savings Bank. During the time these securities were held, the Savings Bank was
required to estimate future cash flows for the purpose of assessing the
appropriate carrying value.
23
<PAGE>
Based on these estimates, over time the Savings Bank incurred charges to write
down the securities to the present value of estimated future cash flows. During
1996, the Savings Bank sold two of these residual investments and two additional
ones were redeemed, resulting in total gains of $902,000. See Note 3 of the
Notes to the Consolidated Financial Statements.
Non-interest Expense. Total non-interest expense increased $560,000 in
1996 compared to 1995. This increase was comprised of increases in salaries and
benefits amounting to $125,000, occupancy expense of $51,000 and federal deposit
insurance of $405,000.
The increase in salaries and benefits was primarily the result of larger
bonus payments, a profit sharing contribution and, to a lesser extent, normal
salary adjustments. The larger bonus payments and profit sharing contribution
were made to both management and non-management employees in recognition of the
continuing improvement in profitability of the Savings Bank during the period.
Occupancy and equipment expense increased by $51,000 as a result of
increased depreciation associated with the renovation of the Spring Hill office,
leasehold improvements at the North Shore office and equipment upgrades. At
December 31, 1996, the total premises and equipment increased to $787,000 from
$287,000 at December 31, 1995. Capitalized expenditures of $472,000 resulted
from improvements to the land and building of the Spring Hill office.
Federal insurance premiums increased by $405,000 due to the SAIF special
assessment of $414,000 which was recognized by the Savings Bank in the third
quarter of 1996. Pursuant to legislation passed on September 30, 1996, the FDIC
imposed a special assessment on SAIF members to capitalize the SAIF to the
designated reserve level of 1.25% as of October 1, 1996.
Income Taxes. Income tax expense increased $119,000 to $231,000 in 1996,
from $112,000 in 1995. The increase in tax expense is principally the result of
higher levels of pre-tax income in 1996.
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented.
24
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Cost(1) Balance Dividends Cost(1)
--------- ---------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(2)....... $54,859 $1,170 8.53% $51,828 $1,134 8.75%
Investment securities..... 1,860 31 6.67 3,460 56 6.47
Mortgage-backed securities 20,132 347 6.89 22,223 386 6.95
Other interest-earning
assets................... 3,618 48 5.31 3,032 41 5.41
------- ------ ----- ------- ------ -----
Total interest-earning
assets................. 80,469 1,596 7.93 80,543 1,617 8.03
------ ------
Non-interest-earning assets 1,917 2,128
------- -------
Total assets............ $82,386 $82,671
======= =======
Interest-bearing
liabilities:
NOW and money market
accounts................. $10,133 69 2.72 $ 9,246 61 2.64
Savings accounts.......... 12,751 98 3.07 13,435 105 3.13
Time certificates of
deposit.................. 42,947 595 5.54 44,676 642 5.75
Collateralized mortgage
obligation............... 5,875 172 11.71 8,151 247 12.12
Borrowed funds............ 5,221 84 6.44 1,777 33 7.43
------- ------ ----- ------- ------ -----
Total interest-bearing
liabilities............ 76,927 1,018 5.29 77,285 1,088 5.63
------- ------ ------- ------
Non-interest-bearing
liabilities............... 668 912
------- -------
Total liabilities....... 77,595 78,197
------- -------
Total equity............... 4,791 4,474
------- -------
Total liabilities and
total equity........... $82,386 $82,671
======= =======
Net interest income........ $ 578 $ 529
====== ======
Interest rate spread....... 2.64% 2.40%
Net interest margin........ 2.87% 2.63%
Ratio of average
interest-earning
assets to average
interest-
bearing liabilities....... 104.60% 104.22%
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1996 1995
------------------------------ --------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
--------- --------- ------- ------- --------- -------
(Dollars in Thousands
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(2)....... $53,215 $4,527 8.51% $53,925 $4,581 8.50%
Investment securities..... 2,628 162 6.16 3,220 189 5.87
Mortgage-backed securities 20,883 1,485 7.11 21,950 1,590 7.24
Other interest-earning
assets................... 2,340 140 5.98 2,286 143 6.26
------- ------ ------ ------- ------ ------
Total interest-earning
assets................. 79,066 6,314 7.99 81,381 6,503 7.99
------ ------
Non-interest-earning assets 1,907 2,492
------- -------
Total assets............ $80,973 $83,873
======= =======
Interest-bearing
liabilities:
NOW and money market
accounts................. $ 9,480 258 2.72 $ 9,145 241 2.64
Savings accounts.......... 13,334 416 3.12 14,139 439 3.10
Time certificates of
deposit.................. 42,515 2,379 5.60 41,985 2,411 5.74
Collateralized mortgage
obligation............... 7,565 931 12.31 8,968 1,061 11.83
Borrowed funds............ 2,629 171 6.50 4,382 308 7.03
------- ------ ------ ------- ------ ------
Total interest-bearing
liabilities............ 75,523 4,155 5.50 78,619 4,460 5.67
------- ------ ------- ------
Non-interest-bearing
liabilities............... 849 906
------- -------
Total liabilities....... 76,372 79,525
------- -------
Total equity............... 4,601 4,348
------- -------
Total liabilities and
total equity........... $80,973 $83,873
======= =======
Net interest income........ $2,159 $2,043
====== ======
Interest rate spread....... 2.49% 2.32%
Net interest margin........ 2.73% 2.51%
Ratio of average
interest-earning
assets to average
interest-
bearing liabilities...... 104.69% 103.51%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Yields and ratios for the three-month periods are annualized.
(2) Average balances include non-accrual loans.
25
<PAGE>
Yields Earned and Rates Paid
The following table sets forth (on a consolidated basis) for the periods
and at the date indicated the weighted average yields earned on the Savings
Bank's assets and the weighted average interest rates paid on the Savings Bank's
liabilities, together with the net yield on interest-earning assets. Amounts
for the three month periods are annualized.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
At March 31, ------------------ ---------------
1997 1997 1996 1996 1995
------------- ----- ---- ----- ------
<S> <C> <C> <C> <C> <C>
Weighted average yield earned on:
Loans receivable....................... 8.55% 8.53% 8.75% 8.51% 8.50%
Investment securities.................. 6.69 6.67 6.47 6.16 5.87
Mortgage-backed securities............. 7.15 6.89 6.95 7.11 7.24
Other interest-earning assets.......... 5.63 5.31 5.41 5.98 6.26
Total interest-earning assets.......... 8.05 7.93 8.03 7.99 7.99
Weighted average rate paid on:
NOW and money market
accounts.............................. 2.94 2.72 2.64 2.72 2.64
Savings accounts....................... 3.14 3.07 3.13 3.12 3.10
Time certificates of deposit........... 5.63 5.54 5.75 5.60 5.74
Collateralized mortgage obligation..... 11.60 11.71 12.12 12.31 11.83
Borrowed funds......................... 6.47 6.44 7.43 6.50 7.03
Total interest-bearing liabilities..... 5.20 5.29 5.63 5.50 5.67
Interest rate spread (spread between
weighted average yield earned on all
interest-earning assets and weighted
average rate paid on all interest-
bearing liabilities)................... 2.85 2.64 2.40 2.49 2.32
Net interest margin (net interest income
as a percentage of average
interest-earning assets)............... -- 2.87 2.63 2.73 2.51
</TABLE>
26
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
the interest income and interest expense of the Savings Bank. Information is
provided with respect to: (i) effects attributable to changes in rate (changes
in rate multiplied by prior volume); (ii) effects attributable to changes in
volume (changes in volume multiplied by prior rate); and (iii) effects
attributable to changes in rate/volume (changes in rate multiplied by changes in
volume).
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 Compared to March 31, 1996 1996 Compared to December 31, 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------ --------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- --------- --------- ----- -------- -------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............... $ 66 $(29) $(1) $ 36 $ (60) $ 5 $ 1 $ (54)
Investment securities.......... (26) 2 (1) (25) (35) 9 (1) (27)
Mortgage-backed securities..... (36) (3) -- (39) (77) (29) 1 (105)
Other interest-earning assets.. 8 (1) -- 7 3 (6) -- (3)
---- ---- --- ---- ----- ---- --- -----
Total interest-earning assets... 12 (31) (2) (21) (169) (21) 1 (189)
---- ---- --- ---- ----- ---- --- -----
Interest Expense:
NOW and money
market accounts............... 6 2 -- 8 9 7 1 17
Savings accounts............... (5) (2) -- (7) (25) 3 (1) (23)
Certificates of deposit........ (25) (23) 1 (47) 30 (59) (3) (32)
Collateralized mortgage
obligation.................... (69) (8) 2 (75) (166) 43 (7) (130)
Borrowed funds................. 64 (4) (9) 51 (123) (23) 9 (137)
---- ---- --- ---- ----- ---- --- -----
Total interest-bearing
liabilities.................... (29) (35) (6) (70) (275) (29) (1) (305)
---- ---- --- ---- ----- ---- --- -----
Net change in net interest
income........................ $ 41 $ 4 $ 4 $ 49 $ 106 $ 8 $ 2 $ 116
==== ==== === ==== ===== ==== === =====
</TABLE>
Asset and Liability Management
The Savings Bank's principal financial objective is to achieve long-
term profitability while reducing its exposure to fluctuating interest rates.
The Savings Bank has sought to reduce exposure of its earnings to changes in
market interest rates by attempting to manage the mismatch between asset and
liability maturities and interest rates. The principal objective of the Savings
Bank's interest rate risk management is to evaluate the interest rate risk
included in certain balance sheet accounts, determine the level of risk
appropriate given the Savings Bank's business strategy, operating environment,
capital and liquidity requirements and performance objectives and manage the
risk consistent with Board of Directors' approved guidelines. Through such
management, the Savings Bank seeks to limit the vulnerability of its operations
to changes in interest rates. The Savings Bank's management meets at least
quarterly to review the Savings Bank's asset/liability policies and interest
rate risk position.
In recent years, the Savings Bank has primarily utilized the following
strategies to manage interest rate risk: (i) shortening the life of its fixed-
rate loan portfolio by offering fixed-rate loans with terms to maturity of no
more
27
<PAGE>
than 20 years on owner-occupied residential properties and 15 years on
investment properties, (ii) offering adjustable-rate loans on investment
properties, (iii) emphasizing adjustable-rate investment and shorter term
mortgage-backed securities, and (iv) extending the life of its liabilities by
emphasizing longer term certificates of deposit during periods of low market
interest rates and utilizing longer term borrowings.
Using data from the Savings Bank's quarterly reports to the OTS, the
Savings Bank receives a report which measures interest rate risk by modeling the
change in Net Portfolio Value ("NPV") over a variety of interest rate scenarios.
This procedure for measuring interest rate risk was developed by the OTS to
replace the "gap" analysis (the difference between interest-earning assets and
interest-bearing liabilities that mature or reprice within a specific time
period). NPV is the difference in the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The calculation is
intended to illustrate the change in NPV that will occur in the event of an
immediate change in interest rates of at least 200 basis points with no effect
given to any steps that management might take to counter the effect of that
interest rate movement. Under OTS regulations, an institution with a greater
than "normal" level of interest rate risk is subject to a deduction from total
capital for purposes of calculating its risk-based capital. However, the OTS
has postponed the implementation of the capital adjustment portion of this
regulation. An institution with a "normal" level of interest rate risk is
defined as one whose "measured interest rate risk" is less than 2.0%.
Institutions with assets of less than $300 million and a risk-based capital
ratio of more than 12.0% are exempt. Assuming this proposed rule was in effect
at March 31, 1997 and that it applied to the Savings Bank, the Savings Bank's
level of interest rate risk would have caused it to be treated as an institution
with greater than "normal" interest rate risk.
The following table is provided by the OTS and illustrates the change
in NPV at March 31, 1997, based on OTS assumptions, that would occur in the
event of an immediate change in interest rates, with no effect given to any
steps that management might take to counter the effect of that interest rate
movement.
<TABLE>
<CAPTION>
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
------------------------------------ --------------------------------
Basis Point ("bp")
Change in Rates $ Amount $ Change(1) % Change NPV Ratio(2) Change(bp)(3)
- ------------------------- -------- ----------- --------- ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
400 $2,524 $(4,267) (63)% 3.28% (477) bp
300 3,645 (3,146) (46) 4.62 (342)
200 4,798 (1,993) (29) 5.94 (211)
100 5,884 (907) (13) 7.12 (93)
0 6,791 -- -- 8.05 --
(100) 7,279 488 7 8.49 44
(200) 7,094 303 4 8.21 16
(300) 6,733 (58) (1) 7.74 (31)
(400) 6,601 (190) (3) 7.52 (53)
</TABLE>
- --------------------
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in interest
rates.
(2) Calculated as the estimated NPV divided by the portfolio value of total
assets ("PV").
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
The following table is provided by the OTS and is based on the calculations
in the above table. At March 31, 1997, the change in NPV as a percentage of
portfolio value of total assets is negative 2.36%, which is greater than
negative 2.0%, indicating that the Savings Bank has a greater than "normal"
level of interest rate risk.
28
<PAGE>
<TABLE>
<CAPTION>
At At At
March 31, December 31, March 31,
1997 1996 1996
---------- ------------- ----------
<S> <C> <C> <C>
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of Assets.. 8.05% 7.51% 6.64%
Exposure Measure: Post-Shock NPV Ratio......... 5.94% 6.14% 5.22%
Sensitivity Measure: Change in NPV Ratio....... (211) bp (137) bp (142) bp
Change in NPV as a % of PV of Assets............ (2.36)% (1.61)% (1.60)%
</TABLE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
tables. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Savings Bank's primary sources of funds are customer deposits,
proceeds from principal and interest payments on loans, proceeds from
maturities, sales and repayments of investment and mortgage-backed securities
and FHLB advances. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Savings Bank must maintain an adequate level of liquidity to
ensure the availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. The Savings Bank generally maintains sufficient cash
and short-term investments to meet short-term liquidity needs. At March 31,
1997, cash and deposits with other banks totalled $3.0 million, or 3.7% of total
assets, and investment and mortgage-backed securities scheduled to mature in one
year or less totalled $719,000, or 0.9% of total assets. Investment and
mortgage-backed securities available for sale totalled $3.1 million at March 31,
1997. In addition, the Savings Bank maintains a credit facility with the FHLB-
Pittsburgh, which provides for immediately available advances. Advances under
this credit facility totalled $9.3 million at March 31, 1997.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5.0%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute
1.0% of the sum of net withdrawable deposit accounts plus short-term borrowings.
The Savings Bank's actual long- and short-term liquidity ratios at March 31,
1997 were 10.9% and 6.2%, respectively.
The primary investing activity of the Savings Bank is the origination
of mortgage loans. During the three months ended March 31, 1997 and the years
ended December 31, 1996 and 1995, the Savings Bank originated loans in the
amounts of $2.9 million, $11.7 million, and $6.6 million, respectively. At
March 31, 1997, the Savings Bank had loan commitments totalling $1.1 million and
undisbursed loans in process totalling $390,000. The Savings Bank anticipates
that it will have sufficient funds available to meet its current loan
origination commitments. Time certificates of deposit that are scheduled to
mature in less than one year from March 31, 1997 totalled $26.2 million.
Management of the Savings Bank believes that it can adjust the offering rates of
deposits to retain deposits in changing interest rate environments.
29
<PAGE>
The Savings Bank is required to maintain specific amounts of capital
pursuant to OTS requirements. As of March 31, 1997, the Savings Bank was in
compliance with all regulatory capital requirements which were effective as of
such date with tangible, core and risk-based capital ratios of 5.4%, 5.4% and
12.5%, respectively. For a detailed discussion of regulatory capital
requirements, see "REGULATION -- Federal Regulation of Savings Banks -- Capital
Requirements." See also "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE."
Impact of New Accounting Standards
Accounting for Stock-Based Compensation. In October 1995, the
Financial Accounting Standards Board ("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 method 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 in
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 expects to use the intrinsic value method
upon consummation of the Conversion and the adoption of stock-based benefit
plans.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In June 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," which provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities. This
statement applies prospectively in fiscal years beginning after December 31,
1996, and establishes new standards that focus on control whereas, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. The adoption of SFAS No. 125 did not have a material impact on
the Savings Bank's results of operations or financial position at or for the
three months ended March 31, 1997.
Deferral of the Effective Date of Certain Provisions of SFAS No. 125.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." SFAS No. 127 defers for one
year the effective date of portions of SFAS No. 125 that address secured
borrowings and collateral for all transactions. Additionally, SFAS No. 127
defers for one year the effective date of transfers of financial assets that are
part of repurchase agreements, securities lending and similar transactions. The
Savings Bank does not expect adoption of SFAS No. 127 to have a material impact
on the Savings Bank's results of operations or financial position.
Earnings Per Share. SFAS No. 128, "Earnings Per Share," standardizes
the international calculation for earnings per share and requires companies with
complex capital structures that have publicly held common stock or potential
common stock to present both basic and diluted earnings per share on the face of
the income statement. SFAS No. 128 becomes effective for periods ending after
December 31, 1997. The Savings Bank does not expect adoption of SFAS No. 128 to
have a material impact on the Savings Bank's results of operations or financial
position.
Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. SFAS No. 130
requires
30
<PAGE>
that companies (i) classify items of other comprehensive income by their nature
in a financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial condition. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Savings Bank's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as a Pennsylvania business
corporation at the direction of the Savings Bank in June 1997 for the purpose of
becoming a holding company for the Savings Bank upon completion of the
Conversion. Upon completion of the Conversion, the Savings Bank will be a
wholly-owned subsidiary of the Holding Company.
Business
Prior to the Conversion, the Holding Company has not and will not
engage in any significant operations. Upon completion of the Conversion, the
Holding Company's sole business activity will be the ownership of the stock of
the Savings Bank and investment of the net proceeds of the Offerings retained by
it. In the future, the Holding Company may acquire or organize other operating
subsidiaries, although there are no current plans, arrangements, agreements or
understandings, written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property
but will instead use the premises, equipment and furniture of the Savings Bank
with the payment of appropriate rental fees, as required by applicable law.
Since the Holding Company will only hold the capital stock of the
Savings Bank, the competitive conditions applicable to the Holding Company will
be the same as those currently confronting the Savings Bank. See "BUSINESS OF
THE SAVINGS BANK -- Competition."
BUSINESS OF THE SAVINGS BANK
General
The Savings Bank is a community oriented financial institution that
engages primarily in the business of attracting deposits from the general public
in the areas surrounding its branch offices and using those funds, together with
funds generated from operations and borrowings, to originate one- to four-family
residential mortgage loans within the Savings Bank's primary market area,
including in recent years an increased emphasis on loans secured
31
<PAGE>
by investor owned one- to four-family properties. To a lesser extent, the
Savings Bank also originates multi-family, construction, commercial real estate
and consumer loans. The Savings Bank generally retains for its portfolio all of
the loans that it originates. To complement its loan portfolio and to assist in
asset/liability management, the Savings Bank maintains a portfolio of investment
and mortgage-backed securities.
Market Area
The Savings Bank is headquartered in Pittsburgh, Pennsylvania and
operates three full-service offices in the city of Pittsburgh. Most of the
Savings Bank's depositors reside in the communities surrounding the Savings
Bank's offices and most of the Savings Bank's loans are made to borrowers
residing in Allegheny County.
Several large industrial firms are headquartered in the Pittsburgh
area including USX Corp., Westinghouse Electric Corp. and Aluminum Company of
America. The largest employers in the Pittsburgh area also include USAirways,
the University of Pittsburgh and the Mellon Bank Corporation. In addition,
seven colleges and universities are also located in the Pittsburgh area. The
economy in the Pittsburgh area experienced a significant restructuring during
the early 1980s 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 faces competition from many financial institutions
for deposits and loan originations. See "-- Competition" and "RISK FACTORS --
Competition Within Market Area."
Lending Activities
General. At March 31, 1997, the Savings Bank's total loans receivable
amounted to $56.0 million, or 67.6% of total assets. The principal lending
activity of the Savings Bank is the origination of conventional mortgage loans
for the purpose of purchasing or refinancing one- to four-family residential
property. At March 31, 1997, $42.7 million, or 76.2%, of the Savings Bank's
total loan portfolio consisted of loans secured by one- to four-family
residential real estate. To a lesser extent, the Savings Bank also originates
multi-family real estate, construction, commercial real estate and consumer
loans. Historically, the Savings Bank's lending activities have been
concentrated in its primary market of Allegheny County, Pennsylvania.
32
<PAGE>
Loan Portfolio Analysis. The following table sets forth the
composition of the Savings Bank's loan portfolio by type of loan at the dates
indicated. The Savings Bank had no concentration of loans exceeding 10% of total
gross loans other than as disclosed below.
<TABLE>
<CAPTION>
At March 31, At December 31,
--------------------------------------
1997 1996 1995
----------------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent
-------- ------------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family (1)...... $42,654 76.16% $41,767 75.10% $39,475 74.63%
Multi-family................. 5,792 10.34 5,677 10.21 5,380 10.17
Construction................. 1,687 3.01 1,727 3.10 1,384 2.62
Commercial real estate....... 2,925 5.22 3,296 5.93 3,191 6.03
------- ------ ------- ------ ------- ------
Total mortgage loans....... 53,058 94.73 52,467 94.34 49,430 93.45
Consumer loans:
Mobile home.................. 2,297 4.10 2,454 4.41 3,161 5.98
Other........................ 568 1.02 611 1.10 167 0.31
------- ------ ------- ------ ------- ------
Total consumer loans....... 2,865 5.12 3,065 5.51 3,328 6.29
Commercial loans.............. 86 0.15 86 0.15 136 0.26
------- ------ ------- ------ ------- ------
Total loans................ 56,009 100.00% 55,618 100.00% 52,894 100.00%
------- ====== ------- ====== ------- ======
Less:
Undisbursed portion of loans.. 390 509 322
Deferred premiums............. (12) (11) (13)
Deferred loan origination
costs, net................... (57) (84) (217)
Allowance for loan losses..... 420 415 276
------- ------- -------
Loans receivable, net...... $55,268 $54,789 $52,526
======= ======= =======
</TABLE>
- ------------------
(1) Includes $1.2 million, $1.2 million and $1.0 million at March 31, 1997 and
December 31, 1996 and 1995, respectively, of home equity loans where the
combined loan-to-value ratio of loans secured by the borrowers residence is
less than 80%.
One- to Four-Family Residential Real Estate Lending. The principal lending
activity of the Savings Bank is the origination of mortgage loans to enable
borrowers to purchase existing one- to four-family residential real estate. At
March 31, 1997, $42.7 million, or 76.2%, of the Savings Bank's total loan
portfolio consisted of loans secured by one- to four-family residential real
estate. Substantially all of the Savings Bank's residential mortgage loans are
secured by property located in the Savings Bank's primary market area. The
Savings Bank generally retains for its portfolio all of the loans that it
originates. As a result, the Savings Bank believes it is better able to vary
the terms of its loan products to meet the needs of its customers.
The Savings Bank's primary product is owner-occupied, fixed-rate mortgage
loans. The Savings Bank's fixed-rate loans generally have maturities ranging
from ten to 20 years. In late 1994, the Savings Bank began originating ten- and
15-year balloon loans with a 30-year amortization schedule. These loans
currently account for a majority of the Savings Bank's originations of one- to
four-family loans. Generally, the Savings Bank originates all fixed-rate loans
under terms, conditions and documentation that would permit them to be sold in
the secondary market to U. S. Government sponsored agencies, although the
Savings Bank has not sold any loans in recent years.
33
<PAGE>
From 1992 through 1995, the Savings Bank originated residential mortgage
loans that repriced once during the loan term at the end of the third year. The
interest rate adjustment on these loans is based on the index value of the
Federal National Mortgage Association ("FNMA") net yield on 30-year fixed-rate
mortgage loans plus a margin. The amount of any interest rate increase is
limited to 2.00%. At March 31, 1997, the Savings Bank had $1.5 million of these
loans that will reprice within 13 months. The balance of these loans have
already repriced. The Savings Bank discontinued this product in 1995. The
Savings Bank does not currently offer ARM loans secured by owner-occupied real
estate. From 1983 to 1989, the Savings Bank originated such loans based on the
One Year U.S. Treasury Note Constant Maturity Rate and a portion of these loans
remain in the portfolio.
The Savings Bank also offers mortgage loans for non-owner-occupied one- to
four-family residences both on a fixed- and adjustable-rate basis. At March 31,
1997, $8.5 million, or 19.9%, of the Savings Bank's one- to four-family mortgage
loans were secured by non-owner-occupied property. The Savings Bank offers
fixed-rate loans for terms not to exceed 15 years with a matching amortization
and adjustable-rate loans for terms not to exceed 20 years with a matching
amortization. These adjustable-rate loans have interest rates that adjust
annually based on the prime rate as published in The Wall Street Journal. The
periodic interest rate cap (the maximum amount by which the interest rate may be
increased or decreased in a given period) on such loans is generally 2% per
adjustment period and the lifetime interest rate cap is generally 5% over the
initial interest rate of the loan. The terms and conditions of the non-owner-
occupied one- to four-family loans offered by the Savings Bank may vary from
time to time. At March 31, 1997, the Savings Bank's portfolio of non-owner-
occupied one- to four-family loans was composed of 79.9% with a fixed interest
rate and 20.1% with an adjustable interest rate. Loans secured by non-owner-
occupied residences generally involve greater risks than loans secured by owner-
occupied residences. Payments on loans secured by such properties are often
dependent on successful operation or management of the properties. Repayment of
such loans may be subject to a greater extent to adverse conditions in the real
estate market or the economy. While several borrowers have more than one loan
outstanding with the Savings Bank that are secured by non-owner-occupied
residences, the maximum amount that the Savings Bank currently will lend to one
borrower is $500,000.
At March 31, 1997, the Savings Bank's one- to four-family mortgage loans
included $4.9 million of ARM loans. The retention of ARM loans in the Savings
Bank's loan portfolio helps reduce the Savings Bank's exposure to changes in
interest rates. There are, however, unquantifiable credit risks resulting from
the potential of increased costs due to increased rates to be paid by the
customer. It is possible that during periods of rising interest rates the risk
of default on ARM loans may increase as a result of repricing and the increased
payments required by the borrower. Another consideration is that although ARM
loans allow the Savings Bank to increase the sensitivity of its asset base to
changes in interest rates, the extent of this interest sensitivity is limited by
the periodic and lifetime interest rate adjustment limits. Because of these
considerations, the Savings Bank has no assurance that yields on ARM loans will
be sufficient to offset increases in the Savings Bank's cost of funds.
While one- to four-family residential real estate loans are normally
originated with ten to 20 year terms, such loans typically remain outstanding
for shorter periods. This is because borrowers often prepay their loans in full
upon sale of the property pledged as security or upon refinancing the original
loan. In addition, substantially all mortgage loans in the Savings Bank's loan
portfolio contain due-on-sale clauses providing that the Savings Bank may
declare the unpaid amount due and payable upon the sale of the property securing
the loan. Typically, the Savings Bank enforces these due-on-sale clauses to the
extent permitted by law and as business judgment dictates. Thus, average loan
maturity is a function of, among other factors, the level of purchase and sale
activity in the real estate market, prevailing interest rates and the interest
rates payable on outstanding loans.
The Savings Bank generally obtains title insurance insuring the status of
its lien on all loans where real estate is the primary source of security. The
Savings Bank also requires that fire and casualty insurance (and, if
appropriate, flood insurance) be maintained in an amount at least equal to the
outstanding loan balance.
34
<PAGE>
The Savings Bank's residential mortgage loans typically do not exceed 80% of
the appraised value of the property securing the loan. Pursuant to the Savings
Bank's underwriting guidelines, the Savings Bank can lend up to 95% of the
appraised value of the property securing a one- to four-family residential loan;
however, the Savings Bank almost always requires mortgage insurance when the
loan-to-value ratio is greater than 80%.
Multi-Family Real Estate Lending. The Savings Bank is actively involved in
originating loans secured by multi-family real estate. At March 31, 1997, $5.8
million, or 10.3%, of the Savings Bank's total loan portfolio consisted of loans
secured by multi-family real estate. All of these loans are secured by property
located in the Savings Bank's market area. Such properties generally consist of
five to 30 dwelling units. Generally, the maximum amount that the Savings Bank
will lend to one borrower is $500,000. At March 31, 1997, the Savings Bank had
35 multi-family real estate loans, the largest of which was $559,000 and which
was performing in accordance with its original terms.
The Savings Bank originates multi-family residential real estate loans with
fixed and adjustable interest rates. Fixed-rate loans have a term of 15 years
while adjustable-rate loans have a maximum term of 20 years with matching
amortizations. Adjustable-rate loans adjust annually based on the prime rate.
Loan-to-value ratios on the Savings Bank's multi-family residential real estate
loans are generally limited to 70% on purchase transactions and 65% on
refinancings. The Savings Bank requires appraisals of all properties securing
multi-family residential real estate loans. Appraisals are performed by
independent appraisers designated by the Savings Bank and are reviewed by
management. The Savings Bank considers the quality and location of the real
estate, the credit of the borrower, the cash flow of the project and the quality
of management involved with the property. It is the Savings Bank's general
policy to obtain personal guarantees from the principals of its corporate
borrowers.
Multi-family residential real estate lending affords the Savings Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family mortgage loans. However, loans secured by such
properties usually are greater in amount, more difficult to evaluate and monitor
and, therefore, involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
residential properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by supply
and demand conditions in the market for apartments, as well as adverse
conditions in the real estate market or the economy.
Construction Lending. The Savings Bank originates residential construction
loans primarily to local contractors with whom it has an established
relationship. To a significantly lesser extent, the Savings Bank originates
construction loans to individuals who have a contract for the construction of
their personal residence. At March 31, 1997, construction loans totalled $1.7
million, or 3.0% of total loans. All of the Savings Bank's construction loans
are secured by property located in the Savings Bank's primary market area.
Construction loans made by the Savings Bank to professional home builders
are primarily those for which purchasers for the finished homes are identified
either during or following the construction period (i.e., speculative loans).
The Savings Bank generally limits the number of unsold homes under construction
by its borrowers, with the amount dependent on the reputation of the borrower,
the current exposure of the borrower, the location of the property and prior
sales of homes in the development. Construction loans to professional home
builders are typically made for a term of 18 months with an interest rate that
adjusts monthly based on the prime rate. Loan-to-value ratios are generally
limited to 80%. Prior to making a commitment to fund a construction loan, the
Savings Bank requires an appraisal of the property by an independent fee
appraiser. The Savings Bank also reviews and inspects each project at the
commencement of construction and throughout the term of the construction loan.
Loan proceeds are disbursed after inspections of the project by the appraiser
based on a percentage of completion. The Savings Bank requires monthly interest
payments during the construction term.
The Savings Bank's construction loans to individuals are typically made in
connection with the granting of a permanent loan on the property. Such loans
provide for interest only payments during the construction period (typically
nine months) after which they convert to a fully amortizing fixed-rate loan.
35
<PAGE>
Construction lending affords the Savings Bank the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does its one-
to four-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than one-to four-family
permanent mortgage lending because of the inherent difficulty in estimating both
a property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Savings Bank may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the
estimate of value upon completion proves to be inaccurate, the Savings Bank may
be confronted with a project whose value is insufficient to assure full
repayment. Projects may also be jeopardized by disagreements between borrowers
and builders and by the failure of builders to pay subcontractors. Loans to
builders to construct homes for which no purchaser has been identified carry
more risk because the payoff for the loan is dependent on the builder's ability
to sell the property prior to the time that the construction loan is due. The
Savings Bank has sought to address these risks by limiting the extent of its
construction lending as a proportion of the total loan portfolio, by limiting
its construction lending to residential properties and by limiting the amount
outstanding to any one builder to $500,000. In addition, the Savings Bank has
adopted underwriting guidelines that 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 to its existing market, and by generally working with
builders with whom it has established relationships. It is also the Savings
Bank's general policy to obtain personal guarantees from the principals of its
corporate borrowers on its construction loans.
Commercial Real Estate Lending. The Savings Bank invests a portion of its
loan portfolio in commercial real estate loans. At March 31, 1997, the Savings
Bank's commercial real estate loan portfolio totalled $2.9 million, or 5.2% of
total loans. The Savings Bank does not solicit commercial real estate loans and
generally offers such loans to accommodate its current and past customers. The
Savings Bank's commercial real estate loans include loans secured by office
buildings, warehouses, undeveloped land and mixed-use buildings comprised of
offices and apartments. All of the Savings Bank's commercial real estate loans
are secured by property in the Savings Bank's primary market area. At March
31, 1997, the Savings Bank had 24 commercial real estate loans, the largest of
which was $633,000 and which was performing in accordance with its original
terms.
The Savings Bank originates commercial real estate loans with fixed and
adjustable interest rates. Fixed-rate loans have a term of 15 years while
adjustable-rate loans have a maximum term of 20 years with matching
amortizations. Adjustable rate loans adjust annually based on the prime rate.
Loan-to-value ratios on the Savings Bank's commercial real estate loans are
generally limited to 70% on purchase transactions and 65% on refinancings. The
Savings Bank requires appraisals of all properties securing commercial real
estate loans. Appraisals are performed by independent appraisers designated by
the Savings Bank and are reviewed by management. The Savings Bank considers the
quality and location of the real estate, the credit of the borrower, the cash
flow of the project and the quality of management involved with the property.
It is the Savings Bank's general policy to obtain personal guarantees from the
principals of its corporate borrowers.
Commercial real estate lending affords the Savings Bank an opportunity to
receive interest at rates higher than those generally available from one- to
four-family residential mortgage loans. However, loans secured by such
properties usually are greater in amount, more difficult to evaluate and monitor
and, therefore, involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy.
Consumer Lending. The Savings Bank currently offers a variety of consumer
loans, including secured, partially secured and unsecured personal loans,
vehicle loans and loans secured by savings deposits. At March 31, 1997, the
Savings Bank's consumer loans totalled $2.9 million, or 5.1% of the Savings
Bank's total loan portfolio. In 1996, as a part of its strategy to provide a
fuller range of services to its retail customers, the Savings Bank expanded its
offering of consumer loans. Consumer loans are generally made to existing
customers as the Savings Bank advertises these loans only on a limited basis.
36
<PAGE>
The largest component of the Savings Bank's consumer loan portfolio consists
of mobile home loans. At March 31, 1997, mobile home loans totalled $2.3
million, or 80.2% of the Savings Bank's consumer loan portfolio. From 1987
through 1992, the Savings Bank originated mobile home loans through a broker
located in Ohio. Since 1992, the Savings Bank has not originated any mobile
home loans other than loans to facilitate the sale of repossessed mobile homes.
At March 31, 1997, the Savings Bank's mobile home loan portfolio consisted of
179 loans with an average loan balance of approximately $12,800. Mobile homes
securing this portfolio are located primarily in Kentucky, South Carolina, West
Virginia, Indiana, Illinois, and Georgia. Mobile home loans involve a greater
degree of risk than one- to four-family mortgage loans, but are typically made
at a higher interest rate and for a shorter maturity. The Savings Bank's mobile
home loans have fixed interest rates and terms of 12 to 15 years. Of the 414
mobile home loans originated by the Savings Bank, the Savings Bank has
repossessed 65 mobile homes of which five were held by the Savings Bank at March
31, 1997, with a carrying value of $39,000. At March 31, 1997, the Savings Bank
had seven mobile home loans totalling $82,000 that were 30 to 59 days
delinquent, three mobile home loans totalling $41,000 that were 60 to 89 days
delinquent and two mobile home loans totalling $21,000 that were 90 days or more
delinquent. The Savings Bank may resume originating mobile home loans in the
future, although it has no current plans to do so.
The underwriting standards employed by the Savings Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, or are secured
by rapidly depreciable assets, such as automobiles or mobile homes. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial stability
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.
Commercial Loans. In recent years, the Savings Bank has purchased office
equipment leases through two leasing companies. At March 31, 1997, commercial
leases amounted to $86,000, or 0.1%, of the Savings Bank's total loan portfolio.
Leases generally have shorter terms than mortgage loans, but generally involve
more credit risk since payment may be dependent on successful operation of the
lessee's business. As of March 31, 1997, as a result of the bankruptcy filing
of the originator of the remaining lease balances, the Savings Bank's commercial
leases were classified as non-performing. Subsequent to March 31, 1997, the
Savings Bank received a pay-off of $47,000 in settlement of the lease obligation
and charged-off the remaining $39,000. The Savings Bank may review the purchase
of additional leases in the future, although it currently has no plans to do so.
37
<PAGE>
Maturity of Loan Portfolio. The following table sets forth certain
information at March 31, 1997 regarding the maturity of the Savings Bank's loan
portfolio. All loans are included in the period in which the final contractual
payment is due. Demand loans, loans having no stated schedule of repayments and
no stated maturity, and overdrafts are reported as due within one year. The
table does not include any estimate of prepayments which significantly shorten
the average life of all loans and may cause the Savings Bank's actual repayment
experience to differ from that shown below.
<TABLE>
<CAPTION>
After After After After 10
One Year 3 Years 5 Years Years
Within Through Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 15 Years 15 Years Total
-------- ------- ------- -------- -------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..... $ 20 $123 $ 600 $ 6,863 $16,744 $18,304 $42,654
Multi-family............ -- -- 63 1,801 3,285 643 5,792
Construction............ 1,115 572 -- -- -- -- 1,687
Commercial real estate.. -- 27 640 362 1,698 198 2,925
Consumer loans:
Mobile home............. 10 48 110 1,989 140 -- 2,297
Other................... 346 70 110 36 6 -- 568
Commercial loans......... 32 54 -- -- -- -- 86
------ ---- ------ ------- ------- ------- -------
Total loans........... $1,523 $894 $1,523 $11,051 $21,873 $19,145 $56,009
====== ==== ====== ======= ======= ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
March 31, 1998, that have fixed interest rates and have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates
------- ----------------
(In Thousands)
<S> <C> <C>
Mortgage loans:
One- to four-family..... $37,774 $ 4,861
Multi-family............ 3,379 2,412
Construction............ -- 572
Commercial real estate.. 697 2,228
Consumer loans:
Mobile home............. 2,287 --
Other................... 222 --
Commercial loans......... 54 --
------- -------
Total loans $44,413 $10,073
======= =======
</TABLE>
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<PAGE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Savings Bank the right to declare loans
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, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans
and, conversely, decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
Loan Solicitation and Processing. Loan applicants come primarily through
referrals by business and industry contacts, local advertising and current and
past customers. The Savings Bank also has relationships with local mortgage
brokers who underwrite mortgage loans in accordance with the Savings Bank's loan
underwriting procedures. During 1996, these mortgage brokers accounted for
approximately one-third of the Savings Bank's loan originations.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate offered as collateral generally is undertaken by an independent
fee appraiser.
Loan applications originated by the Savings Bank are processed at the
Savings Bank's main office. A loan application is initially processed by a loan
processor or loan officer and, once completed, is submitted to the Savings
Bank's Loan Committee. The Loan Committee may approve consumer loans up to
$50,000, loans up to $300,000 that are to be secured by one- to four-family
residential real estate, and loans up to $250,000 that are to be secured by
other real estate. Loans greater than these amounts are submitted for approval
to the Savings Bank's Board of Directors with a report and recommendation from
the Loan Committee.
Loan Originations, Sales and Purchases. During the first quarter of 1997,
the Savings Bank originated $2.9 million of loans, compared with $1.4 million
during the first quarter of 1996. Originations were greater in 1997 over 1996
as the low interest rate environment in early 1996 led the Savings Bank to
reduce loan originations rather than add low yielding loans to its portfolio.
During 1996, the Savings Bank originated $11.7 million of loans compared to $6.6
million in 1995. The increase in originations in 1996 over 1995 was due to
increased referrals from local business and industry contacts coupled with more
competitive interest rates.
In recent years, the Savings Bank has not been an active purchaser of whole
loans or participation interests in loans nor has the Savings Bank been a seller
of loans. During 1996, the Savings Bank purchased participation interests in
loans aggregating $27,000. These participation interests were made in
conjunction with other area financial institutions to foster community
development. During 1995, the Savings Bank purchased whole loans totalling
$345,000 and a participation interest in the amount of $50,000 for a private,
non-profit housing program. These loans are primarily secured by one- to four-
family real estate in the Savings Bank's primary market area.
39
<PAGE>
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
----------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Gross loans at beginning of period.. $55,618 $52,894 $52,894 $55,784
Loans originated:
Mortgage loans:
One- to four-family................ 2,214 284 8,118 4,277
Multi-family....................... 273 -- 1,089 777
Construction....................... 291 303 1,129 1,293
Commercial real estate............. -- 639 639 106
Consumer loans:
Mobile home........................ 23 -- -- 25
Other.............................. 136 136 760 166
------- ------- ------- -------
Total loans originated.......... 2,937 1,362 11,735 6,644
------- ------- ------- -------
Loans purchased:
Mortgage loans:
One- to four-family................ 9 -- 27 395
------- ------- ------- -------
Total loans purchased........... 9 -- 27 395
------- ------- ------- -------
Loan principal repayments........... 2,555 2,238 9,038 9,929
Net loan activity................... 391 (876) 2,724 (2,890)
------- ------- ------- -------
Gross loans at end of period........ $56,009 $52,018 $55,618 $52,894
======= ======= ======= =======
</TABLE>
Loan Commitments. The Savings Bank issues commitments to originate
loans conditioned upon the occurrence of certain events. Such commitments are
made on specified terms and conditions and, in most cases, are honored for up to
60 days from the date of loan approval. Commitments in excess of 60 days are
charged an additional fee. The Savings Bank had outstanding loan commitments of
approximately $1.1 million at March 31, 1997.
Loan Origination and Other Fees. The Savings Bank, in most instances,
receives loan origination fees. Loan fees are a fixed dollar amount or a
percentage of the principal amount of the mortgage loan that is charged to the
borrower for funding the loan. Current accounting standards require fees
received (net of certain loan origination costs) for originating loans to be
deferred and amortized into interest income over the contractual life of the
loan. Net deferred fees or costs associated with loans that are prepaid are
recognized as income or expense at the time of prepayment. The Savings Bank had
$57,000 of net deferred loan origination costs at March 31, 1997. In addition
to loan origination fees, the Savings Bank receives income from fees in
connection with loan modifications, late payments and for various services
related to its loans.
Loan Servicing. The Savings Bank has sold most of its servicing
rights with respect to loans held by others, with the last sale occurring in
1994. At March 31, 1997, the Savings Bank was servicing $472,000 of loans for
others. Loan servicing includes processing payments, accounting for loan funds
and collecting and paying real
40
<PAGE>
estate taxes, hazard insurance and other loan-related items, such as private
mortgage insurance. When the Savings Bank receives the gross mortgage payment
from individual borrowers, it remits to the investor in the mortgage a
predetermined net amount based on the yield on that mortgage. The difference
between the coupon on the underlying mortgage and the predetermined net amount
paid to the investor is the gross loan servicing fee.
Delinquencies and Classified Assets
Delinquent Loans. When a borrower fails to make a required payment
when due, the Savings Bank institutes collection procedures. Contact is
generally made 16 days after a payment is due. In most cases, deficiencies are
cured promptly. If a delinquency continues, the loan and payment history is
reviewed and efforts are made to collect the loan. While the Savings Bank
prefers to work with borrowers to resolve delinquencies, the Savings Bank will
institute foreclosure or other proceedings, as necessary, to minimize any loss.
The Savings Bank generally initiates proceedings when a loan becomes 90 days
delinquent.
Loans are generally placed on nonaccrual status when they become 90
days delinquent or 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 nonaccrual status, previously accrued but unpaid
interest is deducted from interest income. Loans may be reinstated to accrual
status when they become less than 90 days delinquent and, in the opinion of
management, collection of the remaining balance can be reasonably expected.
41
<PAGE>
The following table sets forth information with respect to the Savings
Bank's nonperforming assets and restructured loans within the meaning of SFAS
No. 15 at the dates indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
-----------------
1997 1996 1995
------------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual
basis:
Mortgage loans:
One- to four-family...................... $ 462 $ 432 $ 156
Multi-family............................. 134 149 20
Commercial real estate................... 403 407 425
Consumer loans:
Mobile home.............................. 21 33 15
Other.................................... 2 3 8
Commercial................................ 86 86 26
------ ------ ------
Total................................... 1,108 1,110 650
------ ------ ------
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
One- to four-family...................... 15 -- 80
Consumer loans:
Mobile home.............................. -- -- 22
------ ------ ------
Total................................... 15 -- 102
------ ------ ------
Total of nonaccrual and 90 days past
due loans................................. 1,123 1,110 752
Real estate owned........................... 13 13 940
Other repossessed assets.................... 39 31 24
------ ------ ------
Total nonperforming assets............... $1,175 $1,154 $1,716
====== ====== ======
Restructured loans.......................... $ 16 -- --
Total loans delinquent 90 days
or more as a percent of net loans......... 2.03% 2.03% 1.43%
Total loans delinquent 90 days
or more as a percent of total assets...... 1.36% 1.36% 0.92%
Total nonperforming assets as a percent of
total assets.............................. 1.42% 1.41% 2.10%
</TABLE>
Interest income that would have been recorded for the three months
ended March 31, 1997 and the year ended December 31, 1996 had nonaccruing loans
been current in accordance with their original terms amounted to approximately
$29,000 and $120,000, respectively. The amount of interest included in interest
income on such loans for the three months ended March 31, 1997 and the year
ended December 31, 1996 amounted to approximately $14,000 and $69,000,
respectively.
42
<PAGE>
Real Estate Owned and Other Repossessed Assets. Real estate acquired
by the Savings Bank as a result of foreclosure or by deed-in-lieu of foreclosure
is classified as REO until it is sold. When property is acquired it is recorded
at the lower of its cost, which is the unpaid principal balance of the related
loan plus foreclosure costs, or fair market value. Subsequent to foreclosure,
REO is carried at the lower of the foreclosed amount or fair value, less
estimated selling costs. At March 31, 1997, the Savings Bank had $52,000 of REO
and other repossessed assets, net of specific reserves, which consisted of one
building and five mobile homes.
Asset Classification. The OTS has adopted various regulations
regarding problem assets of savings institutions. The regulations require that
each insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. 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 substandard assets with the additional
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. If an asset or portion thereof is classified as
loss, the insured institution establishes specific allowances for loan losses
for the full amount of the portion of the asset classified as loss. All or a
portion of general loan 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 generally do not qualify as regulatory capital.
Assets that do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are classified as special mention and monitored by the Savings Bank.
The aggregate amounts of the Savings Bank's classified assets at the
dates indicated were as follows:
<TABLE>
<CAPTION>
At December 31,
At March 31, ---------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Loss......................... $ -- $ -- $ --
Doubtful..................... -- -- --
Substandard assets........... 1,455 1,352 2,167
Special mention.............. -- -- --
</TABLE>
At March 31, 1997, classified assets consisted of $366,000 of ten one-
to four-family mortgage loans, $52,000 of REO and other repossessed assets, two
loans to one borrower totalling $283,000 that are secured by a small office
building and the borrower's personal residence, two loans to related borrowers
totalling $403,000 that are secured by a small office building, one of the
borrower's personal residence and a parcel of vacant land, five loans to related
borrowers totalling $265,000 that are secured by non-owner-occupied, one- to
four-family residential real estate, and $86,000 of lease pools.
Allowance for Loan Losses. The allowance for loan losses represents
the amount which management estimates is adequate to provide for potential
losses in its loan portfolio. The allowance method is used in providing for
loan losses. Accordingly, all loan losses are charged to the allowance and all
recoveries are credited to it. The allowance for loan losses is established
through a provision for loan losses charged to operations. The provision for
loan losses is based on management's periodic evaluation of individual loans,
economic factors, past loan loss experience, changes in the composition and
volume of the portfolio, and other relevant factors. The estimates used
43
<PAGE>
in determining the adequacy of the allowance for loan losses, including the
amounts and timing of future cash flows expected on impaired loans, are
particularly susceptible to changes in the near term.
At March 31, 1997, the Savings Bank had an allowance for loan losses
of $420,000. Although management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the
allowance for loan losses may be necessary and results of operations could be
significantly and adversely affected if circumstances differ substantially from
the assumptions used in establishing the allowance.
While the Savings Bank believes it has established its existing
allowance for loan losses in accordance with GAAP, there can be no assurance
that regulators, in reviewing the Savings Bank's loan portfolio, will not
request the Savings Bank to increase significantly its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses may
adversely affect the Savings Bank's financial condition and results of
operations.
44
<PAGE>
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses at and for the periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, December 31,
--------------------- --------------------
1997 1996 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Allowance at beginning of period.. $ 415 $ 276 $ 276 $ 268
Provision for loan losses......... 28 29 239 64
Recoveries:
Mortgage loans:
One- to four-family............ 1 -- 4 1
Consumer loans:
Other.......................... 3 -- 5 8
Commercial loans................ 1 -- 2 1
----- ----- ----- -----
Total recoveries.............. 5 -- 11 10
----- ----- ----- -----
Charge-offs:
Mortgage loans:
One- to four-family............ (22) (6) (24) (40)
Consumer loans:
Mobile home.................... (3) -- (69) --
Other.......................... (3) (4) (12) (11)
Commercial loans................ -- -- (6) (15)
----- ----- ----- -----
Total charge-offs............. (28) (10) (111) (66)
----- ----- ----- -----
Net charge-offs.................. (23) (10) (100) (56)
----- ----- ----- -----
Balance at end of period......... $ 420 $ 295 $ 415 $ 276
===== ===== ===== =====
Allowance for loan losses
as a percent of total
loans receivable................. 0.75% 0.57% 0.75% 0.52%
Net charge-offs to
average loans outstanding........ 0.04% 0.02% 0.19% 0.10%
- -----------
</TABLE>
(1) See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Comparison of Operating Results for the Three Months Ended
March 31, 1997 and 1996 -- Provisions for Loan Losses" and "-- Comparison of
Operating Results for the Years Ended December 31, 1996 and 1995 --
Provisions for Loan Losses" for a discussion of the factors responsible for
changes in the Savings Bank's provision for loan losses between the periods.
45
<PAGE>
The following table sets forth the breakdown of the allowance for loan losses
by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses
in any other category.
<TABLE>
<CAPTION>
At December 31,
At March 31, -----------------------------------
1997 1996 1995
----------------- ---------------- -----------------
% of % of % of
Loans in Loans in Loans in
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ --------- ------ --------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..... $112 76.16% $115 75.10% $ 80 74.63%
Multi-family............ 85 10.34 84 10.21 61 10.17
Construction............ 17 3.01 17 3.10 1 2.62
Commercial real estate.. 58 5.22 62 5.93 62 6.03
Consumer loans:
Mobile home............. 103 4.10 105 4.41 67 5.98
Other................... 11 1.02 15 1.10 1 0.31
Commercial loans......... 34 0.15 17 0.15 4 0.26
---- ------ ---- ------ ----- ------
Total allowance for
loan losses......... $420 100.00% $415 100.00% $ 276 100.00%
==== ====== ==== ====== ===== ======
</TABLE>
Investment Activities
- ---------------------
The Savings Bank is permitted under federal law to invest in various types
of assets, including U.S. Government obligations, securities of various federal
agencies and of state and municipal governments, deposits at the FHLB-
Pittsburgh, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Savings Bank may also invest a portion of its assets in commercial paper and
corporate debt securities. Savings institutions like the Savings Bank are also
required to maintain an investment in FHLB stock. The Savings Bank is required
under federal regulations to maintain a minimum amount of liquid assets. See
"REGULATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources." The Savings
Bank's policies generally limit investments to U.S. Government and agency
securities, municipal bonds, banker's acceptances, corporate bonds, commercial
paper, mutual funds, federal funds and certificates of deposit. Investment in
mortgage-backed and mortgage related securities is also authorized, and includes
securities issued and guaranteed by Federal Home Loan Mortgage Corporation
("FHLMC"), FNMA, Government National Mortgage Association ("GNMA") and
privately-issued collateralized mortgage-backed securities that have the highest
rating by two national rating services. A high credit rating indicates only
that the rating agency believes there is a low risk of default. However, all of
the Savings Bank's investment securities, including those that have high credit
ratings, are subject to market risk insofar as increases in market rates of
interest may cause a decrease in their market value. The Savings Bank's
policies prescribe risk limits and certain other restrictions and provide that
investment purchases be reviewed at monthly Board of Directors meetings. From
time to time, investment levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
46
<PAGE>
as well as management's projections as to the short-term demand for funds to be
used in the Savings Bank's loan origination and other activities.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." Such securities are reported at fair value, and
unrealized gains and losses on such securities would be included in earnings.
The Savings Bank does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." Such securities are
reported at fair value, and unrealized gains and losses on such securities are
excluded from earnings and reported as a net amount in a separate component of
equity. Of the $21.7 million of investment and mortgage-backed securities at
March 31, 1997, $3.1 million, or 14.5%, were classified as available for sale.
Mortgage-Backed Securities. The Savings Bank purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads on large
principal balances with minimal administrative expense; (ii) lower the credit
risk of the Savings Bank as a result of the guarantees provided by FHLMC, FNMA,
and GNMA; (iii) increase the Savings Bank's liquidity; and (iv) control interest
rate risk. The Savings Bank invests in both adjustable- and fixed-rate
mortgage-backed securities with maturities up to 15 years. The Savings Bank has
invested primarily in federal agency securities, principally FNMA, FHLMC and
GNMA. The Savings Bank also invests in CMOs. At March 31, 1997, mortgage-
backed securities totalled $19.7 million, or 23.8% of total assets of which $6.2
million consisted of CMOs. At March 31, 1997, 26.1% of the mortgage-backed
securities were adjustable-rate and 73.9% were fixed-rate.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) typically represent a participation
interest in a pool of single-family or multi-family mortgages. The principal
and interest payments on these mortgages are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and resell 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, FNMA and the GNMA. 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 fall within a specific range
and have varying maturities. Mortgage-backed securities generally yield less
than the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, mortgage-backed securities are
usually more liquid than individual mortgage loans and may be used to
collateralize certain liabilities and obligations of the Savings Bank. These
types of securities also permit the Savings Bank to optimize its regulatory
capital because they have low risk weighting.
CMOs are generally classified as derivative financial instruments because
they are created by redirecting the cash flows from the pool of mortgages or
mortgage-backed securities underlying these securities to create two or more
classes (or tranches) with different maturity or risk characteristics designed
to meet a variety of investor needs and preferences. Management believes these
securities may represent attractive alternatives relative to other investments
due to the wide variety of maturity, repayment and interest rate options
available. Consistent with the guidelines of the OTS, the current investment
policy of the Savings Bank prohibits the purchase of high risk CMOs. CMOs may
be sponsored by private issuers, such as mortgage bankers or money center banks,
or by U.S. Government agencies and government sponsored entities. The privately
issued CMOs held by the Savings Bank carry the highest credit rating offered by
either Moody's or Standard and Poor's. The Savings Bank generally purchases
CMOs in order to shorten the average life of its investment portfolio and to
assist in asset/liability management. The Savings Bank evaluates its mortgage-
related securities portfolio quarterly for compliance with
47
<PAGE>
applicable regulatory requirements, including testing for identification of high
risk investments pursuant to Federal Financial Institutions Examination Council
standards.
Derivatives also include "off balance sheet" financial products whose value
is dependent on the value of an underlying financial asset, such as a stock,
bond, foreign currency, or a reference rate or index. Such derivatives include
"forwards," "futures," "options" or "swaps." The Savings Bank has not invested
in these "off balance sheet" derivative instruments, although the Savings Bank's
investment policies authorize such investments.
Of the Savings Bank's $19.7 million mortgage-backed securities portfolio at
March 31, 1997, $6.1 million with a weighted average yield of 6.80% had
contractual maturities within ten years and $13.5 million with a weighted
average yield of 7.31% had contractual maturities over ten years. However, the
actual maturity of a mortgage-backed security may be 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 may result in a
loss of any premiums paid and thereby reduce the net yield on such securities.
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
declining 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. In contrast to mortgage-backed
securities in which cash flow is received (and hence, prepayment risk is shared)
pro rata by all securities holders, the cash flow from the mortgages or
mortgage-backed securities underlying CMOs are segmented and paid in accordance
with a predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche of CMOs may therefore carry
prepayment risk that differs from that of both the underlying collateral and
other tranches.
48
<PAGE>
The following table sets forth the composition of the Savings Bank's
investment and mortgage-backed securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
At March 31, ---------------------------------------------
1997 1996 1995
--------------------- --------------------- ----------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
-------- ----------- -------- ----------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Available for sale:
U.S. Government obligations......... $ 497 24.94% $ 498 18.15% $ - - %
U.S. Government agency obligations.. 322 16.15 328 11.95 398 12.11
CMO residuals....................... - - - - 249 7.58
------- ------ ------- ------ ------- ------
Total available for sale........... 819 41.09 826 30.10 647 19.69
------- ------ ------- ------ ------- ------
Held to maturity:
U.S. Government agency obligations.. 689 34.57 446 16.25 1,513 46.04
Corporate securities................ 485 24.34 1,472 53.65 1,126 34.27
------- ------ ------- ------ ------- ------
Total held to maturity............ 1,174 58.91 1,918 69.90 2,639 80.31
------- ------ ------- ------ ------- ------
Total investment securities....... $ 1,993 100.00% $ 2,744 100.00% $ 3,286 100.00%
======= ====== ======= ====== ======= ======
Mortgage-backed securities
Available for sale:
GNMA................................ $ 441 2.24% $ 472 2.41% $ - - %
FHLMC............................... 716 3.64 782 4.00 1,006 4.72
FNMA................................ 644 3.27 664 3.40 784 3.68
CMOs................................ 516 2.62 512 2.62 508 2.39
------- ------ ------- ------ ------- ------
Total available for sale.......... 2,317 11.77 2,430 12.43 2,298 10.79
------- ------ ------- ------ ------- ------
Held to maturity:
GNMA................................ 1,544 7.85 1,025 5.24 288 1.35
FHLMC............................... 1,375 6.99 1,448 7.40 1,971 9.26
FNMA................................ 8,757 44.50 9,335 47.73 11,296 53.06
CMOs................................ 5,686 28.89 5,319 27.20 5,438 25.54
------- ------ ------- ------ ------- ------
Total held to maturity............ 17,362 88.23 17,127 87.57 18,993 89.21
------- ------ ------- ------ ------- ------
Total mortgage-backed securities.. $19,679 100.00% $19,557 100.00% $21,291 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
49
<PAGE>
The following table sets forth the maturities and weighted average yields
of the debt securities in the Savings Bank's investment and mortgage-backed
securities portfolio at March 31, 1997.
<TABLE>
<CAPTION>
Over Over
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
-------------- -------------- -------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ------ ------ ------ ------ ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities
Available for sale:
U.S. Government obligations......... $ -- --% $ 497 6.75% $ -- --% $ -- --%
U.S. Government agency obligations.. -- -- -- -- -- -- 322 6.60
------ ------ ------ -------
Total available for sale.......... -- -- 497 6.75 -- -- 322 6.60
------ ------ ------ -------
Held to maturity:
U.S. Government agency obligations.. -- -- -- -- 250 7.20 439 7.66
Corporate securities................ 485 5.55 -- -- -- -- -- --
------ ------ ------ -------
Total held to maturity............ 485 5.55 -- -- 250 7.20 439 7.66
------ ------ ------ -------
Total investment securities....... $485 5.55 $ 497 6.75 $ 250 7.20 $ 761 7.21
====== ====== ====== =======
Mortgage-backed securities
Available for sale:
GNMA................................ $ -- --% $ -- --% $ -- --% $ 441 6.88%
FHLMC............................... -- -- 298 5.35 -- -- 418 6.73
FNMA................................ -- -- -- -- -- -- 644 6.04
CMOs................................ -- -- -- -- -- -- 516 6.76
------ ------ ------ -------
Total available for sale.......... -- -- 298 5.35 -- -- 2,019 6.55
------ ------ ------ -------
Held to maturity:
GNMA................................ 2 13.25 -- -- -- -- 1,542 6.95
FHLMC............................... -- -- 659 6.64 144 7.44 572 8.00
FNMA................................ -- -- -- -- 2,329 7.64 6,428 7.94
CMOs................................ 231 5.75 2,240 6.30 246 6.09 2,969 6.52
------ ------ ------ -------
Total held to maturity............ 233 5.81 2,899 6.37 2,719 7.49 11,511 7.45
------ ------ ------ -------
Total mortgage-backed securities.. $233 5.81 $3,197 6.28 $2,719 7.49 $13,530 7.31
====== ====== ====== =======
</TABLE>
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the Savings
Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Pittsburgh are
used to compensate for reductions in the availability of funds from other
sources and at times for asset and liability management. Currently, the Savings
Bank has no other borrowing arrangements.
Deposit Accounts. Savings deposits are the primary source of funds for the
Savings Bank's lending and investment activities and for its general business
purposes. Substantially all of the Savings Bank's depositors are residents of
Pennsylvania. Deposits are attracted from within the Savings Bank's primary
market area through the offering of a broad selection of deposit instruments,
including NOW checking accounts, money market deposit
50
<PAGE>
accounts, regular savings accounts, certificates of deposit and retirement
savings plans. Deposit account terms vary, according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of its deposit accounts,
the Savings Bank considers current market interest rates, profitability to the
Savings Bank, matching deposit and loan products and its customer preferences
and concerns. The Savings Bank reviews its deposit mix and pricing weekly.
Currently, the Savings Bank does not accept brokered deposits, nor has it
aggressively sought jumbo certificates of deposit, although the Savings Bank has
in the past accepted brokered certificates of deposit. At March 31, 1997,
certificates of deposit that are scheduled to mature in less than one year
totalled $26.2 million. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
The Savings Bank currently offers certificates of deposit for terms not
exceeding 60 months and will consider requests for longer terms. As a result,
the Savings Bank believes that it is better able to match the repricing of its
liabilities to the repricing of its loan portfolio. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Asset and Liability Management."
In the unlikely event the Savings Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the Holding Company, as the sole stockholder of the
Savings Bank.
51
<PAGE>
The following table sets forth information concerning the Savings Bank's
deposits at March 31, 1997.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Term Category Amount Balance Deposits
- ------------- -------------- ----------------------------- ------ ------- -----------
(Dollars in Thousands)
<C> <S> <C> <C> <C> <C>
0.00% -- Non-interest-bearing checking $ 0 $ 405 0.62%
1.46 -- NOW accounts 200 2,631 4.06
3.10 -- Passbook and club accounts 25 11,881 18.34
3.72 -- Premium savings 200 792 1.22
3.81 -- Money market deposit accounts 2,500 5,885 9.09
Certificates of Deposit
-----------------------------
5.06 3 mos Fixed term, fixed rate 1,000 547 0.84
5.19 6 mos Fixed term, fixed rate 1,000 6,399 9.88
5.10 9 mos Fixed term, fixed rate 1,000 10 0.02
5.38 12 mos Fixed term, fixed rate 500 14,742 22.76
5.84 24 mos Fixed term, fixed rate 500 2,527 3.90
5.73 30 mos Fixed term, fixed rate 500 2,821 4.36
5.93 36 mos Fixed term, fixed rate 500 7,439 11.48
5.98 60 mos Fixed term, fixed rate 500 6,229 9.62
6.35 over 60 mos Fixed term, fixed rate 500 2,468 3.81
------- -----
$64,776 100.00%
======= =============
</TABLE>
The following table indicates the amount of the Savings Bank's jumbo
certificates of deposit by time remaining until maturity as of March 31, 1997.
Jumbo certificates of deposit are certificates in amounts of $95,000 or more.
<TABLE>
<CAPTION>
Maturity Period Amount
- ------------------------------- --------------
(In Thousands)
<S> <C>
Three months or less................. $1,100
Over three through six months........ 599
Over six through 12 months........... 706
Over 12 months....................... 3,985
------
Total jumbo certificates
of deposit..................... $6,390
======
</TABLE>
52
<PAGE>
Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Savings Bank between the dates indicated.
<TABLE>
<CAPTION>
At December 31,
At March 31, ------------------------------------------------
1997 1996 1995
------------------------------ ----------------------------- -----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------- -------- ---------- ------- -------- ---------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing checking........ $ 405 0.63% $ 93 $ 312 0.49% $ 79 $ 233 0.36%
Interest-bearing demand.............. 8,516 13.15 (123) 8,639 13.44 890 7,749 11.89
Savings accounts..................... 12,673 19.56 (161) 12,834 19.96 (564) 13,398 20.56
Fixed-rate certificates which........
mature:.............................
Within 1 year...................... 26,177 40.41 (1,138) 27,315 42.48 (5,424) 32,739 50.24
After 1 year, but within 2 years... 6,828 10.54 1,488 5,340 8.31 (303) 5,643 8.66
After 2 years, but within 5 years.. 10,165 15.69 313 9,852 15.32 4,478 5,374 8.25
Certificates maturing thereafter... 12 0.02 10 2 0.00 (22) 24 0.04
------- ------ ------- ------- ------ ------- ------- ------
Total........................... $64,776 100.00% $ 482 $64,294 100.00% ($866) $65,160 100.00%
======= ====== ======= ======= ====== ======= ======= ======
</TABLE>
53
<PAGE>
Time Deposits by Rates. The following table sets forth the time deposits in
the Savings Bank categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
At March 31, ---------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
2.00 - 3.99%.. $ 25 $ 25 $ 586
4.00 - 5.99%.. 32,387 32,154 25,026
6.00 - 7.99%.. 10,702 10,264 18,009
8.00 - 8.99%.. 68 66 159
------- ------- -------
Total........ $43,182 $42,509 $43,780
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits at
March 31, 1997.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------
Percent
of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
-------- ----- ----- ----- ------- ----- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2.00 - 3.99%.......... $ 1 $ 24 $ -- $ -- $ -- $ 25 0.06%
4.00 - 5.99%.......... 23,855 5,214 1,293 1,025 1,000 32,387 75.00
6.00 - 7.99%.......... 2,281 1,585 3,231 261 3,344 10,702 24.78
8.00 - 8.99%.......... 40 5 -- 23 -- 68 0.16
------- ------ ------ ------ ------ ------- ------
Total................ $26,177 $6,828 $4,524 $1,309 $4,344 $43,182 100.00%
======= ====== ====== ====== ====== ======= ======
</TABLE>
54
<PAGE>
Deposit Activity. The following table sets forth the deposit activities of
the Savings Bank for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
------------------- -----------------
1997 1996 1996 1995
-------- --------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Beginning balance........... $64,294 $65,160 $65,160 $60,836
Net increase (decrease)
before interest credited.. (272) 920 (3,913) 1,259
Interest credited........... 754 800 3,047 3,065
------- ------- ------- -------
Net increase (decrease)
in savings deposits....... 482 1,720 (866) 4,324
------- ------- ------- -------
Ending balance.............. $64,776 $66,880 $64,294 $65,160
======= ======= ======= =======
</TABLE>
Borrowings. The Savings Bank utilizes advances from the FHLB-
Pittsburgh to supplement its supply of funds, to meet deposit withdrawal
requirements and for asset and liability management. The FHLB-Pittsburgh
functions as a central reserve bank providing credit for savings associations
and certain other member financial institutions. As a member of the FHLB-
Pittsburgh, the Savings Bank is required to own capital stock in the FHLB-
Pittsburgh and is authorized to apply for advances on the security of such stock
and certain of its mortgage loans and other assets (principally securities that
are obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. The Savings Bank is
currently authorized to borrow from the FHLB up to an amount equal to
approximately 50% of total assets.
In 1987, the Savings Bank incorporated SHFC for the purpose of issuing
a CMO to various investors. In 1987, SHFC issued a CMO with a total par value
of $32.1 million comprised of three classes of bonds with different stated
maturity dates ranging from July 1, 2002 to December 1, 2017. The net proceeds
of the CMO offering amounted to $27.8 million, reflecting issuance costs and the
original issue discount. The collateral and source of cash flows for the
principal and interest payments on the CMO consisted of certain mortgage-backed
securities transferred from the Savings Bank to SHFC. As a result of the lower
interest rate environment prevailing since the issuance of the CMO bonds, the
mortgage-backed securities that were used to collateralize the CMO paid off
faster than originally projected, and the CMO balance was likewise reduced in
advance of the original schedule of stated maturities. In 1993, the class A
bonds of the CMO were paid off. In March 1997, the class C bonds of the CMO
with a par value of $4.8 million were repurchased and extinguished. At March
31, 1997, class B bonds with a principal balance of $2.6 million remained
outstanding. See Note 11 of the Notes to Consolidated Financial Statements for
additional information concerning the CMO.
55
<PAGE>
The following tables sets forth certain information regarding
borrowings by the Savings Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At At
March 31, December 31,
1997 1996 1995
------------- ------ ------
<S> <C> <C> <C>
(Dollars in Thousands)
Weighted average rate paid on:
FHLB advances........................ 6.47% 6.63% 7.04%
Collateralized mortgage obligation... 11.60 12.30 11.83
Balance outstanding:
FHLB advances........................ $9,254 $3,772 $1,778
Collateralized mortgage obligation... 2,454 6,937 8,251
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
------------------- -------------------
1997 1996 1996 1995
------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Maximum amount of borrowings
outstanding at any month end
during the period:
FHLB advances....................... $9,254 $1,778 $6,378 $5,800
FHLB agreements to repurchase
securities previously sold......... -- -- -- 1,325
Collateralized mortgage obligation.. 6,836 8,156 8,156 9,460
Average amount of borrowings
outstanding during the period:
FHLB advances....................... 5,221 1,777 2,629 3,975
FHLB agreements to repurchase
securities previously sold......... -- -- -- 407
Collateralized mortgage obligation.. 5,875 8,151 7,565 8,968
Approximate weighted average
interest rate during the period:
FHLB advances....................... 6.44% 7.43% 6.50% 7.04%
FHLB agreements to repurchase
securities previously sold......... -- -- -- 6.89
Collateralized mortgage obligation.. 11.71 12.12 12.31 11.83
</TABLE>
Competition
The Savings Bank operates in a competitive market for the attraction of
savings deposits (its primary source of lendable funds) and in the origination
of loans. Its most direct competition for savings deposits has historically
come from commercial banks, credit unions and other thrifts operating in its
primary market area. The Savings Bank's competitors include large regional and
superregional banks. These institutions are significantly larger than the
Savings Bank and therefore have greater financial and marketing resources than
the Savings Bank. Particularly in times of high interest rates, the Savings
Bank has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. In recent years, the Savings Bank
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<PAGE>
has experienced an increased level of competition for deposits from securities
firms, insurance companies and other investment vehicles, such as mutual funds.
The Savings Bank's competition for loans comes from commercial banks and other
thrifts operating in its market as well as from mortgage bankers and brokers and
consumer finance companies. Such competition for deposits and the origination
of loans may limit the Savings Bank's growth and profitability in the future.
Subsidiary Activities
The Savings Bank has one operating subsidiary, SHFC, which was created in
1987 for the purpose of issuing a CMO. See "-- Deposit Activities and Other
Sources of Funds -- Borrowings." At March 31, 1997, the Savings Bank's equity
investment in its subsidiary was $1.2 million.
Federal savings associations generally may invest up to 3% of their assets
in service corporations, provided that any amount in excess of 2% is used
primarily for community, inner-city and community development projects. The
Savings Bank did not have any service corporations at March 31, 1997.
Personnel
As of March 31, 1997, the Savings Bank had 23 full-time and four part-time
employees. The employees are not represented by a collective bargaining unit
and the Savings Bank believes its relationship with its employees to be good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Savings Bank's business. In the opinion of management, the Savings Bank is not
a party to any pending legal proceedings that it believes would have a material
adverse effect on the financial condition or operations of the Savings Bank.
Properties
The Savings Bank operates three full-service facilities in Pittsburgh,
Pennsylvania. The Savings Bank owns its Spring Hill and Beechview offices and
leases its North Shore office. The lease expires in December 1999. The Savings
Bank is currently evaluating the prospect of relocating its North Shore office
in late 1997 to a facility of comparable size and cost. At March 31, 1997, the
net book value of the properties (including land and buildings) and the Savings
Bank's fixtures, furniture and equipment was $776,000.
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<PAGE>
The following sets forth certain information regarding the offices of the
Savings Bank.
<TABLE>
<CAPTION>
Square Deposits
Location Year Acquired Footage at March 31, 1997
- -------- ------------- ------- -----------------
(In Thousands)
<S> <C> <C> <C>
North Shore Office 1987 4,909 $14,672
112 Federal Street
Pittsburgh, PA 15212
Spring Hill Office 1960 6,776 31,171
Itin and Rhine Streets
Pittsburgh, PA 15212
Beechview Office 1977 1,770 18,933
1609 Broadway Avenue
Pittsburgh, PA 15216
</TABLE>
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company consists of five persons
divided into three classes, each of which contains approximately one third of
the Board. The Directors shall be elected by the stockholders of the Holding
Company for staggered three-year terms, or until their successors are elected
and qualified. One class of Directors, consisting of Mr. Guy Dille, has a term
of office expiring at the first annual meeting of stockholders, a second class,
consisting of Messrs. George C. Dorsch and Edward W. Preskar, has a term of
office expiring at the second annual meeting of stockholders, and a third class,
consisting of Messrs. Thomas F. Angotti and James G. Caliendo, has a term of
office expiring at the third annual meeting of stockholders. The executive
officers of the Holding 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.
The following individuals hold the offices set forth opposite their names
below.
Name Position held with Holding Company
---- ----------------------------------
Thomas F. Angotti President and Chief Executive Officer
Vincent C. Ashoff Executive Vice President and Chief Financial Officer
Joanne C. Wienand Corporate Secretary
Since the formation of the Holding Company, none of the executive officers,
directors or other personnel has received remuneration from the Holding Company.
Information concerning the principal occupations, employment and compensation of
the directors and executive officers of the Holding Company during the past five
years is set forth under "MANAGEMENT OF THE SAVINGS BANK -- Biographical
Information."
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<PAGE>
MANAGEMENT OF THE SAVINGS BANK
Directors and Executive Officers
The Board of Directors of the Savings Bank is presently composed of five
members who are elected for terms of three years, approximately one third of
whom are elected annually in accordance with the Bylaws of the Savings Bank.
The executive officers of the Savings Bank are elected annually by the Board of
Directors and serve at the Board's discretion. The following table sets forth
information with respect to the Directors and executive officers of the Savings
Bank.
Directors
<TABLE>
<CAPTION>
Current
Director Term
Name Age (1) Position with Savings Bank Since Expires
- ----------------------- ------- -------------------------- -------- -------
<S> <C> <C> <C> <C>
Guy Dille 67 Director 1988 1998
George C. Dorsch 63 Director 1980 1999
Edward W. Preskar 68 Chairman of the Board 1976 1999
Thomas F. Angotti 49 President, Chief Executive 1989 2000
Officer and Director
James G. Caliendo 44 Director 1993 2000
</TABLE>
Executive Officers Who Are Not Directors
<TABLE>
<CAPTION>
Name Age (1) Position with Savings Bank
- ------------------- ------- ---------------------------------------------------------------
<S> <C> <C>
Vincent C. Ashoff 37 Executive Vice President, Chief Financial Officer and Treasurer
Paul F. Hoyson 48 Senior Vice President/Retail Banking
</TABLE>
- ---------------------
(1) As of March 31, 1997.
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Savings Bank. Unless otherwise stated, each Director
and executive officer has held his current occupation for the last five years.
Guy Dille is a retired business man. Prior to his retirement, Mr.
Dille had been associated for 34 years with Williams & Company, Inc., a
distributor of ferrous and nonferrous metals, and welding, commercial
refrigeration and air conditioning equipment and supplies, where from 1986
through 1992 he served as Vice-President, Finance, Treasurer and Chief Financial
Officer.
George C. Dorsch retired in 1991 as a construction engineer for the
Department of Transportation of the Commonwealth of Pennsylvania. From 1991 to
1995, Mr. Dorsch worked as a Quality Assurance Engineer for McGuire Engineering
on various bridge and highway projects.
Edward W. Preskar spent 30 years as a registered architect in private
practice. Mr. Preskar was then employed by the School District of Pittsburgh as
Director of Facilities from 1983 to 1995.
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<PAGE>
Thomas F. Angotti joined the Savings Bank in 1987 as Operations
Manager after 12 years with the OTS, formerly known as the Federal Home Loan
Bank Board and the Examination Division of the Federal Home Loan Bank. In 1989
he became the President of the Savings Bank and joined the Board of Directors.
In April 1997, Mr. Angotti added the title of Chief Executive Officer.
James G. Caliendo is a partner at the management consulting and skill
development firm of Solutions 21. Previously, Mr. Caliendo was the Firm
Administrator for Meyer, Unkovic & Scott and held the position of Senior Vice
President-Chief Administrative Officer at Landmark Savings Association of
Pittsburgh. At Landmark Savings Association, he spent 20 years concentrating
mainly in Retail Banking, Marketing and Operations.
Vincent C. Ashoff has been affiliated with the Savings Bank since
1990. In 1997, Mr. Ashoff was appointed to Executive Vice President, Chief
Financial Officer and Treasurer. From 1995 to 1997, he served as Senior Vice
President/Operations, Chief Financial Officer and Treasurer. Prior to that
time, he served in varied capacities including Vice President/Finance and
Treasurer. Prior to joining the Savings Bank, he served as a consultant to the
thrift industry for seven years.
Paul F. Hoyson has been the Senior Vice President in charge of retail
banking operations for the Savings Bank since August 1995. From August 1993 to
August 1995, Mr. Hoyson performed independent financial consulting services.
Prior to that time, Mr Hoyson spent 20 years in the banking and financial
services industry, including various management positions with Allegheny Valley
Bank, Landmark Savings Association, and Gateway Lessor, Inc.
Meetings and Committees of the Board of Directors
The business of the Savings Bank is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended December 31, 1996, the Board of Directors held 24 meetings. No director
attended fewer than 75% of the total meetings of the Board of Directors and of
committees on which such director served.
The Audit Committee, consisting of Directors Dille and Dorsch and
Executive Vice President Ashoff, meets with the Savings Bank's outside auditor
to discuss the results of the annual audit. The Audit Committee met six times
during the fiscal year ended December 31, 1996.
In April 1997, the Board of Directors designated the entire Board to
act as the Compensation/Personnel Committee. The Compensation/Personnel
Committee is responsible for determining compensation for all employees and
handling other personnel related matters.
The Board of Directors also maintains a standing Corporate Strategy
Committee.
Directors' Compensation
Directors currently receive a monthly retainer of $750. It is
currently anticipated that, after completion of the Conversion, directors' fees
will continue to be paid by the Savings Bank and no separate fees will be paid
for service on the Board of Directors of the Holding Company.
Executive Compensation
Summary Compensation Table. The following information is furnished
for the Chief Executive Officer of the Savings Bank for the year ended December
31, 1996. No executive officers of the Savings Bank received salary and bonus
in excess of $100,000 during the year ended December 31, 1996.
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<PAGE>
<TABLE>
Annual Compensation(1)
-----------------------------------------------
Name and Other Annual All Other
Position Year Salary($) Bonus($) Compensation($)(2) Compensation($)(3)
- ------------------- ---- --------- -------- -------------------- ------------------
<S> <C> <C> <C> <C> <C>
Thomas F. Angotti 1996 $72,500 $15,365 -- $2,548
</TABLE>
- --------------------
(1) Compensation information for fiscal years ended December 31, 1995 and 1994
has been omitted as the Savings Bank was not a public company nor a
subsidiary thereof at such time.
(2) The aggregate amount of perquisites and other personal benefits was less
than 10% of the total annual salary and bonus reported.
(3) Includes employer contribution to 401(k) plan.
Employment Agreements. In connection with the Conversion, the Holding
Company and the Savings Bank (collectively, the "Employers") will enter into
three-year employment agreements with Mr. Angotti and Mr. Ashoff. Under the
agreements the initial salary level for Mr. Angotti will be $80,500 and for Mr.
Ashoff will be $59,000, which amounts will be paid by the Savings Bank and may
be increased at the discretion of the Board of Directors or an authorized
committee of the Board. On each anniversary of the commencement date of the
agreements, the term of the agreements may be extended for an additional year.
The agreements are terminable by the Employers at any time, or by Mr. Angotti or
Mr. Ashoff if either executive is assigned duties inconsistent with his initial
position, duties, responsibilities and status, or upon the occurrence of certain
events specified by federal regulations. In the event that an executive's
employment is terminated without cause or upon the executive's voluntary
termination following the occurrence of an event described in the preceding
sentence, the Savings Bank would be required to honor the terms of the agreement
through the expiration of the current term, including payment of current cash
compensation and continuation of employee benefits.
The employment agreements provide for severance payments and other benefits
in the event of involuntary termination of employment in connection with any
change in control of the Employers. Severance payments also will be provided on
a similar basis in connection with a voluntary termination of employment where,
subsequent to a change in control, the executive is assigned duties inconsistent
with his position, duties, responsibilities and status immediately prior to such
change in control. The term "change in control" is defined in the agreement as
having occurred when, among other things, (a) a person other than the Holding
Company purchases shares of Common Stock pursuant to a tender or exchange offer
for such shares, (b) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or
indirectly, of securities of the Holding Company representing 25% or more of the
combined voting power of the Holding Company's then outstanding securities, (c)
the membership of the Board of Directors changes as the result of a contested
election, or (d) shareholders of the Holding Company approve a merger,
consolidation, sale or disposition of all or substantially all of the Holding
Company's assets, or a plan of partial or complete liquidation.
The severance payment from the Employers will equal three times the
executive's average annual compensation during the five-year period preceding
the change in control. Such amount will be paid in a lump sum within ten
business days following the termination of employment. Assuming that a change
in control had occurred at December 31, 1996, Mr. Angotti and Mr. Ashoff would
be entitled to severance payments of approximately $203,000 and $150,000,
respectively. Section 280G of the Internal Revenue Code of 1986, as amended
("Code"), states that severance payments which equal or exceed three times the
base compensation of the individual for the most recently completed five taxable
years are deemed to be "excess parachute payments" if they are contingent upon a
change in control. Individuals receiving excess parachute payments are subject
to a 20% excise tax on the amount of such excess payments, and the Employers
would not be entitled to deduct the amount of such excess payments.
The agreement restricts the executive's right to compete against the
Employers for a period of one year from the date of termination of the agreement
if he voluntarily terminates employment, except in the event of a change in
control.
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<PAGE>
The Board of Directors of the Holding Company or the Savings Bank may, from
time to time, also enter into employment or severance agreements with other
senior executive officers.
Benefits
General. The Savings Bank currently pays the premiums for medical, dental,
life and disability insurance benefits for full-time employees, subject to
certain deductibles.
Employee Severance Compensation Plan. In connection with the Conversion,
the Board of Directors of the Savings Bank intends to adopt the Severance Plan
to provide benefits to eligible employees in the event of a change in control of
the Holding Company or the Savings Bank. In general, all employees (except for
officers who enter into separate employment agreements with the Holding Company
and the Savings Bank) will be eligible to participate in the Severance Plan.
Under the Severance Plan, in the event of a change in control of the Holding
Company or the Savings Bank, eligible employees, who are terminated or who
terminate employment (but only upon the occurrence of events specified in the
Severance Plan) within 12 months of the effective date of a change in control
will be entitled to a payment based on years of service with the Savings Bank.
Generally, the severance payment would be equal to the employee's current
monthly compensation multiplied by the number of years the employee has served
with the Savings Bank. However, the maximum payment for any eligible employee
would be equal to 18 months of their current compensation. The Severance Plan
also provides that the minimum payment for eligible officers would be equal to
12 months of their current compensation and that the minimum payment for
eligible middle managers would be equal to six months of their current
compensation. Assuming that a change in control had occurred at March 31, 1997
and the termination of all eligible employees, the maximum aggregate payment due
under the Severance Plan would be approximately $389,000.
401(k) Plan. The Savings Bank maintains a 401(k) Plan (the "401(k) Plan")
for the benefit of eligible employees of the Savings Bank. The 401(k) Plan is
intended to be a tax-qualified plan under Sections 401(a) and 401(k) of the
Code. Employees of the Savings Bank who have completed six months of service
and who have attained age 18 are eligible to participate in the 401(k) Plan.
Participants may contribute a portion of their annual compensation to the 401(k)
Plan through a salary reduction election in an amount not in excess of 15% of
compensation and applicable Code limits. The limit for 1997 is $9,500.
The Savings Bank currently matches 50% of participant contributions up to
6% of salary and may make additional discretionary profit sharing contributions.
The amount of matching contributions are subject to review and approval by the
Board of Directors on an annual basis. Participants are at all times 100%
vested in salary reduction contributions, but matching contributions vest at the
rate of 20% per year beginning with the participant's second year of service,
with full vesting after six years of service.
For the fiscal year ended December 31, 1996, the Savings Bank incurred
total contribution-based expenses of $61,000, $48,000 as profit sharing
contributions and $13,000 as matching contributions.
In general, the investment of 401(k) Plan assets is directed by plan
participants. In connection with the Conversion, participants will have the
opportunity to direct the investment of up to 100% of their vested account
balance to purchase shares of the Common Stock. A participant in the 401(k)
Plan who elects to purchase Common Stock in the Conversion through the 401(k)
Plan will receive the same subscription priority and be subject to the same
individual purchase limitations as if the participant had elected to make such
purchase using other funds. See "THE CONVERSION -- Limitations on Purchases of
Shares."
Employee Stock Ownership Plan. The Board of Directors has authorized the
adoption by the Savings Bank of an ESOP for employees of the Savings Bank to
become effective upon the completion of the Conversion. The ESOP is intended to
satisfy the requirements for an employee stock ownership plan under the Code and
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Full-time employees of the Holding
62
<PAGE>
Company and the Savings Bank who have been credited with at least six months of
service during a 12-month period and who have attained age 18 will be eligible
to participate in the ESOP.
In order to fund the purchase of up to 8% of the Common Stock to be issued
in the Conversion, it is anticipated that the ESOP will borrow funds from the
Holding Company. Such loan will equal 100% of the aggregate purchase price of
the Common Stock. If, for any reason, the ESOP is unable to acquire 8% of the
Common Stock issued in the Conversion, it is anticipated that the ESOP will
acquire shares not obtained through the Offering in open market purchases. The
loan to the ESOP will be repaid principally from the Savings Bank's
contributions to the ESOP and dividends payable on Common Stock held by the ESOP
over the anticipated ten-year term of the loan. The interest rate for the ESOP
loan is expected to be the prime rate as published in The Wall Street Journal on
the closing date of the Conversion. See "PRO FORMA DATA." In any plan year,
the Savings Bank may make additional discretionary contributions to the ESOP 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 or which constitute authorized but unissued shares or
shares held in treasury by the Holding Company. The timing, amount, and manner
of such discretionary contributions will be affected by several factors,
including applicable 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 in
a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP upon the
completion of six years of service. Benefits may be payable upon a
participant's retirement, early retirement, death, disability, or termination of
employment. The Savings Bank's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
It is anticipated that the members of the Compensation/Personnel Committee
will be appointed by the Board of Directors of the Savings Bank to 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 plan participants
and allocated shares for which no instructions are received must be voted in the
same ratio on any matter as those shares for which instructions are given.
Pursuant to SOP 93-6, the Savings Bank will record compensation expense in
an amount equal to the fair value of shares committed to be released to
employees from the ESOP and will exclude unallocated shares from earnings per
share computations. The effect of SOP 93-6 on net income and earnings per share
in future periods cannot be predicted due to the uncertainty of the fair value
of the shares at the time they will be committed to be released.
If the ESOP purchases newly issued shares from the Holding Company, total
stockholders' equity would neither increase nor decrease. However, on a per
share basis, 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 ERISA and the regulations
of the IRS and the Department of Labor issued thereunder. The Savings Bank
intends to request a determination letter from the IRS regarding the tax-
qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Savings Bank expects that a
favorable determination letter will be received by the ESOP.
Stock Option Plan. The Board of Directors of the Holding Company intends
to adopt the Stock Option Plan and to submit the Stock Option Plan to the
stockholders for approval at a meeting held no earlier than six
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<PAGE>
months following consummation of the Conversion. Under current OTS regulations,
the approval of a majority vote of the Holding Company's outstanding shares is
required prior to the implementation of the Stock Option Plan within one year of
the consummation of the Conversion. The Stock Option Plan will comply with all
applicable regulatory requirements. However, the Stock Option Plan will not be
approved or endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Savings Bank, and to reward officers and key employees for outstanding
performance. Stock options are valuable only to the extent that they are
exercisable and to the extent that the market price for the underlying share of
Common Stock exceeds the exercise price. An option effectively eliminates the
market risk of holding the underlying security since the option holder pays no
consideration for the option until it is exercised. Therefore, the option
holder may, within the limits of the term of the option, wait to exercise the
option until the market price exceeds the exercise price. The Stock Option Plan
will provide for the grant of incentive stock options ("ISOs") intended to
comply with the requirements of Section 422 of the Code and for nonqualified
stock options ("NQOs"). Upon receipt of stockholder approval of the Stock
Option Plan, stock options may be granted to key employees of the Holding
Company and its subsidiaries, including the Savings Bank. Unless sooner
terminated, the Stock Option Plan will continue in effect for a period of ten
years from the date the Stock Option Plan is approved by stockholders.
A number of authorized shares of Common Stock equal to 10% of the number of
shares of Common Stock issued in connection with the Conversion will be reserved
for future issuance under the Stock Option Plan (71,300 shares based on the
issuance of 713,000 shares at the maximum of the Estimated Valuation Range).
Shares acquired upon exercise of options will be authorized but unissued shares
or treasury shares. In the event of a stock split, reverse stock split, stock
dividend, or similar event, 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 may be adjusted by the Committee to reflect the
increase or decrease in the total number of shares of Common Stock outstanding.
The Stock Option Plan will be administered and interpreted by a committee
of the Board of Directors ("Committee"). Subject to applicable OTS regulations,
the Committee will determine which nonemployee directors, officers and key
employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options. All options granted to
nonemployee directors will be NQOs. The per share exercise price of all options
will equal at least 100% of the fair market value of a share of Common Stock on
the date the option is granted.
Under current OTS regulations, if the Stock Option Plan is implemented
within one year of the consummation of the Conversion, (i) no officer or
employee could receive an award of options covering in excess of 25%, (ii) no
nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, could not receive in excess of 30%, of the number of
shares reserved for issuance under the Stock Option Plan.
It is anticipated that all options granted under the Stock Option Plan will
be granted subject to a vesting schedule whereby the options become exercisable
over a specified period following the date of grant. Under OTS regulations, if
the Stock Option Plan is implemented within the first year following
consummation of the Conversion, the minimum vesting period will be five years.
All unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options will also be exercisable
following a change in control (as defined in the Stock Option Plan) of the
Holding Company or the Savings Bank to the extent authorized or not prohibited
by applicable law or regulations. OTS regulations currently provide that, if
the Stock Option Plan is implemented prior to the first anniversary of the
Conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Savings Bank.
Each stock option that is awarded to an officer or key employee will remain
exercisable at any time on or after the date it vests through the earlier to
occur of the tenth anniversary of the date of grant or three months after
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<PAGE>
the date on which the optionee terminates employment (one year in the event of
the optionee's termination by reason of death or disability), unless such period
is extended by the Committee. Each stock option that is awarded to a
nonemployee director will remain exercisable through the earlier to occur of the
tenth anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are
nontransferable except by will or the laws of descent or distribution.
Under current provisions of the Code, the federal tax treatment of ISOs and
NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference between
the fair market value of the Common Stock on the date of exercise and the option
exercise price generally will be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made at this time, the
Holding Company and the Savings Bank anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent permitted by applicable regulations. The size of individual awards will
be determined prior to submitting the Stock Option Plan for stockholder
approval, and disclosure of anticipated awards will be included in the proxy
materials for such meeting.
Management Recognition Plan. Following the Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Savings
Bank, subject to shareholder approval. The MRP will enable the Holding Company
and the Savings Bank to provide participants with a proprietary interest in the
Holding Company as an incentive to contribute to the success of the Holding
Company and the Savings Bank. The MRP will comply with all applicable
regulatory requirements. However, the MRP will not be approved or endorsed by
the OTS.
Under current OTS regulations, the approval of a majority vote of the
Holding Company's outstanding shares is required prior to the implementation of
the MRP within one year of the consummation of the Conversion.
The MRP expects to acquire a number of shares of Common Stock equal to 4%
of the Common Stock issued in connection with the Conversion (28,520 shares
based on the issuance of 713,000 shares in the Conversion at the maximum of the
Estimated Valuation Range); provided, however, that if the Savings Bank's
tangible capital ratio under OTS guidelines is less than 10% at the time the MRP
is implemented, the MRP will acquire a number of shares equal to 3% of the
Common Stock issued in connection with the Conversion. Such shares will be
acquired on the open market, if available, with funds contributed by the Holding
Company or the Savings Bank to a trust which the Holding Company may establish
in conjunction with the MRP ("MRP Trust") or from authorized but unissued shares
or treasury shares of the Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company or the Savings Bank to the MRP Trust.
The Board of Directors of the Holding Company may terminate the MRP at any time
and, upon termination, all unallocated shares of Common Stock will revert to the
Holding Company.
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<PAGE>
Shares of Common Stock granted pursuant to the MRP will be in the form of
restricted stock payable ratably over a specified vesting period following the
date of grant. Allocations under the MRP will be at no cost to recipients.
During the period of restriction, all shares will be held in escrow by the
Holding Company or by the MRP Trust. Under OTS regulations, if the MRP is
implemented within the first year following consummation of the Conversion, the
minimum vesting period will be five years. All unvested MRP awards will vest in
the event of the recipient's death or disability. Unvested MRP awards will also
vest following a change in control (as defined in the MRP) of the Holding
Company or the Savings Bank to the extent authorized or not prohibited by
applicable law or regulations. OTS regulations currently provide that, if the
MRP is implemented prior to the first anniversary of the Conversion, vesting may
not be accelerated upon a change in control of the Holding Company or the
Savings Bank.
A recipient of an MRP award in the form of restricted stock generally will
not recognize income upon an award of shares of Common Stock, and the Holding
Company will not be entitled to a federal income tax deduction, until the
termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the Holding Company will be entitled to a deduction in such year and in
the same amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Although no specific award determinations have been made at this time, the
Holding Company and the Savings Bank anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent permitted by applicable regulations. Under current OTS regulations, if
the MRP is implemented within one year of the consummation of the Stock
Conversion, (i) no officer or employee could receive an award of options
covering in excess of 25%, (ii) no nonemployee director could receive in excess
of 5% and (iii) nonemployee directors, as a group, could not receive in excess
of 30%, of the number of shares reserved for issuance under the MRP. The size
of individual awards will be determined prior to submitting the MRP for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for such meeting.
Transactions with the Savings Bank
Federal regulations require 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
comparable transactions with other persons, except for loans made pursuant to
programs generally available to all employees, and must not involve more than
the normal risk of repayment or present other unfavorable features. The Savings
Bank is therefore prohibited from making any new loans or extensions of credit
to the Savings Bank's executive officers and directors at different rates or
terms than those offered to the general public, except for loans made pursuant
to programs generally available to all employees, and has adopted a policy to
this effect. In addition, loans made to a director or executive officer in an
amount that, when aggregated with the amount of all other loans to such person
and his or her related interests, are in excess of the greater of $25,000, or 5%
of the Savings Bank's capital and surplus (up to a maximum of $500,000) must be
approved in advance by a majority of the disinterested members of the Board of
Directors. See "REGULATION -- Federal Regulation of Savings Banks --
Transactions with Affiliates." The aggregate amount of loans by the Savings
Bank to its executive officers and directors was $1,000 at December 31, 1996.
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REGULATION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and
the FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Savings Bank's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Savings Bank's mortgage documents. 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 review the Savings Bank's compliance with various regulatory
requirements. 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 Congress, could have a material adverse impact on the Savings Bank and
its operations.
Federal Regulation of Savings Banks
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. The Savings Bank, as
a member of the FHLB-Pittsburgh, is required to acquire and hold shares of
capital stock in the FHLB-Pittsburgh in an amount equal to the greater of (i)
1.0% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or (ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Pittsburgh.
The Savings Bank is in compliance with this requirement with an investment in
FHLB-Pittsburgh stock of $607,000 at March 31, 1997. Among other benefits, the
FHLB-Pittsburgh provides a central credit facility primarily for member
institutions. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB-Pittsburgh.
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the BIF and the SAIF. As insurer of the Savings Bank's deposits, the
FDIC has examination, supervisory and enforcement authority over the Savings
Bank.
The Savings Bank's accounts are insured by the SAIF to the maximum extent
permitted by law. The Savings Bank pays deposit insurance premiums based on a
risk-based assessment system established by the FDIC. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital -- "well capitalized,"
"adequately capitalized," and "undercapitalized" -- which are defined
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in the same manner as the regulations establishing the prompt corrective action
system, as discussed below. These three groups are then divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates that until September 30, 1996 ranged from 0.23% for
well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken.
Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Savings Bank, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of .065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable accounts plus short-term borrowings.
Monetary penalties may be imposed for failure to meet liquidity requirements.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an institution shall be deemed to be (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-
based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is
not subject to specified requirements to meet and maintain a specific capital
level for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, has a Tier I risk-based capital ratio
of 4.0% or more, has a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well
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capitalized;" (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, has a Tier I risk-based capital ratio that is less
than 4.0% or has a leverage ratio that is less than 4.0% (3.0% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total risk-
based capital ratio that is less than 6.0%, has a Tier I risk-based capital
ratio that is less than 3.0% or has a leverage ratio that is less than 3.0%; and
(v) "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At March 31, 1997, the Savings Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Savings Bank
fails to meet any standard prescribed by the Guidelines, the agency may require
the Savings Bank to submit to the agency an acceptable plan to achieve
compliance with the standard. OTS regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either convert to a national bank charter or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be able
to establish a branch office; (iii) the association shall be ineligible to
obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if
it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or that
65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities
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(where the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; direct or indirect obligations of the FDIC; and loans for
educational purposes, loans to small businesses and loans made through credit
cards. In addition, the following assets, among others, may be included in
meeting the test subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and sold within
90 days of origination; 100% of consumer loans; and stock issued by FHLMC or
FNMA. Portfolio assets consist of total assets minus the sum of (i) goodwill
and other intangible assets, (ii) property used by the savings institution to
conduct its business, and (iii) liquid assets up to 20% of the institution's
total assets. At March 31, 1997, the qualified thrift investments of the
Savings Bank were approximately 94.3% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and non-includable subsidiaries. Institutions
that fail to meet the core capital requirement would be required to file with
the OTS a capital plan that details the steps they will take to reach
compliance. In addition, the OTS's prompt corrective action regulation provides
that a savings institution that has a leverage ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See
"-- Federal Regulation of Savings Banks -- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totalled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a
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conversion schedule. These credit equivalent amounts are then assigned to risk
categories in the same manner as balance sheet assets and included risk-weighted
assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
----
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount. The OTS has postponed the date that the component
will first be deducted from an institution's total capital.
See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a table that sets
forth in terms of dollars and percentages the OTS tangible, core and risk-based
capital requirements, the Savings Bank's historical amounts and percentages at
March 31, 1997 and pro forma amounts and percentages based upon the assumptions
stated therein.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
----
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association. Capital distributions in excess of such
amount require advance notice to the OTS. A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the previous
four quarters depending on how close the association is to meeting its fully
phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval. Tier 3 associations are savings associations with
capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
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The Savings Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Savings Bank's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. At March 31, 1997, the Savings Bank's regulatory
limit on loans to one borrower was $667,000. At March 31, 1997, the Savings
Bank's largest aggregate amount of loans to one borrower was $804,000. These
loans were made prior to the imposition of the current limits.
Activities of Associations and Their Subsidiaries. A savings association
may establish operating subsidiaries to engage in any activity that the savings
association may conduct directly and service corporation subsidiaries to engage
in certain preapproved activities or, with approval of the OTS, other activities
reasonably related to the activities of financial institutions. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guarantee and similar types of
transactions. Any loan or extension of credit by the Savings Bank to an
affiliate must be secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve, as is currently the case with respect to all FDIC-
insured banks.
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The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate 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 requires certain board approval procedures
to be followed. The OTS regulations, with certain minor variances, apply
Regulation O to savings institutions.
Community Reinvestment Act. Banks are also subject to the provisions of
the Community Reinvestment Act of 1977, which requires the appropriate federal
bank regulatory agency, in connection with its regular examination of a bank, to
assess the bank's record in meeting the credit needs of the community serviced
by the bank, including low and moderate income neighborhoods. The regulatory
agency's assessment of the bank's record is made available to the public.
Further, such assessment is required of any bank which has applied, among other
things, to establish a new branch office that will accept deposits, relocate an
existing office or merge or consolidate with, or acquire the assets or assume
the liabilities of, a federally regulated financial institution.
Savings and Loan Holding Company Regulation
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding company,
the Holding Company generally is not subject to activity restrictions under the
HOLA. If the Holding Company acquires control of another savings association as
a separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the OTS
by regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple savings and loan holding
company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Banks -- Qualified Thrift
Lender Test," must, within one year after the date on which the association
ceases to be a QTL, register as and be deemed a bank holding company subject to
all applicable laws and regulations.
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TAXATION
Federal Taxation
General. The Holding Company and the Savings Bank will report their income
on a fiscal year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Savings Bank or the Holding Company.
Bad Debt Reserve. Historically, savings institutions such as the Savings
Bank which met certain definitional tests primarily related to their assets and
the nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Savings Bank's deductions
with respect to "qualifying real property loans," which are generally loans
secured by certain interest in real property, were computed using an amount
based on the Savings Bank's actual loss experience, or a percentage equal to 8%
of the Savings Bank's taxable income, computed with certain modifications and
reduced by the amount of any permitted additions to the non-qualifying reserve.
Due to the Savings Bank's loss experience in recent years, the Savings Bank
generally recognized a bad debt deduction based on actual loss experience.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). Because the Savings Bank
has no post-1987 bad debt reserves, the recapture rules will have no effect on
the net income or federal income tax expense. For taxable years beginning after
December 31, 1995, the Savings Bank's bad debt deduction will be determined
under the experience method using a formula based on actual bad debt experience
over a period of years. The unrecaptured base year reserves will not be
subject to recapture as long as the institution continues to carry on the
business of banking. In addition, the balance of the pre-1988 bad debt reserves
continue to be subject to provision of present law referred to below that
require recapture in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Holding Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a letter amount if the Savings Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental reserve for losses on
loans ("Excess Distributions"), and an amount based on the Excess Distributions
will be included in the Savings Bank's taxable income. Nondividend
distributions include distributions in excess of the Savings Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out
of the Savings Bank's current or accumulated earnings and profits, as calculated
for federal income tax purposes, will not be considered to result in a
distribution from the Savings Bank's bad debt reserve. The amount of additional
taxable income created from an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, after the Conversion, the Savings Bank makes a
"nondividend distribution," then approximately one and one-half times the Excess
Distribution would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and local
taxes). See "REGULATION" and "DIVIDEND POLICY" for limits on the payment of
dividends by the Savings Bank. The Savings Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference
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item for purposes of computing the AMTI. In addition, only 90% of AMTI can be
offset by net operating loss carryovers. AMTI is increased by an amount equal
to 75% of the amount by which the Savings Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess
of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Savings Bank, whether or not an Alternative Minimum
Tax ("AMT") is paid.
Dividends-Received Deduction. The Holding 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 Holding Company and the Savings Bank will not file a consolidated
tax return, except that if the Holding Company or the Savings Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
Audits. The Savings Bank's federal income tax returns have not been
audited within the past five years.
State 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.
THE CONVERSION
The OTS has given approval to the Plan subject to the Plan's approval by
the members of the Savings Bank entitled to vote on the matter and subject to
the satisfaction of certain other conditions imposed by the OTS in its approval.
OTS approval, however, does not constitute a recommendation or endorsement of
the Plan.
General
On April 16, 1997, the Board of Directors of the Savings Bank unanimously
adopted the Plan of Conversion, pursuant to which the Savings Bank will convert
from a federally chartered mutual savings bank to a federally chartered stock
savings bank. All of the capital stock of the Savings Bank will be held by the
Holding Company, a newly formed Pennsylvania corporation. The following
discussion of the Plan of Conversion is qualified in its entirety by reference
to the Plan of Conversion, which is attached as Exhibit A to the Savings Bank's
Proxy Statement and is available from the Savings Bank upon request. The OTS
has approved the Plan of Conversion subject to the Plan's approval by the
members of the Savings Bank entitled to vote on the matter at a Special Meeting
called for that purpose to be held on September 18, 1997, and subject to the
satisfaction of certain other conditions imposed by the OTS in its approval.
The Conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the Savings
Bank. As part of the Conversion, the Savings Bank will transfer all of its
newly issued common stock (1,000 shares) to the Holding Company in exchange for
up to 85% of the net proceeds from the sale of Common Stock by the Holding
Company.
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The Plan of Conversion provides generally that: (i) the Savings Bank will
convert from a federally chartered mutual savings bank to a federally chartered
stock savings bank; (ii) the Common Stock will be offered by the Holding Company
in the Subscription Offering to persons having Subscription Rights and in the
Direct Community Offering to certain members of the general public, with
preference given to natural persons and trusts of natural persons residing in
the Local Community; (iii) if necessary, shares of Common Stock not subscribed
for in the Subscription and Direct Community Offering will be offered to certain
members of the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers pursuant to selected dealers agreements;
and (iv) the Holding Company will purchase all of the capital stock of the
Savings Bank to be issued in connection with the Conversion. The Conversion
will be effected only upon completion of the sale of at least $5,270,000 of
Common Stock to be issued pursuant to the Plan of Conversion.
Consummation of the Conversion is subject to the approval of the Plan of
Conversion by the Savings Bank's members and the approval by the OTS of the Plan
of Conversion and the Holding Company's acquisition of the Savings Bank. The
Holding Company has received approval from the OTS to become the holding company
of the Savings Bank, subject to the satisfaction of certain conditions, and to
acquire all of the common stock of the Savings Bank to be issued in the
Conversion in exchange for up to 85% of the net proceeds from the sale of Common
Stock in the Offerings. The Conversion will be effected only upon completion of
the sale of the shares of Common Stock to be issued by the Holding Company
pursuant to the Plan of Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of December 31, 1995); (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of June 30, 1997); and (iv) Other Members (depositors of the Savings Bank as
of July 31, 1997 and borrowers of the Savings Bank with mortgage loans
outstanding as of July 31, 1997).
Shares of Common Stock not sold in the Subscription and Direct Community
Offering may be offered in the Syndicated Community Offering. Regulations
require that the Direct Community and Syndicated Community Offerings be
completed within 45 days after completion of the Subscription Offering unless
extended by the Savings Bank or the Holding Company with the approval of the
regulatory authorities. If the Syndicated Community Offering is determined not
to be feasible, the Board of Directors of the Savings Bank will consult with the
regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of Common Stock. The Plan of Conversion
provides that the Conversion must be completed within 24 months after the date
of the approval of the Plan of Conversion by the members of the Savings Bank.
No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Syndicated Community Offerings, unless the Plan of
Conversion is approved by the members of the Savings Bank.
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Savings Bank's control. No assurance can be given
as to the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Offerings or other sale of the
Common Stock. If delays are experienced, significant changes may occur in the
estimated pro forma market value of the Holding Company and the Savings Bank as
converted, together with corresponding changes in the net proceeds realized by
the Holding Company from the sale of the Common Stock. In the event the
Conversion is terminated, the Savings Bank would be required to charge all
Conversion expenses against current income.
Orders for shares of Common Stock will not be filled until at least 527,000
shares of Common Stock have been subscribed for or sold and the OTS approves the
final valuation and the Conversion closes. If the Conversion is not completed
within 45 days after the last day of the fully extended Subscription Offering
and the OTS consents to an extension of time to complete the Conversion,
subscribers will be given the right to increase, decrease or rescind their
subscriptions. Unless an affirmative indication is received from subscribers
that they wish to continue to subscribe for shares, the funds will be returned
promptly, together with accrued interest at the Savings Bank's
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passbook rate from the date payment is received until the funds are returned to
the subscriber. If such period is not extended, or, in any event, if the
Conversion is not completed, all withdrawal authorizations will be terminated
and all funds held will be promptly returned together with accrued interest at
the Savings Bank's passbook rate from the date payment is received until the
Conversion is terminated.
Purposes of Conversion
Management of the Savings Bank believes that the Conversion offers a number
of advantages which will be important to the future growth and performance of
the Savings Bank in that it is intended: (i) to improve the overall competitive
position of the Savings Bank in its market area and to support possible future
expansion and diversification of operations (currently there are no specific
plans, arrangements or understandings, written or oral, regarding any such
activities); (ii) to afford members of the Savings Bank and others the
opportunity to become stockholders of the Holding Company and thereby
participate more directly in, and contribute to, any future growth of the
Holding Company and the Savings Bank; and (iii) to provide future access to
capital markets.
The Savings Bank's Board of Directors has formed the Holding Company to
serve upon consummation of the Conversion as a holding company with the Savings
Bank as its subsidiary. The Savings Bank, as a federal mutual savings bank,
does not have stockholders and has no authority to issue capital stock. By
converting to the stock form of organization, the Holding Company and the
Savings Bank will be structured in the form used by holding companies of
commercial banks and by a large number of savings institutions.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Savings
Bank
Voting Rights. Savings members and borrowers will have no voting rights in
the Savings Bank or the Holding Company and therefore will not be able to elect
directors of the Savings Bank or the Holding Company or to control their
affairs. Currently, these rights are accorded to members of the Savings Bank.
Subsequent to the Conversion, voting rights will be vested exclusively in the
Holding Company with respect to the Savings Bank and the holders of the Common
Stock as to matters pertaining to the Holding Company. Each holder of Common
Stock shall be entitled to vote on any matter to be considered by the
stockholders of the Holding Company. A stockholder will be entitled to one vote
for each share of Common Stock owned.
Savings Accounts and Loans. The Savings Bank's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion will not affect the
loan accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Savings Bank.
Tax Effects. The Savings Bank has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Savings Bank
in its mutual or stock form by reason of its Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Savings Bank immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Savings Bank in
its mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Savings Bank immediately after the Conversion
will be the same as the tax basis of their accounts immediately prior to
Conversion; (iv) the tax basis of each account holder's interest in the
liquidation account will be zero; (v) the tax basis of the Common Stock
purchased in the Conversion will be the amount paid and the holding period for
such stock will commence at the date of purchase; and (vi) no gain or loss will
be recognized to account holders upon the receipt or exercise of Subscription
Rights in the Conversion, except to the extent Subscription Rights are deemed to
have value as discussed below. Unlike a private letter ruling issued by the
IRS, an opinion of counsel is not binding on the IRS and the IRS could disagree
with the conclusions reached therein. In the event of such disagreement, no
assurance can be given that the conclusions reached in an opinion of counsel
would be sustained by a court if contested by the IRS.
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Based upon past rulings issued by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan will be taxable to the
extent, if any, that the Subscription Rights are deemed to have a fair market
value. Feldman Financial, a financial consulting firm retained by the Savings
Bank, whose findings are not binding on the IRS, has indicated that the
Subscription Rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration and afford the recipients the right only to purchase shares of the
Common Stock at a price equal to its estimated fair market value, which will be
the same price paid by purchasers in the Direct Community Offering for
unsubscribed shares of Common Stock. If the Subscription Rights are deemed to
have a fair market value, the receipt of such rights may only be taxable to
those Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members who exercise their Subscription Rights. The Savings Bank could also
recognize a gain on the distribution of such Subscription Rights. Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members are
encouraged to consult with their own tax advisors as to the tax consequences in
the event the Subscription Rights are deemed to have a fair market value.
The Savings Bank has also received an opinion from S.R. Snodgrass, A.C.,
Wexford, Pennsylvania, that, assuming the Conversion does not result in any
federal income tax liability to the Savings Bank, its account holders, or the
Holding Company, implementation of the Plan of Conversion will not result in any
Pennsylvania income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and S.R. Snodgrass, A.C. and the letter
from Feldman Financial are filed as exhibits to the Registration Statement. See
"ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Savings Bank in its present mutual form, each depositor in the Savings Bank
would receive a pro rata share of any assets of the Savings Bank remaining after
payment of claims of all creditors (including the claims of all depositors up 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 or her
deposit account to the total value of all deposit accounts in the Savings Bank
at the time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the Savings
Bank, including certificates of deposit ("Savings Account(s)"), shall not be
entitled to share in any residual assets in the event of liquidation of the
Savings Bank. However, pursuant to OTS regulations, the Savings Bank shall, at
the time of the Conversion, establish a liquidation account in an amount equal
to its total equity as of the date of the latest statement of financial
condition contained herein.
The liquidation account shall be maintained by the Savings Bank subsequent
to the Conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Savings Bank.
Each Eligible Account Holder and Supplemental Eligible Account Holder shall,
with respect to each Savings Account held, have a related inchoate interest in a
portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Savings Bank subsequent to December 31,
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1995 is less than the lesser of (i) the deposit balance in such Savings Account
at the close of business on any other annual closing date subsequent to December
31, 1995 or June 30, 1997 or (ii) the amount of the "qualifying deposit" in such
Savings Account on December 31, 1995 or June 30, 1997, then the subaccount
balance for such Savings Account shall be adjusted by reducing such subaccount
balance in an amount proportionate to the reduction in such deposit balance. In
the event of a downward adjustment, such subaccount balance shall not be
subsequently increased, notwithstanding any increase in the deposit balance of
the related Savings Account. If any such Savings Account is closed, the related
subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Savings Bank (and only in
such event) each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance(s) for Savings Account(s) then held by such holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of Savings Accounts and other
liabilities or similar transactions with another federally insured institution
in which the Savings Bank is not the surviving institution shall be considered
to be a complete liquidation. In any such transaction the liquidation account
shall be assumed by the surviving institution.
The Subscription, Direct Community and Syndicated Community Offerings
The Subscription and Direct Community Offering will expire at 11:00 a.m.,
Eastern Time, on the Expiration Date, unless extended or continued by the
Holding Company and the Savings Bank, with the approval of the OTS, if
necessary.
Subscription Offering. In accordance with the Plan, nontransferable
Subscription Rights to purchase the Common Stock have been issued to all persons
and entities entitled to purchase the Common Stock in the Subscription Offering.
The amount of the Common Stock which these parties may purchase will be subject
to the availability of the Common Stock for purchase under the categories set
forth in the Plan. Subscription priorities have been established for the
allocation of stock to the extent that the Common Stock is available. These
priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at the Savings Bank as of December 31, 1995 will receive
nontransferable Subscription Rights to subscribe for up to the greater of
$50,000 of Common Stock, one-tenth of one percent of the total offering of
Common Stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of Subscription
Rights in this category results in an oversubscription, shares of Common Stock
will be allocated among subscribing Eligible Account Holders so as to permit
each Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make such person's total allocation equal to 100 shares or
the number of shares actually subscribed for, whichever is less. 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. Subscription Rights received by
officers and directors in this category based on their increased deposits in the
Savings Bank in the one year period preceding December 31, 1995 are subordinated
to the Subscription Rights of other Eligible Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 8% of the shares
of Common Stock issued in the Conversion. The ESOP intends to purchase 8% of
the shares of Common Stock issued in the Conversion. In the event the number of
shares offered in the Conversion is increased above the maximum of the Estimated
Valuation Range, the ESOP shall have a priority right to purchase any such
shares exceeding the maximum of the Estimated Valuation Range up to an aggregate
of 8% of the Common Stock.
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Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of June 30, 1997 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $50,000 of Common
Stock, one-tenth of one percent of the total offering of Common Stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of Subscription Rights in this category results in an oversubscription,
shares of Common Stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make such
person's total allocation equal to 100 shares or the number of shares actually
subscribed for, whichever is less. Any shares remaining after that allocation
will be allocated among the subscribing Supplemental Eligible Account Holders
whose subscriptions remain unsatisfied in the proportion that the amount of the
qualifying deposit of each Supplemental Eligible Account Holder whose
subscription remains unsatisfied bears to the total amount of the qualifying
deposits of all Supplemental Eligible Account Holders.
Category 4: Other Members. Each depositor of the Savings Bank as of the
Voting Record Date and each borrower with a mortgage loan outstanding as of the
Voting Record Date will receive nontransferable Subscription Rights to purchase
up to $50,000 of Common Stock to the extent shares are available following
subscriptions by Eligible Account Holders, the Savings Bank's ESOP and
Supplemental Eligible Account Holders. In the event of an oversubscription in
this category, the available shares will be allocated among subscribing Other
Members proportionately, based on the amounts of their respective subscriptions.
Subscription Rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for Common Stock in the Subscription
Offering or subscribing for Common Stock on behalf of another person will be
subject to forfeiture of such rights and possible further sanctions and
penalties imposed by the OTS or another agency of the U.S. Government. Each
person exercising Subscription Rights will be required to certify that he or she
is purchasing such shares solely for his or her own account and that he or she
has no agreement or understanding with any other person for the sale or transfer
of such shares. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED OR
MODIFIED WITHOUT THE CONSENT OF THE SAVINGS BANK AND THE HOLDING COMPANY.
The Subscription Offering and all Subscription Rights under the Plan will
expire at 11:00 a.m., Eastern Time, on the Expiration Date, whether or not the
Savings Bank has been able to locate each person entitled to such Subscription
Rights. The Subscription Offering may be extended by the Holding Company and
the Savings Bank up to October 6, 1997 without the OTS's approval. OTS
regulations require that the Holding Company complete the sale of Common Stock
within 45 days after the close of the Subscription Offering. If the sale of
Common Stock is not completed within such period, all funds received will be
promptly returned with interest at the Savings Bank's passbook rate and all
withdrawal authorizations will be canceled. If regulatory approval of an
extension of the time period has been granted, all subscribers will be notified
of such extension and of the duration of any extension that has been granted,
and will be given the right to increase, decrease or rescind their orders. If an
affirmative response to any resolicitation is not received by the Holding
Company from a subscriber, the subscriber's order will be rescinded and all
funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled). No single extension can exceed 90 days.
Direct Community Offering. Concurrently with the Subscription Offering,
the Holding Company is offering shares of Common Stock to certain members of the
general public in a Direct Community Offering, with preference given to natural
persons and trusts of natural persons residing in the Local Community.
Purchasers in the Direct Community Offering are eligible to purchase up to
$50,000 of Common Stock. In the event an insufficient number of shares are
available to fill orders in the Direct Community Offering, the available shares
will be allocated among prospective purchases proportionally, based on the
amounts of their respective orders. The Direct Community Offering will
terminate at 11:00 a.m., Eastern Time, on the Expiration Date unless extended by
the Holding Company and the Savings Bank, with approval of the OTS, if
necessary. Any extensions beyond 45 days
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after the close of the Subscription Offering would require a resolicitation of
orders, wherein subscribers would be given the opportunity to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Savings Bank's
passbook rate, or be permitted to modify or cancel their orders. The right of
any person to purchase shares in the Direct Community Offering is subject to the
absolute right of the Holding Company and the Savings Bank to accept or reject
such purchases in whole or in part. If an order is rejected in part, the
purchaser does not have the right to cancel the remainder of the order. The
Holding Company presently intends to terminate the Direct Community Offering as
soon as it has received orders for all shares available for purchase in the
Conversion.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering.
Syndicated Community Offering. The Plan provides that, if necessary, all
shares of Common Stock not purchased in the Subscription and Direct Community
Offering, if any, may be offered for sale to certain members of the general
public in a Syndicated Community Offering through a syndicate of registered
broker-dealers to be formed and managed by Ryan, Beck acting as agent of the
Holding Company. Ryan, Beck may be included as a member of the selling group.
The Holding 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.
Common Stock sold in the Syndicated Community Offering will be sold at the
$10.00 Purchase Price, the same price as all other shares in the Offering. See
"-- Stock Pricing and Number of Shares to be Issued." No person will be
permitted to subscribe in the Syndicated Community Offering for more than
$50,000 of Common Stock. See "-- Marketing and Underwriting Arrangements" for a
description of the commission to be paid to the selected dealers and to Ryan,
Beck.
Payments made in the form of a check, money order or in cash will earn
interest at the Savings Bank's passbook rate from the date such payment is
actually received by the Savings Bank until completion or termination of the
Conversion.
Ryan, Beck may enter into agreements with selected dealers to assist in the
sale of shares in the Syndicated Community Offering. If a syndicate of broker-
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
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of the Common Stock. Any certificates returned as undeliverable will be
disposed of in accordance with applicable law.
The Syndicated Community Offering may terminate no more than 45 days
following the expiration of the Subscription Offering, unless extended by the
Holding Company with the approval of the OTS.
In the event the Savings Bank is unable to find purchasers from the general
public for all unsubscribed shares, other purchase arrangements will be made by
the Board of Directors of the Savings Bank, if feasible. Such other
arrangements will be subject to the approval of the OTS. The OTS may grant one
or more extensions of the offering period, provided that (i) no single extension
exceeds 90 days, (ii) subscribers are given the right to increase, decrease or
rescind their subscriptions during the extension period, and (iii) the
extensions do not go more than two years beyond the date on which the members
approved the Plan. If the Conversion is not completed within 45 days after the
close of the Subscription Offering, either all funds received will be returned
with interest (and withdrawal authorizations canceled) or, if the OTS has
granted an extension of time, all subscribers will be given the right to
increase, decrease or rescind their subscriptions at any time prior to 20 days
before the end of the extension period. If an extension of time is obtained,
all subscribers will be notified of such extension and of their rights to modify
their orders. If an affirmative response to any resolicitation is not received
by the Holding Company from a subscriber, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest (or
withdrawal authorizations will be canceled).
Persons in Non-Qualified States. The Holding 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 Holding Company and the Savings Bank 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: (i) a small number of persons otherwise eligible to subscribe for shares
of Common Stock reside in such state; (ii) the granting of Subscription Rights
or offer or sale of shares of Common Stock to such persons would require the
Holding Company to register, under the securities laws of such state, as a
broker or dealer or to register or otherwise qualify the Common Stock for sale
in such state; or (iii) such registration or qualification would be impractical
for reasons of cost or otherwise. Where the number of persons eligible to
subscribe for shares in one state is small, the Holding Company and the Savings
Bank will base their decision as to whether or not to offer the Common stock in
such state on a number of factors, including the size of accounts held by
account holders in the state and the cost of registering or qualifying the
shares.
Limitations on Purchases of Shares
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of Common Stock by eligible subscribers and others in the
Conversion. Each subscriber must subscribe for a minimum of 25 shares. With
the exception of the ESOP, which is expected to purchase 8% of the shares of
Common Stock issued in the Conversion, no person or entity may purchase more
than $50,000 of Common Stock in the Conversion; and no person or entity,
together with associates of and persons acting in concert with such person or
entity, may purchase in the aggregate more than $85,000 of Common Stock in the
Conversion. Officers, directors and their associates may not purchase, in the
aggregate, more than 34% of the shares of Common Stock offered in the
Conversion. For purposes of the Plan, the directors are not deemed to be acting
in concert solely by reason of their Board membership. Pro rata reductions
within each Subscription Rights category will be made in allocating shares to
the extent that the maximum purchase limitations are exceeded.
The Savings Bank's and the Holding Company's Boards of Directors may, in
their sole discretion, increase the maximum purchase limitation set forth above
up to 9.99% of the shares of Common Stock sold in the Conversion, provided that
orders for shares which exceed 5% of the shares of Common Stock sold in the
Conversion may not exceed, in the aggregate, 10% of the shares sold in the
Conversion. The Savings Bank and the Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of
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the Estimated Valuation Range. If the Boards of Directors decide to increase
the purchase limitation, all persons who subscribed for the maximum number of
shares will be given the opportunity to increase their subscriptions
accordingly, subject to the rights and preferences of any person who has
priority Subscription Rights.
The term "acting in concert" is defined in the Plan to mean: (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (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. In
general, a person who acts in concert with another other party shall also be
deemed to be acting in concert with any person who is also acting in concert
with that other party. The Holding Company and the Savings Bank may presume
that certain persons are acting in concert based upon, among other things, joint
account relationships and the fact that such persons have filed joint Schedules
13D with the SEC with respect to other companies.
The term "associate" of a person is defined in the Plan to mean: (i) any
corporation or organization (other than 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 class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity (excluding tax-qualified employee plans); 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 any of its parents or subsidiaries. For example, a corporation
of which a person serves as an officer would be an associate of such person,
and, therefore, all shares purchased by such corporation would be included with
the number of shares which such person could purchase individually under the
above limitations.
The term "officer" is defined in the Plan to mean an executive officer of
the Savings Bank, including its Chairman of the Board, President, Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents in charge of principal
business functions, Secretary and Treasurer.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Savings Bank and the Holding Company and by National Association of Securities
Dealers, Inc. ("NASD") members. See "-- Restrictions on Transferability by
Directors and Officers and NASD Members."
Marketing and Underwriting Arrangements
The Savings Bank and the Holding Company have engaged Ryan, Beck as a
consultant and financial 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.
Ryan, Beck is not obligated to take or purchase any shares of Common Stock in
the Offerings. Based upon negotiations with the Savings Bank and the Holding
Company concerning fee structure, Ryan, Beck will receive an advisory and
management fee of $25,000 in consideration for providing certain advisory and
administrative services in connection with the Conversion and a marketing fee
equal to 1.5% of the aggregate Purchase Price of Common Stock sold in the
Subscription Offering and a marketing fee of 1.5% of the aggregate Purchase
Price of Common Stock sold in the Community Offering. No fees will be paid to
Ryan, Beck on purchases in the Subscription Offering or in the Direct Community
Offering by any director, officer or employee of the Holding Company or the
Savings Bank or members of their immediate families or by the ESOP. In the
event that a selected dealers agreement is entered into in connection with a
Syndicated Community Offering, the Savings Bank will pay a fee to such selected
dealers of 5.5% for shares sold by an NASD member firm pursuant to a selected
dealers agreement. The minimum fee payable to Ryan, Beck is $100,000 and the
maximum marketing fee payable for shares sold in the Subscription and Direct
Community Offering is 1.5% of aggregate Purchase Price at the midpoint of the
Estimated Valuation Range. 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 in an
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amount not to exceed $7,500 without the prior approval of the Holding Company
and the Savings Bank, and for legal fees of its counsel up to $30,000. The
Holding Company and the Savings Bank have agreed to indemnify Ryan, Beck for
reasonable costs and expenses in connection with certain claims or liabilities,
including certain liabilities under the Securities Act. Ryan, Beck has received
advances towards its fees totalling $12,500. Total marketing fees to Ryan, Beck
are expected to be approximately $100,000 and $118,000 at the minimum and the
maximum of the Estimated Valuation Range, respectively. See "PRO FORMA DATA"
for the assumptions used to arrive at these estimates.
Description of Sales Activities
The Common Stock will be offered in the Subscription and Direct Community
Offering principally by the distribution of this Prospectus and through
activities conducted at the Savings Bank's Stock Information Center at its main
office facility. The Stock Information Center is expected to operate during
normal business hours throughout the Subscription and Direct Community Offering.
It is expected that at any particular time, one or more Ryan, Beck employees
will be working at the Stock Information Center. Such employees of Ryan, Beck
will be responsible for mailing materials relating to the Subscription and
Direct Community Offering, responding to questions regarding the Conversion and
the Subscription and Direct Community Offering and processing stock orders.
Sales of Common Stock will be made by registered representatives affiliated
with Ryan, Beck or by the selected dealers managed by Ryan, Beck. The
management and employees of the Savings Bank may participate in the Offerings in
clerical capacities, providing administrative support in effecting sales
transactions or, when permitted by state securities laws, answering questions of
a mechanical nature relating to the proper execution of the Order Form.
Management of the Savings Bank may answer questions regarding the business of
the Savings Bank when permitted by state securities laws. Other questions of
prospective purchasers, including questions as to the advisability or nature of
the investment, will be directed to registered representatives. The management
and employees of the Holding Company and the Savings Bank have been instructed
not to solicit offers to purchase Common Stock or provide advice regarding the
purchase of Common Stock.
No officer, director or employee of the Savings Bank or the Holding Company
will be compensated, directly or indirectly, for any activities in connection
with the offer or sale of securities issued in the Conversion.
None of the Savings Bank's personnel participating in the Subscription and
Direct Community Offering is registered or licensed as a broker or dealer or an
agent of a broker or dealer. The Savings Bank's personnel will assist in the
above-described sales activities pursuant to an exemption from registration as a
broker or dealer provided by Rule 3a4-1 ("Rule 3a4-1") promulgated under the
Exchange Act. Rule 3a4-1 generally provides that an "associated person of an
issuer" of securities shall not be deemed a broker solely by reason of
participation in the sale of securities of such issuer if the associated person
meets certain conditions. Such conditions include, but are not limited to, that
the associated person participating in the sale of an issuer's securities not be
compensated in connection therewith at the time of participation, that such
person not be associated with a broker or dealer and that such person observe
certain limitations on his or her participation in the sale of securities. For
purposes of this exemption, "associated person of an issuer" is defined to
include any person who is a director, officer or employee of the issuer or a
company that controls, is controlled by or is under common control with the
issuer.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offering
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under 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. The Savings Bank will accept
for processing only orders submitted on Order Forms.
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To purchase shares in the Subscription and Direct Community Offering, an
executed Order Form with the required full payment for each share subscribed
for, or with appropriate authorization for withdrawal of full payment from the
subscriber's deposit account with the Savings Bank (which may be given by
completing the appropriate blanks in the Order Form), must be received by the
Savings Bank by 11:00 a.m., 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 without appropriate withdrawal instructions) are not
required to be accepted. In addition, the Savings Bank is not obligated to
accept orders submitted on photocopied or telecopied Order Forms. The Holding
Company and the Savings Bank have the right to waive or permit the correction of
incomplete or improperly executed Order Forms, but do not represent that they
will do so. Pursuant to the Plan of Conversion, the interpretation by the
Holding Company and the Savings Bank of the terms and conditions of the Plan of
Conversion and of the Order Form will be final. 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 Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1995) and/or the Supplemental Eligibility Record Date (June 30, 1997) and/or the
Voting Record Date (July 31, 1997) must list all accounts on the Order Form
giving all names in each account and the account number. Failure to list an
account could result in fewer shares being allocated in the event of an
oversubscription than if all accounts had been disclosed.
Full payment for subscriptions may be made (i) in cash if delivered in
person at 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. Appropriate means by which such withdrawals may be authorized are
provided on the Order Form. No wire transfers will be accepted. Interest will
be paid on payments made by cash, check, bank draft or money order at the
Savings Bank's passbook rate from the date payment is received until the
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 (unless the
certificate matures after the date of receipt of the Order Form but prior to
closing, in which case funds will earn interest at the passbook rate from the
date of maturity until consummation 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. At the completion or termination
of the Conversion, the funds received in the Offerings will be used to purchase
the shares of Common Stock ordered. The shares issued in the Conversion cannot
and will not be insured by the FDIC or any other government agency. In the
event that the Conversion is not consummated for any reason, all funds submitted
will be promptly refunded with interest as described above.
If a subscriber authorizes the Savings Bank to withdraw the amount of the
aggregate Purchase Price from his or her deposit account, the Savings Bank will
do so as of the effective date of Conversion, though the account must contain
the full amount necessary for payment at the time the subscription order is
received. 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 canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Savings Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather may pay for such shares of Common Stock subscribed for at
the Purchase Price upon consummation of the Conversion, provided that there is
in force from the time of its subscription until such time, a loan commitment
from an unrelated financial institution or the Holding Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
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Individual Retirement Accounts ("IRAs") maintained in the Savings Bank do
not permit investment in the Common Stock. A depositor interested in using his
or her IRA funds to purchase Common Stock must do so through a self-directed
IRA. Since the Savings Bank does not offer such accounts, it will allow such a
depositor to make a trustee-to-trustee transfer of the IRA funds to a trustee
offering a self-directed IRA program with the agreement that such funds will be
used to purchase the Holding Company's Common Stock in the Offerings. There
will be no early withdrawal or IRS interest penalties for such transfers. The
new trustee would hold the Common Stock in a self-directed account in the same
manner as the Savings Bank now holds the depositor's IRA funds. An annual
administrative fee may be payable to the new trustee. Depositors interested in
using funds in a Savings Bank IRA to purchase Common Stock should contact the
Stock Information Center at the Savings Bank as soon as practicable so that the
necessary forms may be forwarded for execution and returned prior to the
Expiration Date. In addition, the provisions of ERISA and IRS regulations
require that officers, directors and 10% stockholders who use self-directed IRA
funds to purchase shares of Common Stock in the Subscription and Community
Offering make such purchases for the exclusive benefit of IRAs.
Certificates representing shares of Common Stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed Order Forms or to the last address of such persons appearing
on the records of the Savings Bank 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. Until
certificates for the Common Stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of Common Stock which they
purchased, even though trading of the Common Stock may have commenced.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the Conversion be based upon an estimated pro
forma value of the Holding Company and the Savings Bank as converted (i.e.,
----
taking into account the expected receipt of proceeds from the sale of securities
in the Conversion), as determined by an independent appraisal. The Savings Bank
and the Holding Company have retained Feldman Financial to prepare an appraisal
of the pro forma market value of the Holding Company and the Savings Bank as
converted, as well as a business plan. Feldman Financial will receive a fee
expected to total approximately $12,500 for its appraisal services and
preparation of a business plan, plus reimbursement for reasonable out-of-pocket
expenses incurred in connection with the appraisal. The Savings Bank has agreed
to indemnify Feldman Financial under certain circumstances against liabilities
and expenses (including legal fees) arising out of, related to, or based upon
the Conversion.
Feldman Financial has prepared an appraisal of the estimated pro forma
market value of the Holding Company and the Savings Bank as converted taking
into account the formation of the Holding Company as the holding company for the
Savings Bank. For its analysis, Feldman Financial undertook substantial
investigations to learn about the Savings Bank's business and operations.
Management supplied financial information, including annual financial
statements, information on the composition of assets and liabilities, and other
financial schedules. In addition to this information, Feldman Financial
reviewed the Savings Bank's Form AC Application for Approval of Conversion and
the Holding Company's Form SB-2 Registration Statement. Furthermore, Feldman
Financial visited the Savings Bank's facilities and had discussions with the
Savings Bank's management and its special conversion legal counsel, Breyer &
Aguggia. No detailed individual analysis of the separate components of the
Holding Company's or the Savings Bank's assets and liabilities was performed in
connection with the evaluation.
In estimating the pro forma market value of the Holding Company and the
Savings Bank as converted, as required by applicable regulatory guidelines,
Feldman Financial's analysis utilized three selected valuation procedures, the
Price/Book ("P/B") method, the Price/Earnings ("P/E") method, and Price/Assets
("P/A") method, all of which are described in its report. Feldman Financial
placed the greatest emphasis on the P/E and P/B methods in estimating pro forma
market value. In applying these procedures, Feldman Financial reviewed, among
other factors, the economic make-up of the Savings Bank's primary market area,
the Savings Bank's financial performance and
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condition in relation to publicly-traded institutions that Feldman Financial
deemed comparable to the Savings Bank, the specific terms of the offering of the
Holding Company's Common Stock, the pro forma impact of the additional capital
raised in the Conversion, conditions of securities markets in general, and the
market for thrift institution common stocks in particular. Feldman Financial's
analysis provides an approximation of the pro forma market value of the Holding
Company and the Savings Bank as converted based on the valuation methods applied
and the assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of the Holding Company after the
Conversion that were utilized in determining the appraised value. These
assumptions included expenses as described under "PRO FORMA DATA," an assumed
after-tax rate of return on the net Conversion proceeds of 3.71%, purchases by
the ESOP of 8% of the stock sold in the Conversion and purchases in the open
market by the MRP of a number of shares equal to 4% of the stock sold in the
Conversion at the Purchase Price. See "PRO FORMA DATA" for additional
information concerning these assumptions. The use of different assumptions may
yield somewhat different results.
On the basis of the foregoing, Feldman Financial has advised the Holding
Company and the Savings Bank that, in its opinion, as of June 23, 1997, the
aggregate estimated pro forma market value of the Holding Company and the
Savings Bank as converted and, therefore, the Common Stock was within the
valuation range of $5,270,000 to $7,130,000 with a midpoint of $6,200,000.
After reviewing the methodology and the assumptions used by Feldman Financial in
the preparation of the appraisal, the Board of Directors established the
Estimated Valuation Range, which is equal to the valuation range of $5,270,000
to $7,130,000 with a midpoint of $6,200,000. In determining the reasonableness
and adequacy of the appraisal, consistent with OTS regulations and policies, the
Board of Directors reviewed the methodology and reasonableness of the
assumptions utilized by Feldman Financial in the preparation of the appraisal.
Assuming that the shares are sold at $10.00 per share in the Conversion, the
estimated number of shares would be between 527,000 and 713,000 with a midpoint
of 620,000. The Purchase Price of $10.00 was determined by discussion among the
Boards of Directors of the Savings Bank and the Holding Company and Ryan, Beck,
taking into account, among other factors (i) the requirement under OTS
regulations that the Common Stock be offered in a manner that will achieve the
widest distribution of the stock and (ii) desired liquidity in the Common Stock
subsequent to the Conversion. Since the outcome of the Offerings relate in
large measure to market conditions at the time of sale, it is not possible to
determine the exact number of shares that will be issued by the Holding Company
at this time. The Estimated Valuation Range may be amended, with the approval
of the OTS, if necessitated by developments following the date of such appraisal
in, among other things, market conditions, the financial condition or operating
results of the Savings Bank, regulatory guidelines or national or local economic
conditions.
Feldman Financial's appraisal report is filed as an exhibit to the
Registration Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription Offering, at least the minimum
number of shares are subscribed for, Feldman Financial, after taking into
account factors similar to those involved in its prior appraisal, will determine
its estimate of the pro forma market value of the Holding Company and the
Savings Bank as converted, as of the close of the Subscription Offering.
No sale of the shares will take place unless prior thereto Feldman
Financial confirms to the OTS that, to the best of Feldman Financial's knowledge
and judgment, nothing of a material nature has occurred that would cause it to
conclude that the actual total purchase price on an aggregate basis was
incompatible with its estimate of the total pro forma market value of the
Holding Company and the Savings Bank as converted at the time of the sale. If,
however, the facts do not justify such a statement, the Offerings or other sale
may be canceled, a new Estimated Valuation Range and price per share set and new
Subscription, Direct Community and Syndicated Community Offerings held. Under
such circumstances, subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced.
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Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares shown above. In the
event the total amount of shares issued is less than 527,000 or more than
819,950 (15% above the maximum of the Estimated Valuation Range), for aggregate
gross proceeds of less than $5,270,000 or more than $8,199,500, subscription
funds will be returned promptly with interest to each subscriber unless he
indicates otherwise. In the event a new valuation range is established by
Feldman Financial, such new range will be subject to approval by the OTS.
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Savings Bank and the Holding Company, if possible.
Such other purchase arrangements will be subject to the approval of the OTS and
may provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided in the Plan
of Conversion and in excess of the proposed director purchases set forth herein,
although no such purchases are currently intended. If such other purchase
arrangements cannot be made, the Plan will terminate.
In formulating its appraisal, Feldman Financial relied upon the
truthfulness, accuracy and completeness of all documents the Savings Bank
furnished it. Feldman Financial also considered financial and other information
from regulatory agencies, other financial institutions, and other public
sources, as appropriate. While Feldman Financial believes this information to
be reliable, Feldman Financial does not guarantee the accuracy or completeness
of such information and did not independently verify the financial statements
and other data provided by the Savings Bank and the Holding Company or
independently value the assets or liabilities of the Holding Company and the
Savings Bank. The appraisal by Feldman Financial is not intended to be, and
must not be interpreted as, a recommendation of any kind as to the advisability
of voting to approve the Conversion or of purchasing shares of Common Stock.
Moreover, because the appraisal is necessarily based on many factors which
change from time to time, there is no assurance that persons who purchase such
shares in the Conversion will later be able to sell shares thereafter at prices
at or above the Purchase Price.
Restrictions on Repurchase of Stock
Upon consummation of the Conversion, the Board of Directors of the Holding
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements, including the OTS regulations applicable
for three years from the date of consummation of the Conversion. Pursuant to
OTS regulations, OTS-regulated savings associations (and their holding
companies) may not for a period of three years from the date of an institution's
mutual-to-stock conversion repurchase any of its common stock from any person,
except in the event of: (i) an offer made to all of its stockholders to
repurchase the common stock on a pro rata basis, approved by the OTS; or (ii)
the repurchase of qualifying shares of a director; or (iii) a purchase in the
open market by a tax-qualified or non-tax-qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan. Furthermore,
repurchases are prohibited if the effect thereof would cause the association's
regulatory capital to be reduced below (a) the amount required for the
liquidation account or (b) the regulatory capital requirements imposed by the
OTS. Repurchases are generally prohibited during the first year following
conversion although the OTS may consider repurchases in the second six months
after conversion on a case-by-case basis. Upon ten days' written notice to the
OTS, and if the OTS does not object, an institution may make open market
repurchases of its outstanding common stock during years two and three following
the conversion, provided that (x) no more than 5% of the outstanding common
stock is to be purchased during any 12-month period, (y) the repurchases do not
cause the association to become undercapitalized as defined under the OTS prompt
corrective action regulations and (z) the repurchase would not adversely affect
the financial condition of the association.
Shares to be Purchased by Management Pursuant to Subscription Rights
The following table sets forth certain information as to the approximate
purchases of Common Stock by each director and executive officer of the Savings
Bank, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement with respect to such intended
purchases. Directors
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and officers of the Savings Bank and their associates may not purchase in excess
of 34% of the shares sold in the Conversion and, therefore, actual purchases
could be more or less than indicated below. For purposes of the following
table, it has been assumed that sufficient shares will be available to satisfy
subscriptions in all categories. Directors, officers and employees will pay the
same price for the shares for which they subscribe as the price that will be
paid by all other subscribers.
<TABLE>
<CAPTION>
Percent of Percent of
Shares at Shares at
Minimum of Maximum of
Name and Anticipated Number of Anticipated Dollar Estimated Estimated
Position Shares Purchased(1) Amount Purchased Valuation Range Valuation Range
- ------------------------------ ------------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Thomas F. Angotti 8,500 $ 85,000 1.61% 1.19%
President, Chief Executive
Officer and Director
Guy Dille 5,000 50,000 0.95 0.70
Director
George C. Dorsch 5,000 50,000 0.95 0.70
Director
Edward W. Preskar 5,000 50,000 0.95 0.70
Director
James G. Caliendo 200 2,000 0.04 0.04
Director
Vincent C. Ashoff 8,500 85,000 1.61 1.19
Chief Financial Officer
Paul F. Hoyson 5,000 50,000 0.95 0.70
------ -------- ---- ----
Senior Vice President
Total 37,200 $372,000 7.06% 5.22%
====== ======== ==== ====
</TABLE>
_____________
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. For a description of the
number of shares to be purchased by the ESOP and issued or reserved under
the MRP and Stock Option Plan, see "MANAGEMENT OF THE SAVINGS BANK --
Benefits -- Employee Stock Ownership Plan," "-- Benefits -- Stock Option
Plan" and "-- Benefits -- Management Recognition Plan."
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of Common Stock purchased in the Offerings by directors and officers
of the Holding Company may not be sold for a period of one year following
consummation of the Conversion, except in the event of the death of the
stockholder or in any exchange of the Common Stock in connection with a merger
or acquisition of the Holding Company. Shares of Common Stock received by
directors or officers through the ESOP or the MRP or upon exercise of options
issued pursuant to the Stock Option Plan or purchased subsequent to the
Conversion are not subject to this restriction. Accordingly, shares of Common
Stock issued by the Holding Company to directors and officers shall bear a
legend giving appropriate notice of the restriction, and, in addition, the
Holding Company will
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give appropriate instructions to the transfer agent for the Holding Company's
Common Stock with respect to the restriction on transfers. Any shares issued to
directors and officers as a stock dividend, stock split or otherwise with
respect to restricted Common Stock shall be subject to the same restrictions.
Purchases of outstanding shares of Common Stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of 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 Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement under
the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion. 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 Common Stock purchased by persons who are not affiliates
of the Holding Company may be resold without registration. Shares purchased by
an affiliate of the Holding Company will be subject to the resale restrictions
of Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, each
affiliate of the Holding 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 Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks. Provision may be made in the future by the Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with Subscription Rights and to certain reporting
requirements upon purchase of such securities.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal law
and regulations and Pennsylvania corporate law, as well as the Articles of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Articles of Incorporation and Bylaws of the Holding
Company. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these
documents.
Conversion Regulations
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a
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selling group acting on the converting institution's (or its holding company's)
behalf for resale to the general public are excepted. The regulation also
provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
Change of Control Regulations
OTS Regulations. Under the Change in Bank Control Act, no person may
acquire control of an insured federal savings association or its parent holding
company unless the OTS has been given 60 days' prior written notice and has not
issued a notice disapproving the proposed acquisition. In addition, OTS
regulations provide 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.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquiror being one of the two largest stockholders. The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies that acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification form that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable. There are also rebuttable presumptions in
the regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.
Pennsylvania Corporate Law
In addition to provisions which may be contained in the Holding Company's
Articles of Incorporation, the PBCL includes certain provisions applicable to
Pennsylvania corporations, such as the Holding Company, which may be deemed to
have an anti-takeover affect. Such provisions include (i) rights of
stockholders to receive the fair 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 PBCL allows 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
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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.
Under the PBCL, 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 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.
The PBCL 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 reclassification 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.
Furthermore, under the PBCL, 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 PBCL 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.
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The PBCL also 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 PBCL 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 PBCL 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.
Anti-takeover Provisions in the Holding Company's Articles of Incorporation and
Bylaws and Pennsylvania Law
A number of provisions of the Holding 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 Holding Company's Articles of Incorporation and Bylaws and
regulatory provisions relating to stock ownership and transfers, the Board of
Directors and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the Board of Directors but
which individual Holding 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 incumbent Board of
Directors or management of the Holding Company more difficult. The following
description of certain of the provisions of the Articles of Incorporation and
Bylaws of the Holding 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. The Articles of Incorporation of the Holding
Company provide that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of common
stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit, unless permitted by a resolution adopted by
a majority of the board of directors. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations of the Exchange Act
and includes shares beneficially owned by such person or any of such person's
affiliates (as defined in the Articles of Incorporation), shares which such
person or such person's affiliates have the right to acquire upon the exercise
of conversion rights or options and shares as to which such person and such
person's affiliates have or share investment or voting power, but shall not
include shares beneficially owned by the ESOP or directors, officers and
employees of the Savings Bank or Holding Company or shares that are subject to a
revocable proxy and that are not otherwise beneficially, or deemed by the
Holding Company to be beneficially, owned by such person and his or her
affiliates.
Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class
shall be elected for a term of three years, with the terms of office of all
members of one class expiring each year so that approximately one-third of the
total number of directors are elected each year. The Holding Company's Articles
of Incorporation provide that the size of the Board shall be as set forth in the
Bylaws. The Bylaws set the initial number of directors at five. The Articles
of Incorporation provide that any vacancy occurring in the Board, including a
vacancy created by an increase in the number of directors, shall be filled by a
vote of a majority of the directors then in office and any director so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of the class to which the director has been chosen expires. 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
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the consent of the incumbent Board of Directors of the Holding Company. The
Articles of Incorporation of the Holding Company provide that a director may be
removed from the Board of Directors prior to the expiration of his or her term
only for cause and only upon the vote of 75% of the outstanding shares of voting
stock. In the absence of this provision, the vote of the holders of a majority
of the shares could remove the entire Board, but only with cause, and replace it
with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Articles of Incorporation do not provide for cumulative voting for any purpose.
Moreover, the Articles of Incorporation provide that special meetings of
stockholders of the Holding Company may be called only by the Board of
Directors, Chairman or President of the Holding Company and that stockholders
may take action by written consent only if signed by all of the stockholders
entitled to vote at a meeting called for such purpose.
Authorized Shares. The Articles of Incorporation authorize the issuance of
10,000,000 shares of Common Stock and 5,000,000 shares of preferred stock. The
shares of Common Stock and preferred stock were authorized in an amount greater
than that to be issued in the Conversion to provide the Holding Company's Board
of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits,
restricted stock grants and the exercise of stock options. However, these
additional authorized shares may also be used by the Board of Directors,
consistent with fiduciary duties, to deter future attempts to gain control of
the Holding 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 tender offer, merger or other transaction by which a third party seeks
control of the Holding Company, and thereby assist members of management to
retain their positions. The Holding Company's Board currently has no plans for
the issuance of additional shares, other than the issuance of shares of Common
Stock upon exercise of stock options and in connection with the MRP.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Articles of Incorporation requires the approval of the
holders of at least 80% of the Holding Company's outstanding shares of voting
stock to approve certain "Business Combinations" (as defined therein) involving
a "Related Person" (as defined therein) except in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Holding Company's Board of Directors who are unaffiliated with the Related
Person and were directors prior to the time when the Related Person became a
Related Person. The term "Related Person" is defined to include any individual,
corporation, partnership or other entity (other than the Holding Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Holding Company or an
affiliate of such person or entity. This provision of the Articles of
Incorporation applies to any "Business Combination," which is defined to
include: (i) any merger or consolidation of the Holding Company with or into
any Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of the Holding Company or combined
assets of the Holding Company and its subsidiaries to a Related Person; (iii)
any merger or consolidation of a Related Person with or into the Holding Company
or a subsidiary of the Holding Company; (iv) any sale, lease, exchange,
transfer, or other disposition of 25% or more of the assets of a Related Person
to the Holding Company or a subsidiary of the Holding Company; (v) the issuance
of any securities of the Holding Company or a subsidiary of the Holding Company
to a Related Person; (vi) the acquisition by the Holding Company or a subsidiary
of the Holding Company of any securities of a Related Person; (vii) any
reclassification of common stock of the Holding Company or any recapitalization
involving the common stock of the Holding Company; or (viii) any agreement or
other arrangement providing for any of the foregoing.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Articles of Incorporation must be approved by a majority vote
of its Board of Directors and also by a majority of the outstanding shares of
its voting stock, provided, however, that an affirmative vote of at least 75% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Articles of Incorporation, including the provision limiting
voting rights,
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the provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Holding Company and amendment of the Holding
Company's Bylaws and Articles of Incorporation. The Holding Company's Bylaws
may be amended by its Board of Directors or by the stockholders, provided,
however, that an affirmative vote of at least 75% of the total votes eligible to
be voted at a duly constituted meeting of stockholders is necessary to amend
certain provisions relating to the conduct of stockholders meetings, directors
and amendment of the Bylaws.
Stockholder Nominations and Proposals. The Articles of Incorporation of
the Holding Company require a stockholder who intends to nominate a candidate
for election to the Board of Directors, or to raise new business at a
stockholder meeting to give not less than 30 nor more than 60 days' advance
notice to the Secretary of the Holding Company. The notice provision requires a
stockholder who desires to raise new business to provide certain information to
the Holding Company concerning the nature of the new business, the stockholder
and the stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a director must provide the
Holding Company with certain information concerning the nominee and the
proposing stockholder.
Purpose and Takeover Defensive Effects of the Holding Company's Articles of
Incorporation and Bylaws. The Board of Directors of the Savings Bank believes
that the provisions described above are prudent and will reduce the Holding
Company's vulnerability to takeover attempts and certain other transactions that
have not been negotiated with and approved by its Board of Directors. These
provisions will also assist the Savings Bank in the orderly deployment of the
Conversion proceeds into productive assets during the initial period after the
Conversion. The Board of Directors believes these provisions are in the best
interest of the Savings Bank and Holding Company and its stockholders. In the
judgment of the Board of Directors, the Holding Company's Board will be in the
best position to determine the true value of the Holding 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 interest of the Holding Company and its stockholders to encourage potential
acquirors to negotiate directly with the Board of Directors of the Holding
Company and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at a price reflective of the true value of the
Holding Company and that is in the best interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company for its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for Exchange Act deregistration.
Despite the belief of the Savings Bank and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's Articles
of Incorporation and Bylaws, these provisions may also have the effect of
discouraging a future takeover attempt that would not be approved by the Holding
Company's Board, but pursuant
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to which stockholders may receive a substantial premium for their shares over
then current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have any opportunity to do so. Such
provisions will also render the removal of the Holding Company's Board of
Directors and of management more difficult. The Board of Directors of the
Savings Bank and the Holding Company, however, have concluded that the potential
benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted for a Pennsylvania business corporation. The Holding Company and
the Savings Bank do not presently intend to propose the adoption of further
restrictions on the acquisition of the Holding Company's equity securities.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Articles of Incorporation and Bylaws of the Holding
Company and in Federal and Pennsylvania law may be to discourage potential
takeover attempts and perpetuate incumbent management, even though certain
stockholders of the Holding Company may deem a potential acquisition to be in
their best interests, or deem existing management not to be acting in their best
interests.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue 10,000,000 shares of Common
Stock having a par value of $.01 per share and 5,000,000 shares of preferred
stock having a par value of $.01 per share. The Holding Company currently
expects to issue up to 713,000 shares of Common Stock and no shares of preferred
stock in the Conversion. Each share of the Holding 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 Holding Company will represent nonwithdrawable
capital, will not be an account of any type, and will not be insured by the FDIC
or any other government agency.
Common Stock
Dividends. The Holding Company can pay dividends as and when declared by
its Board of Directors. The payment of dividends by the Holding Company is
subject to limitations which are imposed by law and applicable regulation. See
"DIVIDEND POLICY" and "REGULATION." The holders of Common Stock of the Holding
Company will be entitled to receive and share equally in such dividends as may
be declared by the Board of Directors of the Holding Company out of funds
legally available therefor. If the Holding Company issues preferred stock, the
holders thereof may have a priority over the holders of the Common Stock with
respect to dividends.
Stock Repurchases. The Plan and OTS regulations place certain limitations
on the repurchase of the Holding Company's capital stock. See "THE CONVERSION
- -- Restrictions on Repurchase of Stock" and "USE OF PROCEEDS."
Voting Rights. Upon Conversion, the holders of Common Stock of the Holding
Company will possess exclusive voting rights in the Holding Company. They will
elect the Holding Company's Board of Directors and act on such other matters as
are required to be presented to them under Pennsylvania law or as are otherwise
presented to them by the Board of Directors. Except as discussed in
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder of Common
Stock will be entitled to one vote per share and will not have any
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right to cumulate votes in the election of directors. If the Holding Company
issues preferred stock, holders of the Holding Company preferred stock may also
possess voting rights. Certain matters require a super-majority vote of the
outstanding shares entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
As a federal 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 who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Savings Bank,
all of which will be owned by the Holding Company, and voted at the direction of
the Holding 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 Holding 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 Supplemental
Eligible Account Holders (see "THE CONVERSION"), all assets of the Savings Bank
available for distribution. In the event of liquidation, dissolution or winding
up of the Holding 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 Holding Company available for
distribution. If Holding Company 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 Holding Company will
not be entitled to preemptive rights with respect to any shares that may be
issued. The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the authorized Holding Company preferred stock will
be issued in the Conversion and there are no plans to issue the preferred stock.
Such stock may be issued with such designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that 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.
Restrictions on Acquisition
Acquisitions of the Holding Company are restricted by provisions in its
Articles of Incorporation and Bylaws and by the rules and regulations of various
regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act upon the completion of the Conversion and will
not deregister its Common Stock for a period of at least three years following
the completion of the Conversion. Upon such registration, the proxy and tender
offer rules, insider trading reporting and restrictions, annual and periodic
reporting and other requirements of the Exchange Act will be applicable.
97
<PAGE>
LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Offerings have been opined upon by Breyer & Aguggia and the Pennsylvania tax
consequences of the Offerings have been opined upon by S.R. Snodgrass, A.C.,
Wexford, Pennsylvania. Breyer & Aguggia and S.R. Snodgrass A.C. have consented
to the references herein to their opinions. Certain legal matters will be
passed upon for Ryan, Beck by Elias, Matz, Tiernan & Herrick L.L.P., Washington,
D.C.
EXPERTS
The consolidated financial statements of the Savings Bank as of December
31, 1996 and 1995 and for each of the two years in the period ended December 31,
1996 included in this Prospectus have been audited by S.R. Snodgrass, A.C.,
independent auditors, as stated in its report appearing herein, and have been so
included in reliance upon the report of such firm given upon its authority as
experts in accounting and auditing.
Feldman Financial has consented to the publication herein of the summary of
its report to the Savings Bank setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Savings Bank as converted and
its letter with respect to subscription rights and to the use of its name and
statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
SB-2 (File No. 333-30231) under the Securities Act with respect to the Common
Stock offered in the Conversion. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at its
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies
may be obtained at prescribed rates from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Registration Statement is publicly available through the SEC's World Wide Web
site on the Internet (http://www.sec.gov).
The Savings Bank has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Savings Bank's Special
Meeting and certain other information. This Prospectus omits certain
information contained in such Application. The Application, including the proxy
materials, exhibits and certain other information that are a part thereof, may
be inspected, without charge, at the offices of the OTS, 1700 G Street, N.W.,
Washington, D.C. 20552 and at the office of the Regional Director of the OTS at
the Northeast Regional Office of the OTS, 10 Exchange Plaza, 18th Floor, Jersey
City, New Jersey 07302.
98
<PAGE>
Index To Consolidated Financial Statements
Spring Hill Savings Bank, FSB
Pages
Report of Independent Auditor.................................... F-1
Consolidated Statement of Financial Condition as of
March 31, 1997 (unaudited) and December 31, 1996 and 1995....... F-2
Consolidated Statement of Operations for Three Months
Ended March 31, 1997 and 1996 (unaudited) and the Years Ended
December 31, 1996 and 1995...................................... 18
Consolidated Statement of Retained Earnings for
the Three Months Ended March 31, 1997 (unaudited)
and the Years Ended December 31, 1996 and 1995.................. F-3
Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 1997 and 1996 (unaudited) and the Years
Ended December 31, 1996 and 1995................................ F-4
Notes to Consolidated Financial Statements....................... F-6
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements on the Holding Company have not been included
since it will not engage in material transactions, if any, until after the
Conversion. The Holding Company, which has been inactive to date, has no
significant assets, liabilities, revenues, expenses or contingent liabilities.
99
<PAGE>
[LOGO OF SNODGRASS]
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors
Spring Hill Savings Bank, FSB
We have audited the accompanying consolidated statement of financial condition
of Spring Hill Savings Bank, FSB and subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of operations, retained earnings,
and cash flows for the years then ended. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spring Hill Savings
Bank, FSB and subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, effective
January 1, 1995, the Bank changed its method of accounting for the impairment of
loans and the related allowance for loan losses.
/s/ S. R. Snodgrass, A.C.
Wexford, PA
March 21, 1997, except for the
second paragraph of Note 19,
as to which date is April 16, 1997
F-1
<PAGE>
SPRING HILL SAVINGS BANK, FSB
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
------------------ ------------------- ------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 652,410 $ 584,634 $ 419,061
Interest-bearing deposits with other banks 2,377,517 1,516,281 1,284,179
Investment securities available for sale 818,743 826,407 646,903
Investment securities held to maturity (market
value of $1,171,808, $1,918,242 and $2,651,993) 1,173,968 1,917,929 2,639,418
Mortgage-backed securities available for sale 2,316,544 2,430,439 2,298,085
Mortgage-backed securities held to maturity (market
value of $17,350,302, $17,249,409 and
$19,368,898) 17,362,329 17,126,963 18,992,674
Loans receivable (net of allowance for loan losses of
$419,581, $415,426 and $276,212) 55,267,734 54,789,033 52,525,935
Accrued interest receivable 488,422 498,502 536,297
Real estate owned 12,500 12,500 940,232
Premises and equipment 775,988 787,378 286,854
Federal Home Loan Bank stock 607,022 594,722 591,300
Other assets 956,178 603,153 495,063
--------------- ---------------- ---------------
TOTAL ASSETS $ 82,809,355 $ 81,687,941 $ 81,656,001
=============== ================ ===============
LIABILITIES
Deposits $ 64,776,108 $ 64,294,119 $ 65,160,207
Advances by borrowers for taxes and insurance 1,175,654 1,062,206 1,152,544
Collateralized mortgage obligation 2,453,663 6,937,405 8,250,537
Borrowed funds 9,253,951 3,772,036 1,778,000
Accrued interest payable 155,187 161,240 169,104
Other liabilities 545,361 620,918 704,981
--------------- ---------------- ---------------
TOTAL LIABILITIES 78,359,924 76,847,924 77,215,373
--------------- ---------------- ---------------
COMMITMENTS AND CONTINGENCIES(Note 16)
RETAINED EARNINGS
Retained earnings-substantially restricted 4,502,097 4,889,486 4,496,742
Net unrealized loss on securities, net of tax (9,558) (6,361) (4,622)
Pension adjustment (43,108) (43,108) (51,492)
--------------- ---------------- ---------------
TOTAL RETAINED EARNINGS 4,449,431 4,840,017 4,440,628
--------------- ---------------- ---------------
TOTAL LIABILITIES AND RETAINED
EARNINGS $ 82,809,355 $ 81,687,941 $ 81,656,001
=============== ================ ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
SPRING HILL SAVINGS BANK, FSB
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
<TABLE>
<CAPTION>
Net Unrealized
Retained Gain (Loss) Pension
Earnings on Securities Adjustment Total
------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 4,265,681 (82,350) (31,992) 4,151,339
Net income 231,061 231,061
Net unrealized gain on securities 77,728 77,728
Unfunded pension loss (19,500) (19,500)
--------------- --------------- ---------------- ---------------
Balance, December 31, 1995 4,496,742 (4,622) (51,492) 4,440,628
Net income 392,744 392,744
Net unrealized loss on securities (1,739) (1,739)
Unfunded pension gain 8,384 8,384
--------------- --------------- ---------------- ---------------
Balance, December 31, 1996 4,889,486 (6,361) (43,108) 4,840,017
Net loss (unaudited) (387,389) (387,389)
Net unrealized loss on securities (3,197) (3,197)
--------------- --------------- ---------------- ---------------
Balance, March 31, 1997
(unaudited) $ 4,502,097 $ (9,558) $ (43,108) $ 4,449,431
=============== =============== ================ ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
SPRING HILL SAVINGS BANK, FSB
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 1996 1996 1995
--------------- -------------- --------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (387,389) $ 60,149 $ 392,744 $ 231,061
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for losses on loans and
real estate owned 27,943 42,109 260,612 90,031
Depreciation and amortization 75,020 94,110 385,884 375,878
Net securities (gains) losses (116,541) - (902,488) 7,971
Loss on extinguishment of debt 963,062 - - -
Net (gains) losses on sale of real
estate owned - (31,772) 12,981 33,171
Deferred income taxes (406,156) (24,923) (124,280) (97,290)
Decrease in accrued interest
receivable 10,080 2,621 37,795 30,025
Increase (decrease) in accrued
interest payable (6,053) 3,279 (7,864) (29,005)
Other, net (127,393) (218,068) (88,276) 257,889
--------------- -------------- --------------- --------------
Net cash provided by (used for)
operating activities 32,573 (72,495) (32,892) 899,731
--------------- -------------- --------------- --------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (497,500) - (500,547) -
Proceeds from sales 617,079 - 1,122,351 976,094
Maturities and repayments 6,654 24,851 98,104 57,644
Investment securities held to maturity:
Purchases (499,531) (2,967,105) (4,954,808) (2,250,000)
Maturities and repayments 1,243,492 2,144,269 5,676,297 1,126,409
Mortgage-backed securities available for sale:
Purchases - - (510,170) (1,148,881)
Maturities and repayments 103,793 28,091 368,845 724,327
Mortgage-backed securities held to maturity:
Purchases (1,386,878) (2,199,502) (2,890,899) (1,215,382)
Maturities and repayments 1,147,150 1,186,630 4,734,188 2,734,189
Loans receivable:
Purchases (8,900) - (26,933) (394,528)
Other net (increase) decrease (497,744) 1,971,832 (1,062,845) 2,402,520
Purchase of Federal Home Loan
Bank stock (12,300) (3,422) (3,422) (31,000)
Purchase of premises and
equipment, net (4,518) (26,137) (563,157) (130,253)
Proceeds from sales of real estate
owned - 24,424 40,819 183,359
Other, net - - (20,000) 28,742
--------------- -------------- --------------- --------------
Net cash provided by
investing activities 210,797 183,931 967,823 3,063,240
--------------- -------------- --------------- --------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
SPRING HILL SAVINGS BANK, FSB
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 1996 1996 1995
---------------- --------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 481,989 $ 1,392,557 $ (866,088) $ 4,324,360
Increase (decrease) in advances by
borrowers for taxes and insurance 113,448 65,559 (90,338) (111,686)
Collateralized mortgage obligation
payments (462,710) (347,480) (1,574,866) (1,554,601)
Extinguishment of debt (4,929,000) - - -
Decrease in short-term borrowings - - - (4,813,000)
Proceeds from borrowed funds 5,500,000 - 3,000,000 -
Repayment of borrowed funds (18,085) - (1,005,964) (722,000)
---------------- --------------- ---------------- ---------------
Net cash provided by (used for)
financing activities 685,642 1,110,636 (537,256) (2,876,927)
---------------- --------------- ---------------- ---------------
Increase in cash and cash
equivalents 929,012 1,222,072 397,675 1,086,044
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,100,915 1,703,240 1,703,240 617,196
---------------- --------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD 3,029,927 $ 2,925,312 $ 2,100,915 $ 1,703,240
================ =============== ================ ===============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and
borrowings $ 1,024,332 $ 1,084,643 $ 4,163,078 $ 4,488,546
Income taxes 135,000 203,250 461,000 76,000
Non-cash items:
Loans transferred to real estate
owned - 9,380 112,541 181,121
Loans to facilitate the sale of
real estate owned - 794,559 985,231 34,412
Transfer of investment and
mortgage-backed securities from
held to maturity to available
for sale - - - 751,963
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
SPRING HILL SAVINGS BANK, FSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(ALL DATA RELATED TO MARCH 31, 1997 AND THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Spring Hill Savings Bank, FSB (the "Bank") is a federally chartered mutual
savings bank located in Pittsburgh, Pennsylvania. The Bank's principal
sources of revenue emanate from its investment, mortgage-backed securities,
and mortgage loan portfolios. The Bank is supervised by the Office of Thrift
Supervision. Spring Hill Funding Corporation ("SHFC") is a wholly-owned
limited purpose finance subsidiary formed to issue bonds collateralized by
Federal National Mortgage Association mortgage-backed securities (the
"FNMAs").
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying consolidated financial statements
follows:
Basis of Presentation
---------------------
The accounting policies followed by the Bank and its wholly-owned subsidiary
and the methods of applying these principles conform with generally accepted
accounting principles and with general practice within the banking industry.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the statement of financial condition and
revenues and expenses for the period. Actual results could differ
significantly from those estimates. The unaudited interim financial
statements as of and for the three months ended March 31, 1997 and 1996,
reflect all adjustments (consisting of only normal recurring accruals except
the extraordinary item discussed in Note 19) which in the opinion of
management, are necessary to present fairly the results for the interim
periods. Results of interim periods are not necessarily indicative of
results to be expected for the full year.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Spring Hill
Savings Bank, FSB and its wholly-owned limited purpose finance subsidiary,
Spring Hill Funding Corporation. All significant intercompany accounts and
transactions have been eliminated.
Investment Securities Including Mortgage-Backed Securities
----------------------------------------------------------
Debt securities, including mortgage-backed securities and collateralized
mortgage obligations, acquired with the intent and ability to hold to
maturity are stated at cost and adjusted for amortization of premium and
accretion of discount, which are computed using a level yield method and are
recognized as adjustments of interest income. Certain other debt securities
have been classified as available for sale to serve principally as a source
of liquidity. Unrealized holding gains and losses for available for sale
securities are reported as a separate component of retained earnings, net of
tax, until realized. Realized securities gains and losses are computed using
the specific identification method. Interest and dividends on investment
securities are recognized as income when earned.
CMO residuals were carried at estimated market value. Total cash flows
expected to be received over the estimated life of the investment is
allocated between principal and interest. At the date of purchase, an
effective yield was calculated based on the purchase price and anticipated
future cash flows. In the initial accounting period, interest income was
accrued on the investment balance using that rate. Cash received on the
investment is first applied to accrued interest with any excess reducing the
recorded investment balance. At each reporting date, the effective yield is
recalculated based on the amortized cost of the investment and the then
current
F-6
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities Including Mortgage-Backed Securities (Continued)
----------------------------------------------------------------------
estimate of future cash flows. This procedure continues until all
cash flows from the investment have been received. The amortized balance of
the investment at the end of each period will equal the present value of the
estimated future cash flows discounted at the newly calculated effective
yield.
Common stock of the Federal Home Loan Bank (the "FHLB") represents ownership
in an institution which is wholly-owned by other financial institutions.
This equity security is accounted for at cost and reported separately on the
accompanying statement of financial condition.
Loans Receivable
----------------
Loans receivable are stated at their unpaid principal amounts net of any
unearned income. Interest on loans is credited to income as earned. Interest
accrued on loans more than 90 days delinquent is generally offset by a
reserve for uncollected interest and is not recognized as income.
Loan Origination Fees
---------------------
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment of
the related loan's yield. The Bank is amortizing these amounts over the
contractual life of the related loans.
Allowance for Loan Losses
-------------------------
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118. Under this Standard, the Bank
estimates credit losses on impaired loans based on the present value of
expected cash flows or fair value of the underlying collateral if the loan
repayment is expected to come from the sale or operation of such collateral.
Prior to 1995, the credit losses related to these loans were estimated based
on undiscounted cash flows or the fair value of the underlying collateral.
Statement 118 amends Statement 114 to permit a creditor to use existing
methods for recognizing interest income on impaired loans eliminating the
income recognition provisions of Statement 114. The adoption of these
statements did not have a material effect on the Bank's financial position
or results of operation.
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Bank will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Bank
individually evaluates such loans for impairment and does not aggregate
loans by major risk classifications. The definition of "impaired loans" is
not the same as the definition of "nonaccrual loans," although the two
categories overlap. The Bank may choose to place a loan on nonaccrual status
due to payment delinquency or uncertain collectibility, while not
classifying the loan as impaired if the loan is not a commercial or
commercial real estate loan. Factors considered by management in determining
impairment include payment status and collateral value. The amount of
impairment for these types of impaired loans is determined by the difference
between the present value of the expected cash flows related to the loan,
using the original interest rate, and its recorded value, or, as a practical
expedient in the case of collateralized loans, the difference between the
fair value of the collateral and the recorded amount of the loans. When
foreclosure is probable, impairment is measured based on the fair value of
the collateral.
F-7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------------------------------------------------------
Allowance for Loan Losses (Continued)
-------------------------------------
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the borrower's prior payment record, and the amount of shortfall in relation
to the principal and interest owed.
The allowance for loan losses represents the amount which management
estimates is adequate to provide for losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance and all recoveries are credited to it.
The allowance for loan losses is established through a provision for loan
losses charged to operations. The provision for loan losses is based on
management's periodic evaluation of individual loans, economic factors, past
loan loss experience, changes in the composition and volume of the
portfolio, and other relevant factors. The estimates used in determining the
adequacy of the allowance for loan losses, including the amounts and timing
of future cash flows expected on impaired loans, are particularly
susceptible to changes in the near term.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets of 3 to 35 years. Expenditures for
maintenance and repairs are charged to operations as incurred. Costs of
major additions and improvements are capitalized.
Debt Discount and Issue Costs
-----------------------------
Discounts and issue costs related to the issuance of collateralized mortgage
obligations are amortized to interest expense on the interest method.
Real Estate Owned
-----------------
Real estate owned, acquired in settlement of foreclosed loans, is carried at
the lower of cost or fair value minus estimated cost to sell. Valuation
allowances for estimated losses are provided when the carrying value exceeds
the fair value. Direct costs incurred on such properties are recorded as
expenses of current operations.
Federal Income Taxes
--------------------
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rates. Deferred income tax
expenses or benefits are based on the changes in the deferred tax asset or
liability from period to period.
Cash and Cash Equivalents
-------------------------
The Bank has defined cash and cash equivalents as those cash and due from
banks, overnight deposits with the FHLB, and federal funds sold.
Reclassification of Comparative Amounts
---------------------------------------
Certain comparative account balances for 1995 have been reclassified to
conform to the 1996 classifications. Such reclassifications did not effect
net income.
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("the FASB")
issued Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," which provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of
liabilities. This statement applies prospectively in fiscal years
beginning after December 31, 1996, and establishes new standards that
focus on control whereas, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
The Bank does not expect adoption of Statement 125 to have a material
impact on the Bank's results of operations or financial position.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125." Statement 127 defers for one year the
effective date of portions of Statement 125 that address secured
borrowings and collateral for all transactions. Additionally, Statement
127 defers for one year the effective date of transfers of financial
assets that are part of repurchase agreements, securities lending and
similar transactions. The Bank does not expect adoption of Statement 127
to have a material impact on the Bank's results of operations or
financial position.
2. INTEREST-BEARING DEPOSITS WITH OTHER BANKS
Interest-bearing deposits with other banks is comprised of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
----------------- ------------------ -----------------
<S> <C> <C> <C>
Overnight deposits $ 2,352,517 $ 1,491,281 $ 1,259,179
Federal funds sold 25,000 25,000 25,000
----------------- ------------------ -----------------
Total $ 2,377,517 $ 1,516,281 $ 1,284,179
================= ================== =================
</TABLE>
3. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
March 31, 1997
Available for Sale
U. S. Treasury securities $ 497,541 $ - $ (666) $ 496,875
Securities of U.S. Government
agencies 320,267 1,601 - 321,868
------------------ ----------------- ------------------ ----------------
Total $ 817,808 $ 1,601 $ (666) $ 818,743
================== ================= ================== ================
Held to Maturity
Securities of U.S. Government
agencies $ 689,029 $ 500 $ (2,660) $ 686,869
Corporate securities 484,939 - - 484,939
------------------ ----------------- ------------------ ----------------
Total $ 1,173,968 $ 500 $ (2,660) $ 1,171,808
================== ================= ================== ================
</TABLE>
F-9
<PAGE>
3. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1996
Available for Sale
U. S. Treasury securities $ 500,538 $ - $ (2,728) $ 497,810
Securities of U.S. Government
agencies 326,962 1,635 - 328,597
----------------- ---------------- ----------------- ----------------
Total $ 827,500 $ 1,635 $ (2,728) $ 826,407
================= ================ ================= ================
Held to Maturity
Securities of U.S. Government
agencies $ 446,288 $ 313 $ - $ 446,601
Corporate securities 1,471,641 - - 1,471,641
----------------- ---------------- ----------------- ----------------
Total $ 1,917,929 $ 313 $ - $ 1,918,242
================= ================ ================= ================
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1995
Available for Sale
Securities of U.S. Government
agencies $ 396,451 $ 1,982 $ - $ 398,433
Collateralized mortgage
obligation residuals 248,470 - - 248,470
----------------- ---------------- ----------------- ----------------
Total $ 644,921 $ 1,982 $ - $ 646,903
================= ================ ================= ================
Held to Maturity
Securities of U.S. Government
agencies $ 1,513,244 $ 12,575 $ - $ 1,525,819
Corporate securities 1,126,174 - - 1,126,174
----------------- ---------------- ----------------- ----------------
Total $ 2,639,418 $ 12,575 $ - $ 2,651,993
================= ================ ================= ================
</TABLE>
F-10
<PAGE>
3. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
by contractual maturity are shown below.
<TABLE>
<CAPTION>
March 31, 1997
Available for Sale Held to Maturity
----------------------------------------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ 484,939 $ 484,939
Due after one year through
five years 497,541 496,875 - -
Due after five years through
ten years - - 250,000 247,343
Due after ten years 320,267 321,868 439,029 439,526
----------------- ---------------- ----------------- --------------
Total $ 817,808 $ 818,743 $ 1,173,968 $ 1,171,808
================= ================ ================= ===============
<CAPTION>
December 31, 1996
Available for Sale Held to Maturity
-------------------------------------------------------------------------------
Estimated Estimatedd
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ 1,477,013 $ 1,477,013
Due after one year through
five years 500,538 497,810 250,000 250,313
Due after ten years 326,962 328,597 190,916 190,916
----------------- ---------------- ----------------- ---------------
Total $ 827,500 $ 826,407 $ 1,917,929 $ 1,918,242
================= ================ ================= ===============
</TABLE>
Securities of U.S. Government agencies with an amortized cost of
$250,000 and estimated market value of $250,313 and $259,295 at December
31, 1996 and 1995, respectively, were pledged to secure public funds.
Proceeds from sales of investment securities available for sale and
gross gains and losses realized on those sales were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 1996 1996 1995
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Proceeds from sales $ 617,079 $ - $ 1,122,351 $ 976,094
Gross gains 121,063 - 902,488 -
Gross losses 4,522 - - 7,971
</TABLE>
During 1996, four collateralized mortgage obligation ("CMO") residuals
were either sold or redeemed at a price which significantly exceeded the
Bank's recorded investment in the securities. Throughout the holding
period, as the amortized cost of these securities exceeded the fair
market value, permanent impairment losses were recognized. The estimated
market value of the CMO residuals had been based upon the present value
of estimated future cash flows of the underlying mortgage collateral,
discounted at a risk-free interest rate.
F-11
<PAGE>
3. INVESTMENT SECURITIES (Continued)
During 1996, two CMO residuals were sold at a gain of $38,358. The
remaining gain of $864,130 was the Bank's portion, based on its
ownership interest, of the proceeds from the early redemption of two CMO
residuals. In 1996, favorable market conditions had a positive impact on
the valuation of the underlying mortgage collateral and those owning the
right to call the CMO issues exercised their option. The underlying
collateral was sold at a premium resulting in a significant gain to the
Bank.
A gain of $121,063 was realized in the first quarter of 1997 from the
early redemption of the last remaining CMO residual owned by the Bank as
an investment. This gain resulted from the exercise of the early call
provisions of the Trust Indenture and the collateral value exceeding the
debt obligations secured by the collateral. The Bank received its
proportionate interest in the premium realized from the sale of the
collateral that had been held by the Trustee to secure the CMO bonds. At
December 31, 1996, this security had no carrying value as a result of
previous impairment charges and principal repayments. There was no
indicated market value for this security due to uncertainty in both
timing and amount of proceeds from the exercise of the early redemption.
On December 29, 1995, in accordance with the Financial Accounting
Standards Board Special Report, "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity
Securities," the Bank reclassified certain investment and mortgage-
backed securities from the held to maturity classification to the
available for sale classification with an amortized cost of $751,963 and
an estimated market value of $756,435.
4. MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
March 31, 1997
Available for Sale
GNMA $ 438,766 $ 2,132 $ - $ 440,898
FHLMC 727,486 - (11,439) 716,047
FNMA 661,845 - (18,108) 643,737
Collateralized mortgage
obligations 505,745 10,117 - 515,862
----------------- ---------------- ----------------- ----------------
Total $ 2,333,842 $ 12,249 $ (29,547) $ 2,316,544
================= ================ ================= ================
Held to Maturity
GNMA $ 1,543,762 $ 8,073 $ (12,292) $ 1,539,543
FHLMC 1,375,331 15,114 (14,854) 1,375,591
FNMA 8,757,067 45,001 (49,907) 8,752,161
Collateralized mortgage
obligations 5,686,169 21,574 (24,736) 5,683,007
----------------- ---------------- ----------------- ----------------
Total $ 17,362,329 $ 89,762 $ (101,789) $ 17,350,302
================= ================ ================= ================
</TABLE>
F-12
<PAGE>
4. MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1996
Available for Sale
GNMA $ 471,867 $ 108 $ - $ 471,975
FHLMC 787,724 238 (5,977) 781,985
FNMA 675,365 - (11,622) 663,743
Collateralized mortgage
obligations 505,279 7,457 - 512,736
----------------- ---------------- ----------------- ----------------
Total $ 2,440,235 $ 7,803 $ (17,599) $ 2,430,439
================= ================ ================= ================
Held to Maturity
GNMA $ 1,024,906 $ 3,230 $ (7,178) $ 1,020,958
FHLMC 1,447,707 21,194 (10,866) 1,458,035
FNMA 9,334,750 129,981 (872) 9,463,859
Collateralized mortgage
obligations 5,319,600 13,306 (26,349) 5,306,557
----------------- ---------------- ----------------- ----------------
Total $ 17,126,963 $ 167,711 $ (45,265) $ 17,249,409
================= ================ ================= ================
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1995
Available for Sale
FHLMC $ 1,017,191 $ - $ (11,621) $ 1,005,570
FNMA 787,297 1,434 (4,181) 784,550
Collateralized mortgage
obligations 503,493 4,472 - 507,965
----------------- ---------------- ----------------- ----------------
Total $ 2,307,981 $ 5,906 $ (15,802) $ 2,298,085
================= ================ ================= ================
Held to Maturity
GNMA $ 288,221 $ 1,820 $ (5,031) $ 285,010
FHLMC 1,971,029 33,222 (8,464) 1,995,787
FNMA 11,295,467 351,646 - 11,647,113
Collateralized mortgage
obligations 5,437,957 28,226 (25,195) 5,440,988
----------------- ---------------- ----------------- ----------------
Total 18,992,674 414,914 (38,690) 19,368,898
================= ================ ================= ================
</TABLE>
At March 31, 1997 and December 31, 1996 and 1995, substantially all the
collateralized mortgage obligations consisted of federal agency
CMO's.
The amortized cost and estimated market value of mortgage-backed
securities by contractual maturity are shown below. Mortgage-backed
securities provide for periodic payments of principal and interest. Due
to expected repayment terms being significantly less than the underlying
mortgage loan pool contractual maturities, the estimated lives of these
securities could be significantly shorter.
F-13
<PAGE>
4. MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
March 31, 1997
Available for Sale Held to Maturity
------------------------------------- -------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ 233,348 $ 233,372
Due after one year through
five years 306,212 297,731 2,898,862 2,879,856
Due after five years through
ten years - - 2,718,643 2,691,378
Due after ten years 2,027,630 2,018,813 11,511,476 11,545,696
----------------- ---------------- ----------------- ----------------
Total $ 2,333,842 $ 2,316,544 $ 17,362,329 $ 17,350,302
================= ================ ================= ================
<CAPTION>
December 31, 1996
Available for Sale Held to Maturity
------------------------------------- -------------------------------------
Estimated Estimatedd
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ 80,360 $ 80,635
Due after one year through
five years 315,851 309,874 3,299,516 3,285,033
Due after five years through
ten years - - 2,961,314 2,975,455
Due after ten years 2,124,384 2,120,565 10,785,773 10,908,286
----------------- ---------------- ----------------- ----------------
Total $ 2,440,235 $ 2,430,439 $ 17,126,963 $ 17,249,409
================= ================ ================= ================
</TABLE>
FNMA mortgage-backed securities with an amortized cost of $7,242,912,
$7,766,886 and $9,362,853 and an estimated market value of $7,214,208,
$7,857,979 and $9,656,852 at March 31, 1997 and December 31, 1996 and
1995, respectively, are pledged as collateral for the collateralized
mortgage obligation bonds issued by SHFC.
F-14
<PAGE>
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Mortgage loans:
1 - 4 family units $ 42,653,965 $ 41,767,116 $ 39,475,086
Multi-family units 5,791,690 5,676,859 5,379,957
Construction loans 1,686,820 1,726,819 1,383,921
Commercial real estate 2,924,901 3,295,934 3,191,426
------------- ------------- ------------
53,057,376 52,466,728 49,430,390
------------- ------------- ------------
Consumer loans:
Mobile home 2,296,916 2,454,431 3,160,706
Other 568,175 610,847 166,801
------------- ------------- ------------
2,865,091 3,065,278 3,327,507
------------- ------------- ------------
Commercial loans 86,070 86,070 135,743
------------- ------------- ------------
Less:
Undisbursed portion of loans 389,974 509,053 321,667
Deferred premiums (11,732) (11,032) (13,319)
Deferred loan origination costs, net (57,020) (84,404) (216,855)
Allowance for loan losses 419,581 415,426 276,212
-------------- -------------- -------------
740,803 829,043 367,705
-------------- -------------- -------------
Total $ 55,267,734 $ 54,789,033 $ 52,525,935
============== ============== =============
</TABLE>
The Bank's primary business activity is with customers located within its
local trade area. Commercial, residential, and personal loans are granted.
The repayment of these loans is dependent upon the local economic conditions
in its immediate trade area. The mobile home loan portfolio at December 31,
1996 and 1995, consists primarily of loans granted to individuals outside of
the Bank's immediate trade area.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 1996 1996 1995
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Balance, at beginning of
period $ 415,426 $ 276,212 $ 276,212 $ 267,726
Loans charged off (28,238) (10,382) (111,458) (65,783)
Recoveries 4,450 78 11,302 10,269
----------------- ---------------- ----------------- ----------------
Net loans charged off (23,788) (10,304) (100,156) (55,514)
Provision for loan losses 27,943 29,528 239,370 64,000
----------------- ---------------- ----------------- ----------------
Balance, at end of period $ 419,581 $ 295,436 $ 415,426 $ 276,212
================= ================ ================= ================
</TABLE>
F-15
<PAGE>
5. LOANS RECEIVABLE (Continued)
The recorded investment in loans which are considered to be impaired in
accordance with Statement 114 was $619,316 at March 31, 1997 and $648,569
and $424,768 at December 31, 1996 and 1995, respectively. All impaired loans
were on a nonaccrual basis. At March 31, 1997 and December 31, 1996, $63,408
and $64,870 of the allowance for loan losses has been allocated for impaired
loans. At December 31, 1995, no allowance for loan losses has been allocated
due to the loans being collateral dependent and the fair value of the
collateral exceeding the recorded investment in the related loans.
The average recorded investment in impaired loans at March 31, 1997 and
December 31, 1996 and 1995 was $621,873, $659,317 and $177,995,
respectively. For the three month period ended March 31, 1997 and the years
ended December 31, 1996 and 1995, interest income totaling $9,564, $53,042
and $9,835 was recognized using the cash basis method of income recognition.
The Bank also had nonaccrual loans of $489,028, $462,057 and $198,650 at
March 31, 1997, December 31, 1996 and 1995, respectively, which in
management's opinion did not meet the definition of impaired in accordance
with Statement 114. Interest income on loans would have been increased by
$8,151, $25,203 and $10,134, respectively, if these loans had performed in
accordance with their original terms.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Investment securities $ 28,800 $ 26,357 $ 43,570
Mortgage-backed securities 129,405 130,171 141,881
Loans receivable 330,217 341,974 350,846
------------ ------------ ------------
Total $ 488,422 $ 498,502 $ 536,297
============ ============ ============
</TABLE>
7. REAL ESTATE OWNED
Real estate owned consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Real estate acquired through foreclosure $ 12,500 $ 12,500 $ 955,263
Less allowance for estimated losses - - 15,031
------------ ------------ ------------
Total $ 12,500 $ 12,500 $ 940,232
============ ============ ============
</TABLE>
F-16
<PAGE>
7. REAL ESTATE OWNED (Continued)
Activity in the allowance for estimated losses on real estate owned is as
follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 1996 1996 1995
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance, at beginning of
period $ - $ 15,031 $ 15,031 $ 6,009
Add provision charged to
operations - 12,581 21,242 26,031
Less charge-offs - 15,031 36,273 17,009
------------- ------------ ------------- -------------
Balance, at end of period $ - $ 12,581 $ - $ 15,031
============= ============ ============= =============
</TABLE>
8. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Land and improvements $ 106,313 $ 106,313 $ 69,763
Buildings and improvements 733,322 724,822 289,195
Furniture and equipment 739,698 738,678 835,034
Leasehold improvements 58,747 58,747 63,427
------------ ------------- ------------
1,638,080 1,628,560 1,257,419
Less accumulated depreciation 862,092 841,182 970,565
------------ ------------- ------------
Total $ 775,988 $ 787,378 $ 286,854
============ ============= ============
</TABLE>
Depreciation expense for the three months ended March 31, 1997 and 1996, and
the years ended December 31, 1996 and 1995 was $20,908, $12,324, $62,633,
and $23,578, respectively.
9. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System. As a member, the
Bank maintains an investment in the capital stock of the Federal Home Loan
Bank of Pittsburgh, at cost, in an amount not less than the greater of 1% of
its outstanding home loans or 5% of its outstanding notes payable to the
Federal Home Loan Bank of Pittsburgh as calculated at December 31 of each
year.
F-17
<PAGE>
10. DEPOSITS
Comparative details of deposits are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
---------------------------- ------------------------- -----------------------
Amount % Amount % Amount %
------------ ---------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing $ 404,824 0.6% $ 311,628 0.5% $ 232,859 0.3%
Interest-bearing
Savings 12,672,501 19.6 12,834,398 20.0 13,397,909 20.6
NOW checking 2,631,481 4.1 2,731,846 4.2 2,816,257 4.3
Money market 5,884,995 9.1 5,906,940 9.2 4,933,307 7.6
------------ ---------- ------------ --------- ------------ --------
21,593,801 33.4 21,784,812 33.9 21,380,332 32.8
------------ ---------- ------------ --------- ------------ --------
Time certificates of deposit
2.00 - 3.99% 24,856 - 24,648 - 586,165 0.9
4.00 - 5.99% 32,386,977 50.0 32,154,297 50.0 25,026,190 38.5
6.00 - 7.99% 10,702,700 16.5 10,263,820 16.0 18,009,062 27.6
8.00 - 9.99% 67,774 0.1 66,542 0.1 158,458 0.2
------------ ---------- ------------ --------- ------------ --------
43,182,307 66.6 42,509,307 66.1 43,779,875 67.2
------------ ---------- ------------ --------- ------------ --------
Total $ 64,776,108 100.0% $ 64,294,119 100.0% $ 65,160,207 100.0%
============ ========== ============ ========= ============ =========
</TABLE>
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was $3,826,538, $3,515,097, and $3,231,467 at
March 31, 1997 and December 31, 1996 and 1995, respectively. Deposits in
excess of $100,000 are not federally insured.
The scheduled maturities of time certificates of deposit are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
With one year $26,177,446 $27,315,014
Beyond one year but within two years 6,827,779 5,340,199
Beyond two years but within three years 4,524,874 5,043,149
Beyond three years but within four years 1,308,629 809,352
Beyond four years 4,343,579 4,001,593
----------- -----------
Total $43,182,307 $42,509,307
=========== ===========
</TABLE>
F-18
<PAGE>
10. DEPOSITS (Continued)
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 1996 1996 1995
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Savings $ 97,983 $ 104,751 $ 416,202 $ 438,979
NOW and money market 66,053 56,885 245,025 225,307
Time certificates of deposit 594,338 642,732 2,379,069 2,411,194
------------- -------------- ------------- --------------
Total $ 758,374 $ 804,368 $ 3,040,296 $ 3,075,480
============= ============== ============= ==============
</TABLE>
11. COLLATERALIZED MORTGAGE OBLIGATION
The bonds are collateralized by a pledge of the FNMAs and are identified
as follows:
<TABLE>
<CAPTION> March 31, 1997
--------------------------------------
Original
Par Par Carrying
Class Value Value Value
------------ --------------- --------------- ---------------
<S> <C> <C> <C>
A $ 14,420,000 $ - $ -
B 12,847,000 2,560,918 2,453,663
C 4,800,000 - -
--------------- --------------- --------------
$ 32,067,000 $ 2,560,918 $ 2,453,663
=============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------------------------ ------------------------------------
Original
Par Par Carrying Par Carrying
Class Value Value Value Value Value
------------ ---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
A $ 14,420,000 $ - $ - $ - $ -
B 12,847,000 3,023,659 2,881,510 4,598,524 4,291,295
C 4,800,000 4,800,000 4,055,895 4,800,000 3,959,242
---------------- --------------- --------------- --------------- ---------------
$ 32,067,000 $ 7,823,659 $ 6,937,405 $ 9,398,524 $ 8,250,537
================ =============== =============== =============== ===============
</TABLE>
Following are the stated interest rates and maturities of the bonds:
<TABLE>
<CAPTION>
Interest Stated
Class Rate Maturity
--------------- ------------ ------------
<S> <C> <C>
A 7.80% July 1, 2002
B 7.90 July 1, 2015
C 7.95 December 1, 2017
</TABLE>
F-19
<PAGE>
11. COLLATERALIZED MORTGAGE OBLIGATION (Continued)
The FNMAs will remain pledged until the collateralized mortgage obligation
bonds are fully satisfied. The amount of monthly payments on the bonds is
based upon the timing of cash receipts from the FNMAs. Interest is paid
monthly. All principal payments on the bonds will be allocated among the
bonds in the order of their respective stated maturities.
Effective March 7, 1997, the Bank purchased the Class C bonds at a loss
of $963,062, as discussed in Note 19.
12. BORROWED FUNDS
Borrowed funds consist of credit arrangements with the Federal Home Loan
Bank of Pittsburgh. FHLB borrowings are subject to annual renewal, incur no
service charges, and are secured by a blanket security agreement on certain
investment and mortgage-backed securities, outstanding residential
mortgages and the Bank's investment in FHLB stock. As of December 31, 1996,
the Bank's maximum borrowing capacity with the FHLB was $47.5 million.
FHLB "Flexline" advances are short-term borrowings that mature within one
year, bear a variable rate of interest that adjusts daily and are not
subject to prepayment penalties. Included in the $47.5 million maximum
borrowing capacity with the FHLB is a $4.7 million credit line available
under the Flexline. As of March 31, 1997 and December 31, 1996 and 1995,
there were no outstanding Flexline borrowings.
The following tables present the scheduled repayments of the outstanding
advances:
<TABLE>
<CAPTION>
Weighted
Interest March 31,
Maturity Rate 1997
-------- -------- ---------
<S> <C> <C>
1998 7.05% $ 1,000,000
2000 5.89 778,000
2001 6.06 500,000
2002 6.31 2,000,000
2006 6.28 1,475,951
2007 6.66 3,500,000
------------
Total $ 9,253,951
============
<CAPTION>
Weighted Weighted
Interest December 31, Interest December 31,
Maturity Rate 1996 Rate 1995
-------- -------- ------------ --------- -------------
<S> <C> <C> <C> <C>
1996 - % $ - 7.69% $ 1,000,000
1998 7.05 1,000,000 7.53 500,000
2000 5.89 778,000 6.10 278,000
2001 6.06 500,000 - -
2006 6.29 1,494,036 - -
----------- --------------
Total $ 3,772,036 $ 1,778,000
=========== ==============
</TABLE>
F-20
<PAGE>
13. SAVINGS ASSOCIATION INSURANCE FUNDS RECAPITALIZATION
On September 30, 1996, the President signed into law legislation which
included, among other things, recapitalization of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC") by a one time charge to SAIF-insured institutions of 65.7 basis
points per one hundred dollars of insurable deposits. The gross effect to
the Bank amounted to $414,305, which is reflected in the financial results
of the Bank for the year ended December 31, 1996.
14. INCOME TAXES
The components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 1996 1996 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Current payable
Federal $ 92,372 $ 57,404 $ 296,656 $ 189,943
State 22,351 10,362 58,871 19,050
------------- ------------ ------------- ------------
114,723 67,766 355,527 208,993
Deferred taxes (5,619) (24,923) (124,280) (97,290)
------------- ------------ ------------- ------------
Total $ 109,104 $ 42,843 $ 231,247 $ 111,703
============= ============ ============= ============
</TABLE>
Income taxes (benefit) applicable to net securities gains (losses) were
$44,798 for the three months ended March 31, 1997, and $346,916 and
$(3,064) for the years ended December 31, 1996 and 1995, respectively.
On August 20, 1996, The Small Business Job Protections Act (the "Act") was
signed into law. The Act eliminated the percentage of taxable income bad
debt deduction for thrift institutions for tax years beginning after
December 31, 1995. The Act provides that bad debt reserves accumulated
prior to 1988 be exempt from recapture. Bad debt reserves accumulated after
1987 are subject to recapture. The Bank has not accumulated any additional
bad debt reserves since 1987; therefore, the impact of this legislation
will not have a material effect on the Bank's financial statements.
The following temporary differences gave rise to the net deferred tax
assets (liabilities):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Deferred Tax Assets:
Net unrealized loss on securities $ 6,805 $ 4,529 $ 3,292
Pension adjustment 30,695 30,695 36,664
Allowance for loan losses 154,967 148,528 103,289
Investment in SHFC 152,989 152,989 152,989
Deferred loan origination costs, net 26,842 35,500 42,972
Loss on extinguishment of debt 400,537 - -
Other 30,071 34,515 22,315
------------ ------------- ------------
Total gross deferred tax assets 802,906 406,756 361,521
------------ ------------- ------------
Deferred Tax Liabilities:
Discount on mortgage-backed securities 208,339 210,926 285,706
SHFC debt issuance costs 45,495 47,082 57,137
Other 20,984 29,092 24,539
------------ ------------- ------------
Total gross deferred tax liabilities 274,818 287,100 367,382
------------ ------------- ------------
Net deferred tax assets (liabilities) $ 528,088 $ 119,656 $ (5,861)
============ ============= ============
</TABLE>
F-21
<PAGE>
14. INCOME TAXES (Continued)
No valuation allowance was established at March 31, 1997 or December 31,
1996 and 1995, in view of the Bank's ability to carryback taxes paid in
previous years and to a lesser extent future anticipated taxable income.
The reconciliation of the federal statutory rate and the Bank's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
----------------------------------------------------------------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
--------------- ------------- -------- ----------
<S> <C> <C> <C> <C>
Provision at statutory rate $ 96,642 34.0% $ 35,017 34.0%
State tax expense, net of
federal tax benefit 11,387 4.0 5,161 5.0
Other, net 1,075 0.4 2,665 2.6
--------------- ------------- -------- ----------
Actual tax expense
and effective rate $ 109,104 38.4% $ 42,843 41.6%
=============== ============= ======== ==========
<CAPTION>
Year Ended December 31,
1996 1995
----------------------------------------------------------------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
--------------- ------------- -------- ----------
<S> <C> <C> <C> <C>
Provision at statutory rate $ 212,157 34.0% $ 116,540 34.0%
State tax expense, net of
federal tax benefit 26,572 4.3 12,573 3.7
Other, net (7,482) (1.2) (17,410) (5.1)
--------------- ------------- --------- ----------
Actual tax expense
and effective rate $ 231,247 37.1% $ 111,703 32.6%
=============== ============= ========= ==========
</TABLE>
15. EMPLOYEE BENEFITS
The Bank sponsors a trusteed, defined benefit pension plan covering
substantially all employees and officers. The plan calls for benefits to
be paid to eligible employees at retirement based primarily upon years
of service with the Bank and compensation rates near retirement. The
plan was amended in 1992 to suspend funding of future benefits.
Accordingly, accrued benefits earned to that point were frozen. The
Bank's funding policy is to make annual contributions as needed based
upon the funding formula developed by the plan's actuary. Net periodic
pension cost is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
------------ -----------
<S> <C> <C>
Service cost of the current period $ - $ -
Interest cost on projected benefit obligation 9,159 6,627
Actual return on plan assets (6,660) (6,501)
Net amortization and deferral 7,720 5,331
------------ -----------
Net periodic pension cost $ 10,219 $ 5,457
============ ===========
</TABLE>
F-22
<PAGE>
15. EMPLOYEE BENEFITS (Continued)
The actuarial present value of accumulated benefit obligations at
December 31, 1996 and 1995, was $133,376 and $130,850, the entire
amounts being vested for both years. The following table sets forth the
funded status and amounts recognized in the statement of financial
condition:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------- ------------
<S> <C> <C>
Plan assets at fair value $ 100,406 $ 89,579
Projected benefit obligation 133,376 130,850
------------- ------------
Funded status (32,970) (41,271)
Unrecognized net loss 73,803 88,156
Additional minimum liability (73,803) (88,156)
------------- ------------
Net pension liability $ (32,970) $ (41,271)
============= ============
</TABLE>
In preparing the above information for the years ended December 31, 1996
and 1995, a 7% discount rate and 7% expected long-term rate of return on
plan assets was assumed. Plan assets are invested primarily in
certificates of deposit of the Bank.
The Bank also sponsors a contributory defined contribution 401(k) plan
in which substantially all employees participate. The Bank recorded
expense of $60,820 and $5,826 in 1996 and 1995, respectively.
16. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
-----------
In the normal course of business, the Bank makes various commitments
which are not reflected in the accompanying financial statements. These
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the statement of
financial condition. The Bank's exposure to credit loss in the event of
nonperformance by the other parties to the financial instruments is
represented by the contractual amounts as disclosed. The Bank minimizes
its exposure to credit loss under these commitments by subjecting them
to credit approval and review procedures, and collateral requirements,
as deemed necessary.
The off-balance sheet commitments were comprised of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Commitments to extend credit:
Fixed Rate $ 867,550 $ 346,500 $ 731,000
Variable Rate 244,000 520,500 -
Standby letters of credit 13,676 13,000 35,000
------------ ------------- ------------
Total $ 1,125,226 $ 880,000 $ 766,000
============ ============= ============
</TABLE>
The range of interest rates on fixed rate commitments was 7.125% to
10.00% at March 31, 1997.
Contingent Liabilities
----------------------
In the normal course of business, the Bank is involved in various legal
proceedings primarily involving the collection of outstanding loans.
None of these proceedings are expected to have a material effect on the
consolidated financial position or operations of the Bank.
F-23
<PAGE>
17. CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. The Office of Thrift
Supervision sets forth capital standards applicable to all thrifts.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by the
regulators that, if undertaken, could have a direct material effect on
the Bank's financial statements. Capital adequacy guidelines involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by the regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
Total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of tangible and core capital (as defined in
the regulations) to adjusted assets (as defined). Management believes as
of December 31, 1996 that the Bank meets all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Bank's
primary regulator categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
"well capitalized" the Bank must maintain minimum tangible, core, and
risk-based ratios. There have been no conditions or events since that
notification that management believes have changed the Bank's category.
The following table reconciles capital under generally accepted
accounting principles to regulatory capital:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Total equity $4,449,431 $4,840,017 $4,440,628
Unrealized loss on securities 9,558 6,361 4,622
---------- ---------- ----------
Tier I, Core, and Tangible Capital 4,458,989 4,846,378 4,445,250
Allowance for loan losses 419,581 415,426 276,212
---------- ---------- ----------
Risk-based Capital $4,878,570 $5,261,804 $4,721,462
========== ========== ==========
</TABLE>
F-24
<PAGE>
17. CAPITAL REQUIREMENTS (Continued)
Actual capital levels of the Bank and minimum required levels are as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
---------------------------- ----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------- --------- --------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-Weighted Assets
-------------------------------------
Actual $ 4,878,570 12.46% $ 5,261,804 13.39% $ 4,721,462 12.37%
For Capital Adequacy Purposes 3,132,320 8.00 3,144,880 8.00 3,054,348 8.00
To be "Well Capitalized" 3,915,400 10.00 3,931,100 10.00 3,817,935 10.00
Tier I Capital to Risk-Weighted Assets
--------------------------------------
Actual $ 4,458,989 11.39% $ 4,846,378 12.33% $ 4,445,250 11.64%
For Capital Adequacy Purposes 1,566,160 4.00 1,572,440 4.00 1,527,174 4.00
To be "Well Capitalized" 2,349,240 6.00 2,358,660 6.00 2,290,761 6.00
Core Capital to Adjusted Assets
-------------------------------
Actual $ 4,458,989 5.38% $ 4,846,378 5.93% $ 4,445,250 5.44%
For Capital Adequacy Purposes 2,484,772 3.00 2,450,965 3.00 2,449,917 3.00
To be "Well Capitalized" 4,141,286 5.00 4,084,942 5.00 4,083,196 5.00
Tangible Capital to Adjusted Assets
-----------------------------------
Actual $ 4,458,989 5.38% $ 4,846,378 5.93% $ 4,445,250 5.44%
For Capital Adequacy Purposes 1,242,386 1.50 1,225,482 1.50 1,224,959 1.50
To be "Well Capitalized" N/A N/A N/A N/A N/A N/A
</TABLE>
Prior to the enactment of The Small Business Job Protection Act
discussed in Note 14, the Bank accumulated approximately $4,475,000 of
retained earnings at December 31, 1996, which amount represents
allocations of income to bad debt deductions for tax purposes only.
Since this amount represents the accumulated bad debt reserves prior to
1988, no provision for federal income tax has been made for such amount.
If any portion of this amount is used other than to absorb loan losses
(which is not anticipated), the amount will be subject to federal income
tax at the current corporate rate.
F-25
<PAGE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments at
December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- -----------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks,
interest-bearing deposits
in other banks $ 2,100,915 $ 2,100,915 $ 1,703,240 $ 1,703,240
Investment securities
available for sale 826,407 826,407 646,903 646,903
Investment securities
held to maturity 1,917,929 1,923,721 2,639,418 2,651,993
Mortgage-backed securities
available for sale 2,430,439 2,430,439 2,298,085 2,298,085
Mortgage-backed securities
held to maturity 17,126,963 17,249,409 18,992,674 19,368,898
FHLB stock 594,722 594,722 591,300 591,300
Loans receivable 54,789,033 55,769,000 52,525,935 54,063,000
Accrued interest receivable 498,502 498,502 536,297 536,297
--------------- ------------- ------------- -------------
Total $ 80,284,910 $ 81,393,115 $ 79,933,852 $ 81,859,716
=============== ============= ============= =============
Financial liabilities:
Deposits $ 64,294,119 $ 64,262,119 $ 65,160,207 $ 65,500,332
Advances by borrowers
for taxes and insurance 1,062,206 1,062,206 1,152,544 1,152,544
CMOs 6,937,405 7,925,000 8,250,537 9,725,000
Borrowed funds 3,772,036 3,734,000 1,778,000 1,808,000
Accrued interest payable 161,240 161,240 169,104 169,104
--------------- ------------- ------------- -------------
Total $ 76,227,006 $ 77,144,565 $ 76,510,392 $ 78,354,980
=============== ============= ============= =============
</TABLE>
Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract which creates an obligation or
right to receive or deliver cash or another financial instrument from/to
a second entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties
other than in a forced or liquidation sale. If a quoted market price is
available for a financial instrument, the estimated fair value would be
calculated based upon the market price per trading unit of the
instrument.
If no readily available market exists, the fair value estimates for
financial instruments are based upon management's judgment regarding
current economic conditions, interest rate risk, expected cash flows,
future estimated losses, and other factors as determined through various
option pricing formulas or simulation modeling. As many of these
assumptions result from judgments made by management based upon
estimates which are inherently uncertain, the resulting estimated fair
values may not be indicative of the amount realizable in the sale of a
particular financial instrument. In addition, changes in the assumptions
on which the estimated fair values are based may have a significant
impact on the resulting estimated fair values.
F-26
<PAGE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
As certain assets, such as deferred tax assets and premises and
equipment, are not considered financial instruments, the estimated fair
value of financial instruments would not represent the full value of the
Bank.
The Bank employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumptions:
Cash and Due From Banks, Interest-bearing Deposits with Other Banks,
--------------------------------------------------------------------
Accrued Interest Receivable, FHLB Stock, Advances By Borrowers For Taxes
------------------------------------------------------------------------
and Insurance, and Accrued Interest Payable
-------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
The fair value of these securities is equal to the available quoted
market price. If no quoted market price is available, fair value is
estimated using the quoted market price for similar securities.
Loans Receivable, Deposits, Collateralized Mortgage Obligation, and
-------------------------------------------------------------------
Borrowed Funds
--------------
The fair value of loans is estimated by discounting the future cash
flows using a simulation model which estimates future cash flows based
upon current market rates adjusted for prepayment risk and credit
quality. Savings, checking, and money market deposit accounts are valued
at the amount payable on demand as of year end. Fair values for time
deposits, collateralized mortgage obligation, and borrowed funds are
estimated using a discounted cash flow calculation that applies
contractual costs currently being offered in the existing portfolio to
current market rates being offered for deposits and notes of similar
remaining maturities.
Commitments to Extend Credit and Commercial Letters of Credit
-------------------------------------------------------------
These financial instruments are generally not subject to sale, and
estimated fair values are not readily available. The carrying value,
represented by the net deferred fee arising from the unrecognized
commitment or letter of credit, and the fair value, determined by
discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements
with similar credit risk, are not considered material for disclosure.
The contractual amounts of unfunded commitments and letters of credit
are presented in Note 16.
19. SUBSEQUENT EVENTS
Debt Extinguishment
-------------------
On March 7, 1997, the Bank purchased the Class C bond of the
Collateralized Mortgage Obligation issued by SHFC from a third party
investor. The bond was purchased for $4,929,000 and had a carrying value
of $4,073,151. The Bank also accelerated the recognition of deferred
debt issuance costs by $107,213 in connection with this transaction. As
a result, the Bank recorded a loss on the extinguishment of the Class C
bond of $562,525, net of related taxes of $400,537.
F-27
<PAGE>
19. SUBSEQUENT EVENTS (Continued)
Plan of Conversion
------------------
On April 16, 1997, the Board of Directors of the Bank, subject to
regulatory approval and approval by the members of the Bank, adopted a
Plan of Conversion (the "Plan") to convert from a federally chartered
mutual savings bank to a federally chartered stock savings bank and the
concurrent formation of a holding company for the Bank. 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, the Bank's
tax-qualified employee stock benefits plans, supplemental eligible
account holders, and directors, officers, and employees. Any shares
remaining may then be offered to the general public. The Plan also
provides that the holding company will be acquiring all of the stock of
the Bank.
Conversion costs will be deferred and deducted from the proceeds of the
stock offering. If the offering is unsuccessful for any reason, the
deferred costs will be charged to operations. At December 31, 1996, no
costs have yet been deferred.
At the date of conversion, the Bank will establish a liquidation account
in an amount equal to its 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
account holders and supplemental eligible account holders who continue
to maintain their accounts at the Bank after the conversion. The
liquidation will be reduced annually to the extent these account holders
have reduced their qualifying deposits. In the event of a complete
liquidation, each eligible savings account holder will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts
then held.
The Bank may not declare or pay a cash dividend on, or repurchase any of
its common shares if the effect thereof would cause the Bank's
shareholders' equity to be reduced below either the amount required for
the liquidation account or the regulatory capital requirements for
insured institutions.
F-28
<PAGE>
20. SPRING HILL FUNDING CORPORATION
Condensed financial statements for Spring Hill Funding Corporation are
presented below:
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
Cash $ 229,995 $ 176,918 $ 1,000
Investments 484,939 477,120 629,159
Mortgage-backed securities 6,785,024 7,259,729 8,675,903
Other assets 455,656 468,555 466,511
-------------- -------------- --------------
Total assets $ 7,955,614 $ 8,382,322 $ 9,772,573
============== ============== ==============
LIABILITIES
Collateralized mortgage obligation $ 6,535,570 $ 6,937,405 $ 8,250,537
Accrued interest payable 96,143 102,620 123,378
Other liabilities 103,517 102,266 98,800
-------------- ------------- -------------
Total liabilities 6,735,230 7,142,291 8,472,715
-------------- ------------- -------------
STOCKHOLDER'S EQUITY
Capital stock 1,000 1,000 1,000
Additional paid-in capital 1,500,037 1,500,037 1,500,037
Retained deficit (280,653) (261,006) (201,179)
-------------- ------------- -------------
Total stockholder's equity 1,220,384 1,240,031 1,299,858
-------------- ------------- -------------
Total liabilities and stockholder's equity $ 7,955,614 $ 8,382,322 $ 9,772,573
============== ============= =============
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 1996 1996 1995
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Interest income $ 200,966 $ 224,709 $ 872,176 $ 1,025,875
Interest expense 206,557 246,624 930,669 1,060,807
-------------- ------------ ------------- --------------
Net interest loss (5,591) (21,915) (58,493) (34,932)
Other expenses 14,056 10,931 43,774 43,774
-------------- ------------ ------------- --------------
Loss before income taxes (19,647) (32,846) (102,267) (78,706)
Income tax benefit - - (42,441) (32,734)
-------------- ------------ ------------- --------------
Net loss $ (19,647) $ (32,846) $ (59,826) $ (45,972)
============== ============ ============= ==============
</TABLE>
F-29
<PAGE>
===============================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PRO-
SPECTUS 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 SHS BANCORP, INC. OR SPRING HILL SAVINGS BANK, F.S.B. 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 OR IN ANY JURISDIC-
TION 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 JU-
RISDICTION. 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 SHS BANCORP, INC. OR SPRING HILL SAVINGS BANK, F.S.B.
SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE
THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary..................................................... (i)
Selected Consolidated Financial Information............................ (viii)
Recent Developments.................................................... (x)
Risk Factors........................................................... 1
SHS Bancorp, Inc. ..................................................... 5
Spring Hill Savings Bank, F.S.B. ...................................... 6
Use of Proceeds........................................................ 6
Dividend Policy........................................................ 8
Market for Common Stock................................................ 9
Capitalization......................................................... 10
Historical and Pro Forma Capital Compliance............................ 12
Pro Forma Data......................................................... 13
Spring Hill Savings Bank, F.S.B. and Subsidiary Consolidated Statements
of Operations......................................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 20
Business of the Holding Company........................................ 31
Business of the Savings Bank........................................... 31
Management of the Holding Company...................................... 58
Management of the Savings Bank......................................... 59
Regulation............................................................. 67
Taxation............................................................... 74
The Conversion......................................................... 75
Restrictions on Acquisition of the Holding Company..................... 90
Description of Capital Stock of the Holding Company.................... 96
Registration Requirements.............................................. 97
Legal and Tax Opinions................................................. 98
Experts................................................................ 98
Additional Information................................................. 98
Index to Consolidated Financial Statements............................. 99
</TABLE>
UNTIL THE LATER OF SEPTEMBER 16, 1997, OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING OF COMMON STOCK, IF ANY, 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 ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
[LOGO of SHS BANCORP, INC.]
(PROPOSED HOLDING COMPANY FOR SPRING HILL SAVINGS BANK, F.S.B.)
713,000 SHARES OF
COMMON STOCK
(ANTICIPATED MAXIMUM)
---------------
PROSPECTUS
---------------
[Logo of Ryan, Beck & Co.]
AUGUST 12, 1997
===============================================================================
<PAGE>
[LOGO OF SHS BANCORE, INC.]
Dear Member:
I am pleased to inform you that the Board of Directors has unanimously
approved a Plan of Conversion whereby Spring Hill Savings Bank, F.S.B.
("Spring Hill" or the "Savings Bank") will convert from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank. As part of
the conversion process, the Savings Bank will become a wholly-owned subsidiary
of SHS Bancorp, Inc., which is a recently organized Pennsylvania corporation.
The Office of Thrift Supervision has approved the Plan of Conversion subject
to a favorable vote of our members. Please read the enclosed Proxy Statement,
vote and sign the enclosed Proxy Card(s) and mail them to us in the enclosed
reply envelope. The Board of Directors urges you to vote "FOR" the Plan of
Conversion. We must receive the card(s) by 11:00 a.m., Eastern Time, on
September 18, 1997.
Although you may vote on the Savings Bank's Plan of Conversion, SHS Bancorp,
Inc. is unfortunately unable to offer or sell its common stock to you because
the small number of members in your state makes registration or qualification
under your state securities laws impractical for reasons of cost or otherwise.
Accordingly, this letter, the enclosed Proxy Statement, and the enclosed
Prospectus should not be considered an offer to sell nor a solicitation of an
offer to buy the common stock. The Prospectus is referred to in the Proxy
Statement for a more detailed explanation of the conversion process and is
enclosed with this letter solely to provide such explanation and not as an
offer to sell nor a solicitation of an offer to buy the common stock described
in the Prospectus.
IF YOU HAVE ANY QUESTIONS ABOUT YOUR VOTING RIGHTS OR THE CONVERSION, PLEASE
CALL OUR STOCK INFORMATION CENTER AT (412) 323-3750, FROM 9:00 A.M. TO 4:00
P.M., MONDAY THROUGH FRIDAY.
Sincerely,
/s/Thomas F. Angotti
Thomas F. Angotti
President and Chief Executive Officer
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS, HOWEVER, NEITHER
AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY IS BEING MADE WITH THE
ENCLOSED PROSPECTUS. THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION ARE
NOT ACCOUNTS OR DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED. THE
COMMON STOCK HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE OFFICE OF
THRIFT SUPERVISION OR ANY OTHER GOVERNMENT AGENCY.
STOCK INFORMATION CENTER
SPRING HILL SAVINGS BANK, F.S.B.
112 FEDERAL STREET
PITTSBURGH, PA 15212
(412) 323-3750
Bluesky
<PAGE>
Ryan, Beck & Co. [LOGO OF RYAN, BECK & CO.]
- --------------------------------------------------------------------------------
Investment Bankers and Bank/Thrift Consultants
Dear Potential Investor:
At the request of SHS Bancorp, Inc., we are enclosing materials regarding
the conversion of Spring Hill Savings Bank, F.S.B. from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank. The materials
include the Prospectus and a Question and Answer Brochure describing the
Conversion and SHS Bancorp, Inc.'s common stock offering.
We have been asked to forward these materials to you in view of certain
regulatory requirements and securities laws.
Sincerely,
COMMUNITY CAPITAL GROUP
a division of
Ryan, Beck & Co.
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF
COMMON STOCK OFFERED IN THE CONVERSION ARE NOT ACCOUNTS OR DEPOSITS AND ARE
NOT FEDERALLY INSURED OR GUARANTEED. THE COMMON STOCK HAS NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE OFFICE OF THRIFT SUPERVISION OR ANY OTHER
GOVERNMENT AGENCY.
Broker Dealer
<PAGE>
[LOGO OF SHS BANCORP, INC.]
Dear Member:
I am pleased to inform you that the Board of Directors has unanimously
approved a Plan of Conversion whereby Spring Hill Savings Bank, F.S.B.
("Spring Hill" or the "Savings Bank") will convert from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank. As part of
the conversion process, the Savings Bank will become a wholly-owned subsidiary
of SHS Bancorp, Inc., which is a recently organized Pennsylvania corporation.
Enclosed are a Prospectus, Stock Order Form, and Question and Answer
Brochure. You may purchase common stock in the Conversion without paying a
commission or fee. YOUR COMPLETED STOCK ORDER FORM, ALONG WITH FULL PAYMENT OR
AUTHORIZATION TO WITHDRAW FUNDS FROM YOUR SPRING HILL DEPOSIT ACCOUNT(S), MUST
BE RECEIVED AT ANY OF OUR OFFICES BY 11:00 A.M., EASTERN TIME, ON SEPTEMBER
16, 1997.
Please remember:
. YOUR DEPOSIT ACCOUNTS AT THE SAVINGS BANK WILL CONTINUE TO BE INSURED TO
THE MAXIMUM EXTENT ALLOWED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
. THERE WILL BE NO CHANGE IN THE TERMS OF YOUR ACCOUNTS OR LOANS.
. DEPOSITORS WILL ENJOY THE SAME SERVICES IN OUR OFFICES WITH THE SAME STAFF.
. YOUR VOTE IN FAVOR OF CONVERSION DOES NOT OBLIGATE YOU TO BUY STOCK.
. YOU HAVE A RIGHT TO BUY STOCK BEFORE STOCK IS OFFERED TO THE GENERAL PUBLIC
SUBJECT TO THE PURCHASE PRIORITY ALLOCATIONS SET FORTH IN THE PLAN OF
CONVERSION.
Interest at the Savings Bank's stated rate on passbook accounts will be paid
on all subscription funds received until completion or termination of the
Conversion. Authorized withdrawals from existing accounts will continue to
earn interest at the contractual rate until the completion of the Conversion.
You may purchase the common stock by a withdrawal from your savings or
certificate account without the penalty for early withdrawals. PLEASE CALL THE
STOCK INFORMATION CENTER EARLY IN THE CONVERSION PERIOD IF YOU WISH TO
PURCHASE COMMON STOCK USING IRA FUNDS BECAUSE IRA-RELATED PROCEDURES REQUIRE
ADDITIONAL PROCESSING TIME.
Dear Member
<PAGE>
Page 2
The Office of Thrift Supervision has approved the Plan of Conversion subject
to a favorable vote of our members. Also enclosed you will find a Proxy
Statement, Proxy Card(s) and a reply envelope. Management urges that you vote
"FOR" the Plan of Conversion after reviewing the Proxy Statement. Please sign
the enclosed Proxy Card(s) and return them to any Spring Hill office or mail
them immediately in the enclosed reply envelope. Should you choose to attend
the Special Meeting of Members and wish to vote in person, you may do so by
revoking your previously executed proxy.
IF YOU HAVE ANY QUESTIONS, PLEASE CALL THE STOCK INFORMATION CENTER AT (412)
323-3750, FROM 9:00 A.M. - 4:00 P.M., MONDAY THROUGH FRIDAY.
We hope that you will take advantage of this opportunity to join us as a
charter stockholder of SHS Bancorp, Inc.
Sincerely,
/s/ Thomas F. Angotti
Thomas F. Angotti
President and Chief Executive Officer
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF
COMMON STOCK OFFERED IN THE CONVERSION ARE NOT ACCOUNTS OR DEPOSITS AND ARE
NOT FEDERALLY INSURED OR GUARANTEED. THE COMMON STOCK HAS NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE OFFICE OF THRIFT SUPERVISION OR ANY OTHER
GOVERNMENT AGENCY.
STOCK INFORMATION CENTER
SPRING HILL SAVINGS BANK, F.S.B.
112 FEDERAL STREET
PITTSBURGH, PA 15212
(412) 323-3750
<PAGE>
[LOGO OF SHS BANCORP, INC.]
Dear Sir/Madam:
I am pleased to inform you that the Board of Directors has unanimously
approved a Plan of Conversion whereby Spring Hill Savings Bank, F.S.B.
("Spring Hill" or the "Savings Bank") will convert from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank. As part of
the conversion process, the Savings Bank will become a wholly-owned subsidiary
of SHS Bancorp, Inc., which is a recently organized Pennsylvania corporation.
Enclosed are a Prospectus, Stock Order Form, and Question and Answer
Brochure. You may purchase SHS Bancorp, Inc. common stock in the Conversion
before it is offered to the general public and without paying a commission or
fee subject to the purchase priority allocations set forth in the Plan of
Conversion. YOUR COMPLETED STOCK ORDER FORM, ALONG WITH FULL PAYMENT, MUST BE
RECEIVED AT ANY OF OUR OFFICES BY 11:00 A.M., EASTERN TIME ON SEPTEMBER 16,
1997.
Interest at the Savings Bank's stated rate on passbook accounts will be paid
on all subscription funds received until completion or termination of the
Conversion.
IF YOU HAVE ANY QUESTIONS, PLEASE CALL THE STOCK INFORMATION CENTER AT (412)
323-3750, FROM 9:00 A.M. - 4:00 P.M., MONDAY THROUGH FRIDAY.
We hope that you will take advantage of this opportunity to join us as a
charter stockholder of SHS Bancorp, Inc.
Sincerely,
/s/ Thomas F. Angotti
Thomas F. Angotti
President and Chief Executive Officer
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF
COMMON STOCK OFFERED IN THE CONVERSION ARE NOT ACCOUNTS OR DEPOSITS AND ARE
NOT FEDERALLY INSURED OR GUARANTEED. THE COMMON STOCK HAS NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE OFFICE OF THRIFT SUPERVISION OR ANY OTHER
GOVERNMENT AGENCY.
STOCK INFORMATION CENTER
SPRING HILL SAVINGS BANK, F.S.B.
112 FEDERAL STREET
PITTSBURGH, PA 15212
(412) 323-3750
Closed Account
<PAGE>
[LOGO OF SHS BANCORP, INC.]
Dear Potential Investor:
I am pleased to inform you that the Board of Directors has unanimously
approved a Plan of Conversion whereby Spring Hill Savings Bank, F.S.B.
("Spring Hill" or the "Savings Bank") will convert from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank. As part of
the conversion process, the Savings Bank will become a wholly-owned subsidiary
of SHS Bancorp, Inc., which is a recently organized Pennsylvania corporation.
In connection with the Conversion, SHS Bancorp, Inc. is offering up to
713,000 shares of common stock (subject to a possible increase to 819,950
shares of common stock) at $10.00 per share through a Subscription and
Community Offering. The stock is being offered to qualifying depositors and
other members of the Savings Bank along with the employee stock ownership plan
of the Savings Bank in a Subscription Offering and then to certain members of
the general public in a Community Offering.
Enclosed are a Prospectus, Stock Order Form, reply envelope, and Question
and Answer Brochure. If you are interested in purchasing shares of common
stock, you may do so during the Subscription and Community Offering without
paying a commission or fee, subject to the purchase priorities set forth in
the Plan of Conversion and described in the Prospectus. YOUR COMPLETED STOCK
ORDER FORM, ALONG WITH FULL PAYMENT, MUST BE RECEIVED AT ANY OF OUR OFFICES BY
11:00 A.M., EASTERN TIME, ON SEPTEMBER 16, 1997.
Interest at the Savings Bank's stated rate paid on passbook accounts will be
paid on all subscription funds received until completion or termination of the
Conversion.
IF YOU HAVE ANY QUESTIONS, PLEASE CALL THE STOCK INFORMATION CENTER AT (412)
323-3750, FROM 9:00 A.M - 4:00 P.M., MONDAY THROUGH FRIDAY.
We hope that you will take advantage of this opportunity to join us as a
charter stockholder of SHS Bancorp, Inc.
Sincerely,
/s/ Thomas F. Angotti
Thomas F. Angotti
President and Chief Executive Officer
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF
COMMON STOCK OFFERED IN THE CONVERSION ARE NOT ACCOUNTS OR DEPOSITS AND ARE
NOT FEDERALLY INSURED OR GUARANTEED. THE COMMON STOCK HAS NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE OFFICE OF THRIFT SUPERVISION OR ANY OTHER
GOVERNMENT AGENCY.
STOCK INFORMATION CENTER
SPRING HILL SAVINGS BANK, F.S.B.
112 FEDERAL STREET
PITTSBURGH, PA 15212
(412) 323-3750
Potential Investor
<PAGE>
[LOGO OF SHS BANCORE INC.]
Dear Valued Friend in California:
We appreciate this opportunity to provide you with information regarding
the offering of common stock of SHS Bancorp, Inc. In order to offer common stock
to residents of the State of California, a condition was imposed limiting (i)
the California portion of the offering solely to members of Spring Hill Savings
Bank, FSB residing in California, and (ii) the aggregate purchases of stock
which may be purchased within California to 26,344 shares. In the event the
aggregate purchases in California exceed this restriction, the available shares
will be allocated among all subscribers in California based upon the priority
categories set forth in the Plan of Conversion.
If you have any questions about the conversion, please call the Stock
Information Center at (412) 323-3750 between 9:00 a.m. and 4:00 p.m., Eastern
Time, Monday through Friday.
Thank you for giving these matters your attention and timely consideration.
Sincerely,
/s/ Thomas F. Angotti
Thomas F. Angotti
President and Chief Executive Officer
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF
COMMON STOCK OFFERED IN CONNECTION WITH THE CONVERSION ARE NOT SAVINGS ACCOUNTS
OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
<PAGE>
[LOGO SHS BANCORP, INC.]
STOCK ORDER FORM
PLEASE READ AND COMPLETE THIS STOCK ORDER FORM. INSTRUCTIONS ARE INCLUDED ON
THE REVERSE SIDE OF THIS FORM.
- --------------------------------------------------------------------------------
DEADLINE AND DELIVERY: 11:00 A.M., EASTERN TIME, ON SEPTEMBER 16, 1997
Please mail the Stock Order Form in the enclosed envelope to the address listed
below or hand-deliver to any Spring Hill Savings Bank, F.S.B. ("Spring Hill")
office. SHS Bancorp, Inc. is not required to accept copies of Stock Order
Forms.
NUMBER OF SHARES OFFICE USE ONLY
(1)Number Price per Share Total Amount Due
of Shares
X $10.00 = $ ------------- ------- -------
(Minimum 25) Date Received Batch # Order #
METHOD OF PAYMENT PURCHASER INFORMATION
(2) [_] Enclosed is a check or money (4) Check one of the following
order payable to SHS BANCORP, INC. for boxes.
$ .
(a) [_] Check here if you are a
director, officer or employee of
Spring Hill, or a member of his
or her immediate family.
(3) [_] I authorize Spring Hill to
make the withdrawal(s) from the Spring (b) [_] Check here if you were a
Hill account(s) listed below, and depositor of Spring Hill on
understand that the amounts indicated DECEMBER 31, 1995. List
below will not be available for account(s) you had at this date
withdrawal once this Stock Order Form below.
is submitted:
(c) [_] Check here if you were not
a depositor on December 31,
1995, but were a depositor on
JUNE 30, 1997. List those
account(s) below.
ACCOUNT NUMBER(S) AMOUNT(S)
$
--------------------------------------- (d) [_] Check here if you were NOT
$ a depositor at December 31, 1995
--------------------------------------- or June 30, 1997, but you WERE a
$ depositor or borrower on July
--------------------------------------- 31, 1997. List account(s) you
$ had at this date below.
---------------------------------------
Total Withdrawal $ (e) [_] Check here if you have never
--------------------------------------- -----
THERE IS NO EARLY WITHDRAWAL PENALTY been a Spring Hill depositor.
FOR THE PURCHASE OF STOCK.
ACCOUNT TITLE (NAME(S) ACCOUNT
ON ACCOUNT) NUMBER
------------------------------------
------------------------------------
------------------------------------
------------------------------------
------------------------------------
IF ADDITIONAL SPACE IS NEEDED,
PLEASE USE THE BACK OF THIS STOCK
ORDER FORM.
STOCK REGISTRATION (PLEASE PRINT CLEARLY)
(5) (6)
-----------------------------------------------------------------------------
(First Name) (M.I.) (Last Name) Social Security #/Tax ID#
(certificate will show this
number)
-----------------------------------------------------------------------------
(First Name) (M.I.) (Last Name) Social Security #/Tax ID#
(7)
-----------------------------------------------------------------------------
(Street Address) (Daytime Phone Number)
-----------------------------------------------------------------------------
(City) (State) (County) (Zip) (Evening Phone Number)
(8) Form of Stock Ownership (check one)
[_] Individual [_] Joint Tenants [_] Tenants in Common
[_] Uniform Transfer to
[_] Individual Retirement Account (IRA) Minors
[_] Corporation [_] Fiduciary (Under Agreement
Dated , 199 )
NASD AFFILIATION (IF APPLICABLE)
[_] Check here and initial below if you are a member of the NASD ("National
Association of Securities Dealers") or a person associated with an NASD
member or a member of the immediate family of any such person to whose
support such person contributes, directly or indirectly, or if you have an
account in which an NASD member, or person associated with an NASD member,
has a beneficial interest. I agree (i) not to sell, transfer, or hypothecate
the stock for a period of 90 days following issuance; and (ii) to report this
subscription in writing to the applicable NASD member I am associated with
within one day of payment for the stock. (Please initial)
ACKNOWLEDGMENT AND SIGNATURE (VERY IMPORTANT)
I(we) acknowledge receipt of the Prospectus dated August 12, 1997. The
Prospectus that I(we) received contains disclosure concerning the nature of
the common stock being offered by SHS Bancorp, Inc., and describes risk
factors involved in the investment in this common stock. I(we) understand
that, after receipt by SHS Bancorp, Inc., this order may not be modified or
-------
withdrawn without the consent of SHS Bancorp, Inc. I(we) hereby certify that
the shares which are being subscribed for are for my(our) account only, and
that I(we) have no present agreement or understanding regarding any
subsequent sale or transfer of such shares and I(we) confirm that my(our)
order does not conflict with the purchase limit provisions in the Plan of
Conversion. I(we) acknowledge that the common stock being ordered is not a
deposit or savings account, is not federally-insured, and is not guaranteed
by SHS Bancorp, Inc. or the federal government. If anyone asserts that the
common stock being ordered is federally-insured or guaranteed, or is as safe
as an insured deposit, I(we) should call the Regional Director, Office of
Thrift Supervision, Northeast Regional Office, at (201) 413-1000. Under
penalties of perjury, I(we) certify that (1) the Social Security #(s) or Tax
ID#(s) given above is(are) correct; and (2) I(we) am(are) not subject to
backup withholding tax (You must cross out #2 above if you have been notified
by the Internal Revenue Service that you are subject to backup withholding
because of underreporting interest or dividends on your tax return).
Please sign and date this form. Only one signature is required, unless
authorizing a withdrawal from a Spring Hill Savings Bank deposit account
requiring more than one signature to withdraw funds. If signing as a
custodian, corporate officer, etc., please include your full title.
STOCK INFORMATION CENTER:
------------------------------------- Spring Hill Savings Bank
Signature Title (if applicable) Date 112 Federal Street
Pittsburgh, PA 15212
-------------------------------------
Signature (if required) Date QUESTIONS? Please call
(412) 323-3750
9:00 am to 4:00 pm, Monday-Friday
THIS ORDER NOT VALID UNLESS SIGNED
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION ARE NOT ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED.THE COMMON STOCK HAS NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE
FEDEERAL DEPOSIT INSURANCE CORPORATION, THE OFFICE OF THRIFT SUPERVISION OR ANY
OTHER GOVERNMENT AGENCY.
<PAGE>
SHS BANCORP, INC.
STOCK ORDER FORM INSTRUCTIONS
1--Fill in the number of shares you wish to purchase and the amount due. The
maximum order that an individual (or individuals exercising subscription
rights through a single Spring Hill account) may place in the SUBSCRIPTION AND
COMMUNITY OFFERING is $50,000. The overall limit in the Subscription Offering
and Community Offering, combined, for any individual, together with associates
or group acting in concert, is $85,000. See the Prospectus section entitled
"The Conversion--The Subscription, Direct Community and Syndicated Community
Offerings" for a more detailed description of purchase priorities in the
Subscription Offering and Community Offering. SHS Bancorp, Inc. reserves the
right to accept or reject any order received in the Community Offering.
2--Check the appropriate box(es). Payment for shares may be made by check or
money order payable to SHS Bancorp, Inc. Funds received in this form of
payment will be cashed immediately and deposited into a separate account
established for the purposes of this Offering. You will earn interest at
Spring Hill's passbook rate from the time funds are received until the
Offering is terminated or consummated.
3--You may pay for your shares by withdrawal from your Spring Hill deposit
account(s). Indicate the account number(s) and the amount(s) to be withdrawn.
These funds will be unavailable to you from the time this Stock Order Form is
received until the Offering is consummated. The funds will continue to earn
interest at the account's contractual rate until the Offering is completed.
PLEASE CONTACT THE STOCK INFORMATION CENTER EARLY IN THE OFFERING PERIOD IF
YOU ARE INTENDING TO MAKE SUCH A WITHDRAWAL FROM A SPRING HILL IRA ACCOUNT.
4--Check one of the boxes. THIS INFORMATION IS VERY IMPORTANT BECAUSE
ELIGIBILITY DATES ARE UTILIZED TO PRIORITIZE YOUR ORDER IN THE EVENT AN
OVERSUBSCRIPTION OCCURS. List the deposit account name(s) and number(s) that
you held at the applicable date. Please see the section of the Prospectus
entitled "The Conversion - The Subscription, Direct Community and Syndicated
Community Offerings" for a more detailed explanation of how shares will be
allocated in the event the Offering is oversubscribed. Failure to complete
this section could result in a loss of all or part of your share allocation.
(Continued from previous page)
ACCOUNT TITLE (NAME(S) ON ACCOUNT) ACCOUNT NUMBER
-------------------------- ---------------------
-------------------------- ---------------------
-------------------------- ---------------------
-------------------------- ---------------------
5--Please CLEARLY PRINT the name(s) and address in which you want the stock
certificate registered and mailed. If you are purchasing in the Subscription
Offering as a Spring Hill (i) depositor as of December 31, 1995; (ii)
depositor as of June 30, 1997; or (iii) depositor or mortgage borrower as of
July 31, 1997, you must register the stock in the name of one of the account
holders listed on your account as of the applicable date. HOWEVER, adding the
name(s) of other persons who are not account holders, or were account holders
at a later date than you, will result in a loss of your purchase priority.
NOTE: ONE STOCK CERTIFICATE WILL BE GENERATED PER ORDER FORM. IF VARIOUS
REGISTRATIONS AND SHARE AMOUNTS ARE DESIRED ON VARIOUS CERTIFICATES, A
SEPARATE STOCK ORDER FORM MUST BE COMPLETED FOR EACH CERTIFICATE DESIRED.
6--Enter the Social Security Number or Tax ID Number of each of the registered
owners.
7--Be sure to include at least one phone number, in the event you must be
contacted regarding this Stock Order Form.
8--Please check the one type of ownership applicable to your registration. An
explanation of each follows:
GUIDELINES FOR REGISTERING STOCK
For reasons of clarity and standardization, the stock transfer industry has
developed uniform stockholder registrations which we will utilize in the
issuance of your SHS Bancorp, Inc. stock certificate(s). If you have any
questions, please consult your legal advisor.
Stock ownership must be registered in one of the following manners:
- ------------------------------------
INDIVIDUAL: Avoid the use of two initials. Include the first given name,
middle initial and last name of the stockholder. Omit words of
limitation that do not affect ownership rights such as "special
account," "single man," "personal property," etc. If the stock is
held individually upon the individual's death, the stock will be
owned by the individual's estate and distributed as indicated by
the individual's will or otherwise in accordance with law.
- ------------------------------------
JOINT: Joint ownership of stock by two or more persons shall be inscribed
on the certificate with one of the following types of joint
ownership. Names should be joined by "and"; do not connect with
"or." Omit titles such as "Mrs.," "Dr.," etc.
JOINT TENANTS--Joint Tenancy with Right of Survivorship and not as
Tenants in Common may be specified to identify two or more owners
where ownership is intended to pass automatically to the surviving
tenant(s).
TENANTS IN COMMON--Tenants in Common may be specified to identify
two or more owners. When stock is held as tenancy in common, upon
the death of one co-tenant, ownership of the stock will be held by
the surviving co-tenant(s) and by the heirs of the deceased co-
tenant. All parties must agree to the transfer or sale of shares
held in this form of ownership.
- ------------------------------------
UNIFORM Stock may be held in the name of a custodian for a minor under the
TRANSFER Uniform Transfers to Minors laws of the individual states. There
TO MINORS: may be only one custodian and one minor designated on a stock
certificate. The standard abbreviation of custodian is "CUST",
while the description "Uniform Transfers to Minors Act" is
abbreviated "UNIF TRAN MIN ACT." Standard U.S. Postal Service
state abbreviations should be used to describe the appropriate
state. For example, stock held by John P. Jones under the Uniform
Transfers to Minors Act will be abbreviated:
JOHN P. JONES CUST SUSAN A. JONES
UNIF TRAN MIN ACT PA
- ------------------------------------
FIDUCIARIES:Stock held in a fiduciary capacity must contain the following:
1. The name(s) of the fiduciary:
--If an individual, list the first given name, middle
initial, and last name.
--If a corporation, list the corporate title.
--If an individual and a corporation, list the corporation's
title before the individual.
2. The fiduciary capacity:
--Administrator
--Conservator
--Committee
--Executor
--Trustee
--Personal Representative
--Custodian
3. The type of document governing the fiduciary relationship.
Generally, such relationships are either under a form of living
trust agreement or pursuant to a court order. Without a
document establishing a fiduciary relationship, your stock may
not be registered in a fiduciary capacity.
4. The date of the document governing the relationship. The date
of the document need not be used in the description of a trust
created by a will.
5. Either of the following:
The name of the maker, donor or testator
or
The name of the beneficiary
Example of Fiduciary Ownership:
JOHN D. SMITH, TRUSTEE FOR TOM A. SMITH
UNDER AGREEMENT DATED 6/9/74
<PAGE>
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SPRING HILL SAVINGS BANK, F.S.B. FOR THE SPECIAL MEETING OF MEMBERS
The undersigned member of Spring Hill Savings Bank, F.S.B. ("Savings Bank")
hereby appoints the Board of Directors, with full powers of substitution, as
attorneys-in-fact and agents for and in the name of the undersigned, to vote
such shares as the undersigned may be entitled to cast at the Special Meeting of
Members ("Meeting") of the Savings Bank to be held at the Savings Bank's Spring
Hill office at Itin and Rhine Streets, Pittsburgh, Pennsylvania, on the date and
time indicated on the Notice of Special Meeting, and at any adjournment thereof.
They are authorized to cast all votes to which the undersigned is entitled, as
indicated on the reverse hereof.
Should the undersigned be present and elect to vote at said Meeting or at any
adjournment thereof and, after notification to the Secretary of the Savings Bank
at said Meeting of the member's decision to terminate this Proxy, then the power
or said attorney-in-fact or agents shall be deemed terminated and of no further
force and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting of Members
of the Savings Bank called on the date and time indicated on the Notice of
Special Meeting, and a Proxy Statement relating to said Meeting from the Savings
Bank, prior to the execution of this Proxy.
THIS PROXY, IF SIGNED AND RETURNED, WILL BE VOTED FOR THE PROPOSITION
STATED IF NO CHOICE IS MADE HEREIN
FOLD AND DETACH HERE
<PAGE>
[X] Please mark
your votes
as indicated
[ ]FOR [ ]AGAINST
1. To approve a Plan of Conversion adopted by the Board of Directors on April
16, 1997, providing for (i) the conversion of the Savings Bank from a federally
chartered mutual savings bank to a federally chartered capital stock savings
bank to be held as a wholly-owned subsidiary of a new holding company, SHS
Bancorp, Inc., including the adoption of a Federal Stock Charter and Bylaws for
the Savings Bank, pursuant to the laws of the United States and the rules and
regulations of the Office of Thrift Supervision.
2. In their discretion, upon such other matters as may properly come before the
Special Meeting.
NOTE: The Board of Directors is not aware of any other matter that may come
before the Meeting.
REVOCABLE
PROXY
PLEASE SIGN YOUR NAME EXACTLY AS IT
APPEARS ON THIS PROXY CARD.
Signature(s) ___________________________ Date _______________________________
Signature(s) ___________________________ Date _______________________________
NOTE: Only one signature is required in the case of a joint account, but all
account holders should sign if possible. When signing as an attorney,
administrator, agent, corporation, officer, executor, trustee, guardian or
similar position, please give your full title.
FOLD AND DETACH HERE
<PAGE>
[LOGO OF SHS BANCORP, INC.]
Questions
and
Answers
About
the
Conversion
and
Stock
Offering
<PAGE>
Spring Hill Savings Bank, F.S.B. ("Spring Hill" or the "Savings Bank") is con-
verting to the stock form of ownership pursuant to a Plan of Conversion (the
"Plan"). You have the opportunity to become a charter stockholder in SHS
Bancorp, Inc., the Savings Bank's recently organized holding company (the
"Holding Company"). This pamphlet answers frequently asked questions about the
stock conversion and about your opportunity to invest in SHS Bancorp, Inc.
Investment in the common stock involves certain risks. For a discussion of
these risks and other factors, investors are urged to read the accompanying
Prospectus.
- -------------------------------------------------------------------------------
GENERAL
- -------------------------------------------------------------------------------
Q. WHAT IS MEANT BY CONVERSION?
A. Conversion is a change in the legal form of the Savings Bank's organization.
Spring Hill is presently a federally chartered mutual (no stockholders) savings
------
bank. After the Conversion, Spring Hill will be a federally-chartered capital
-------
stock savings bank and a wholly-owned subsidiary of SHS Bancorp, Inc. Pursuant
- -----
to the Plan of Conversion, the Holding Company will acquire all of the Spring
Hill common stock to be issued in the Bank's stock conversion, and the holding
company will become a "public" company by selling shares of SHS Bancorp, Inc.
common stock. The stockholders of SHS Bancorp, Inc. will have voting rights
with respect to certain key business matters. The holding company structure
will provide advantages which may facilitate the future growth and financial
performance of the Savings Bank.
Q. WHY IS SPRING HILL CONVERTING TO THE STOCK FORM OF OWNERSHIP?
A. Although the Savings Bank exceeds all regulatory capital requirements, the
Savings Bank's business strategy includes raising additional capital. The con-
version of Spring Hill and the related sale of the Holding Company's common
stock will:
. Allow customers and community members to become stockholders, sharing in
our organization's future;
. Provide additional funds for lending and investment activities;
. Facilitate future access to the capital markets;
. Enhance the operating flexibility of our organization; and
. Improve the competitive position of Spring Hill.
Q. WHAT STEPS ARE INVOLVED IN COMPLETING THE CONVERSION?
A.. A Plan of Conversion was adopted by the Board of Directors;
. The Office of Thrift Supervision approved the Plan of Conversion, subject
to approval of the Savings Bank's members (depositors and certain borrow-
ers);
. The Board of Directors is soliciting proxies from the Savings Bank's mem-
bers, requesting that they vote "FOR" the Plan of Conversion;
. The Holding Company is conducting a Subscription Offering and a Community
Offering of common stock (together, the "Offering");
. At the conclusion of the Conversion, SHS Bancorp, Inc. will own all of the
stock of Spring Hill, and stockholders will own SHS Bancorp Inc.'s common
stock; and
. When the Plan is approved and the Offering is completed, certificates for
the common stock will be issued to SHS Bancorp Inc.'s stockholders.
Q. WHAT EFFECT WILL THE CONVERSION HAVE ON THE SAVINGS BANK'S OPERATIONS?
A. After the Conversion, Spring Hill will continue to offer customers a full
range of financial services. The Savings Bank's principal business of accepting
deposits and making mortgage and other loans will continue without interrup-
tion.
Q. WILL THERE BE ANY CHANGES IN MANAGEMENT OR PERSONNEL OF THE SAVINGS BANK AS
A RESULT OF THE CONVERSION?
A. No. Directors, officers and employees will continue in their same positions
at the Savings Bank. Our day-to-day activities will not change.
Q. WILL THE CONVERSION HAVE ANY EFFECT ON MY DEPOSIT ACCOUNTS OR LOANS WITH
SPRING HILL?
A. No. The Conversion will not affect the balance, interest rate or withdrawal
rights of your savings or certificate accounts. Insurance of deposit accounts
by the FDIC will continue without change. The rights and obligations of borrow-
ers under their loan agreements will not be affected.
<PAGE>
Q. HOW WILL THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK BE USED?
A. The net proceeds from the sale of common stock will increase Spring Hill's
capital base and will support the Savings Bank's business activities, including
the origination of one-to-four family residential loans and other loans.
Q. WHAT ARE THE PURCHASE PRIORITIES FOR THE SUBSCRIPTION OFFERING AND COMMUNITY
OFFERING?
A. Non-transferable subscription rights to subscribe for the common stock in a
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SUBSCRIPTION OFFERING have been granted, in descending order of purchase prior-
ity to (i) depositors with aggregate deposits of $50.00 or more as of December
31, 1995; (ii) the Bank's tax- qualified Employee Stock Ownership Plan; (iii)
depositors with aggregate deposits of $50.00 or more as of June 30, 1997; and
(iv) depositors of the Savings Bank as of July 31, 1997, and mortgage borrowers
of the Savings Bank with mortgage loans outstanding as of this date.
Subject to the prior rights of holders of subscription rights, common stock
is being offered in a concurrent COMMUNITY OFFERING to certain members of the
general public, with preference given to natural persons residing in Allegheny,
Armstrong, Beaver, Butler, Washington and Westmoreland Counties, Pennsylvania.
Because Qualifying Deposits are utilized in allocating shares to Eligible Ac-
count Holders and Supplemental Eligible Account Holders, each such subscriber
should be sure to list on the Stock Order Form all the deposit accounts in
which he or she had an ownership interest at the applicable date, December 31,
1995 or June 30, 1997.
Q. ARE THE DEPOSITORS AND MORTGAGE BORROWERS WHO ARE ELIGIBLE TO BUY COMMON
STOCK OBLIGATED TO DO SO?
A. No. They will become stockholders only if they decide to purchase shares of
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common stock
Q. AS A DEPOSITOR OR MORTGAGE BORROWER ELIGIBLE TO BUY COMMON STOCK IN THE SUB-
SCRIPTION OFFERING, MAY I SELL OR ASSIGN MY SUBSCRIPTION RIGHTS?
A. No. Such transfer is prohibited by law. Subject to the availability of stock
and certain other restrictions, persons who do not have subscription rights may
purchase common stock in the COMMUNITY OFFERING, which is being conducted
concurrently with the SUBSCRIPTION OFFERING.
Q. HOW WAS THE OFFERING RANGE AND THE PRICE PER SHARE DETERMINED?
A. The offering range is based on an independent appraisal of the pro forma
market value of the common stock performed by an appraisal firm experienced in
valuations of thrift institutions. The appraisal, dated June 23, 1997, indi-
cated that the aggregate pro forma market value of the common stock ranged be-
tween $5.27 million and $7.13 million (with a mid-point of $6.20 million). The
offering range is between 527,000 and 713,000 shares. The Board of Directors
determined to offer the shares at $10.00 per share.
Q. WILL THE COMMON STOCK I PURCHASE BE INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION?
A. No. Common stock cannot be insured by the Federal Deposit Insurance Corpora-
tion ("FDIC"). Your deposit accounts at Spring Hill, however, will continue to
be insured by the FDIC.
Q. WILL DIVIDENDS BE PAID?
A. The Board of Directors has not formulated a cash dividend policy, but in-
tends to develop a policy of paying cash dividends in the future. Future pay-
ment of dividends is subject to the discretion of the Board of Directors, which
will consider the Savings Bank's and Holding Company's earnings, regulatory re-
quirements, business needs and other relevant factors. The Holding Company may
pay stock dividends in lieu of or in addition to cash dividends, although there
can be no assurance that any dividends will be paid.
Q. HOW WILL THE COMMON STOCK BE TRADED?
A. The common stock has received conditional approval for quotation on the
Nasdaq SmallCap Market under the symbol "SHSB". However, there can be no assur-
ance that an active and liquid market will develop. Although under no obliga-
tion to do so, Ryan Beck & Co., Inc. has informed Spring Hill that it intends,
upon the completion of the Conversion, to make a market in the common stock by
maintaining bid and asked quotations.
<PAGE>
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VOTING
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YOUR VOTE IS IMPORTANT!
Details about the stock conversion of Spring Hill Savings Bank and the forma-
tion of the Holding Company are provided in the Proxy Statement.
Q. HAS SPRING HILL'S BOARD OF DIRECTORS ADOPTED THE PLAN OF CONVERSION?
A. Yes. The Plan of Conversion was unanimously adopted by the Board of Direc-
tors of the Savings Bank.
Q. WHAT VOTE IS NECESSARY TO APPROVE THE PLAN OF CONVERSION?
A. The Conversion cannot be consummated without the approval of the Savings
Bank's members. The Plan of Conversion must be approved by a majority of the
total votes eligible to be cast. NOT VOTING IS THE SAME AS VOTING AGAINST THE
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PLAN. THEREFORE, YOUR VOTE IS VERY IMPORTANT!
Q. AM I REQUIRED TO VOTE OR BUY STOCK?
A. No. Members are not required to vote, and voting does not obligate a member
to buy stock. Because your vote is important, however, management urges that
you take advantage of this opportunity to vote "FOR" the Plan. Your proxy card
is enclosed in the window of your envelope. Please vote, sign and return the
card(s) in the enclosed proxy return envelope. THE CARD(S) MUST BE RECEIVED BY
11:00 A.M., EASTERN TIME, ON SEPTEMBER 18, 1997.
Q. WHY DID I GET SEVERAL PROXY CARDS?
A. If you have more than one deposit account or loan, you could receive more
than one proxy card, depending on the ownership structure of your accounts.
Please vote, sign and return all cards that you receive. ONLY ONE SIGNATURE IS
--- ---
NEEDED ON PROXY CARDS WITH MORE THAN ONE NAME LISTED.
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PURCHASING COMMON STOCK
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Q. HOW MANY SHARES ARE BEING OFFERED?
A. SHS Bancorp, Inc. is offering between 527,000 and 713,000 shares of common
stock.
Q. WHAT IS THE PRICE PER SHARE?
A. The subscription price is $10.00 per share.
Q. HOW DO I ORDER COMMON STOCK DURING THE SUBSCRIPTION OFFERING AND COMMUNITY
OFFERING?
A. Complete and return the enclosed Stock Order Form, together with payment or
authorization for account withdrawal, as described above. You may use the en-
closed order return envelope. ORDERS MUST BE RECEIVED BY SPRING HILL BY 11:00
A.M., EASTERN TIME, ON SEPTEMBER 16, 1997.
Q. HOW DO I PAY FOR COMMON STOCK?
A. Payment may be made by check, bank draft or money order or by authorization
for withdrawal (without early withdrawal penalty) from passbook, statement sav-
----------------------------------
ings or certificate of deposit accounts maintained at Spring Hill. Funds autho-
rized for withdrawal will remain in the account and will continue to earn in-
terest at the contractual rate, but will be unavailable to the depositor during
the Offering. Subscriptions made by check, bank draft or money order will earn
interest at Spring Hill's passbook savings account rate until the Conversion is
completed.
Q. HOW MUCH COMMON STOCK MAY I ORDER?
A. The purchase limits in the Subscription Offering and in the Community Offer-
ing are described in detail in the section of the Prospectus entitled "The Con-
version--Limitations on Purchases of Shares." No person may purchase more than
$50,000 of the stock sold in the Conversion (or 5,000 shares) and no person,
together with associates and persons acting in concert, may purchase in the ag-
gregate more than $85,000 of the stock sold in the Conversion (or 8,500
shares). The minimum purchase is 25 shares or $250.
Q. AS A DEPOSITOR OR MORTGAGE BORROWER, WILL I PAY A LOWER PRICE FOR THE COMMON
STOCK THAN SOMEONE WHO IS NOT A CUSTOMER OF THE SAVINGS BANK?
A. No. The price per share is the same for all subscribers in the Offering.
---
Q. DO I PAY A COMMISSION?
A. No. No commission or fee will be charged for the purchase of shares during
the Offering.
<PAGE>
Q. ARE EXECUTIVE OFFICERS AND DIRECTORS OF THE SAVINGS BANK PLANNING TO PUR-
CHASE COMMON STOCK?
A. Yes. Spring Hill's executive officers and directors presently expect to
purchase an aggregate of approximately $372,000 of common stock.
Q. WHAT HAPPENS TO MY ORDER IF ORDERS ARE RECEIVED FOR MORE COMMON STOCK THAN
IS AVAILABLE?
A. This is referred to as an oversubscription and shares will be allocated on
a priority basis as described in the Prospectus. The priority order is also
described above. Any funds submitted by you to purchase stock will be refunded
to you with interest should your order not be filled, or not filled in full.
Q. I HAVE AN IRA ACCOUNT AT SPRING HILL. CAN I USE THIS MONEY TO PURCHASE THE
COMMON STOCK WITHOUT INCURRING ANY TAX CONSEQUENCES?
A. You will need to transfer your IRA relationship to a broker-dealer, who
will establish a self-directed IRA account for you. Spring Hill will not
charge a penalty for early withdrawal, and there will be no IRS penalty in-
curred as a result of purchasing the common stock by this means. BECAUSE IRA-
RELATED SUBSCRIPTIONS REQUIRE ADDITIONAL PROCESSING TIME, PLEASE CALL THE
STOCK INFORMATION CENTER BY NO LATER THAN SEPTEMBER 2 FOR A COMPLETE DESCRIP-
TION OF AND ASSISTANCE WITH IRA PROCEDURES.
Q. MAY SHARES BE REGISTERED IN SOMEONE ELSE'S NAME?
A. No. Common stock initially must be registered in the name(s) of the pur-
chaser(s) as described on the Stock Order Form. You may later re-register the
stock in other names.
Q. IN THE FUTURE, HOW MAY I PURCHASE ADDITIONAL SHARES OR SELL SHARES?
A. You may purchase or sell shares through your stockbroker or discount bro-
kerage firm. The firm will charge a commission for trades.
Q. WHEN WILL I RECEIVE MY COMMON STOCK CERTIFICATE(S)?
A. Common stock certificates will be mailed by our transfer agent promptly af-
ter the Conversion is completed. Please be aware that you may not be able to
sell shares purchased in the Offering until you receive your stock certifi-
cate.
QUESTIONS?
Stock Information Center
Spring Hill Savings Bank, F.S.B.
112 Federal Street
Pittsburgh, PA 15212
(412) 323-3750
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THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COM-
MON STOCK OFFERED IN THE CONVERSION ARE NOT ACCOUNTS OR DEPOSITS AND ARE NOT
FEDERALLY INSURED OR GUARANTEED. THE COMMON STOCK HAS NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT IN-
SURANCE CORPORATION, THE OFFICE OF THRIFT SUPERVISION OR ANY OTHER GOVERNMENT
AGENCY.
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